Broadly speaking, the subject of this report is the treatment of a spouse’s interest in a pension plan upon marriage breakdown. Our principal concern in that regard is with occupational pension plans that provide lifetime periodic (usually monthly) benefit payments to former employees following their retirement, with a particular focus on defined benefit plans, as it is in relation to interests under those types of plans that the main problems that have been identified arise. Generally, the report will not deal with other kinds of private arrangements aimed at providing an income on retirement, such as personal or group Registered Retirement Savings Plans (RRSPs), or with government-provided social welfare schemes, such as the federal Old Age Security program, although it will deal with certain matters related to the Canada Pension Plan (CPP).[4]
A. Types of Pension Plans and Employee Coverage
Occupational pension plans are most commonly established by an employer, although in some cases, a plan may be established jointly by one or more employers and one or more trade unions. In the construction industry, where employer-employee relationships tend to be transient, the plan might be established solely by a union.[5] Plans covering public sector employees are usually established by legislation.[6]
In terms of the nature of the benefit provided, there are two main types of occupational pension plan, the defined benefit plan and the defined contribution plan. Under both kinds of plan the employer is required to make contributions, but both may also require employees to make contributions (in which case the plan is labelled “contributory”).
Under a defined contribution plan, the contributions made by the employer and by the employee, if any, are set at a fixed amount or rate; those contributions are invested and the sum of accumulated contributions and returns on their investment is used to purchase an annuity when the employee retires. (Because of this aspect, such plans are sometimes referred to as “money purchase plans”.) In contrast, the amount of the pension benefit under a defined benefit plan has no immediate relation to the contributions and investment yield, but rather is determined according to a set formula.
Defined benefit plans are generally seen as being superior from the perspective of an employee, in that the amount of income that she will have in retirement is more predictable than in the case of defined contribution plans, while the degree of security for the employee is perceived to be greater and the risk posed for her by poor investment returns to the plan lower[7] (although any thought that the risks in the case of defined benefit plans are all borne by the employer is clearly erroneous[8]).
A typical defined benefit formula might provide that the annual pension amount is equal to the product obtained when the employee’s number of years of service with the employer is multiplied by a specified percentage and then applied against the average salary earned by the employee during some specified number of years in which his employment income was the greatest or during some specified number of years immediately preceding retirement.[9] For example, a plan might provide that the yearly pension income would be equal to years of service times two per cent times the average salary of the employee during his five highest years of earnings. A member of such a plan who had 25 years of service at retirement and who earned an average of $80,000 during his most remunerative years would have an annual pension income of $40,000.
The type of defined benefit plan described in the preceding paragraph is often referred to as a “best average” or “final average” earnings plan. Other common types include the flat benefit plan and the career earnings plan. In a flat benefit plan, the formula does not refer to earnings or percentages; rather, the multiplier is simply the years of service and the multiplicand is a flat dollar amount. (For example, if the flat dollar amount is $80 a month, an employee who retired after thirty years’ service would have a monthly pension of $2,400, or $28,800 annually.) Under a career earnings plan, the multiplier is a bare percentage (that is, it is not a function of years of service) and the multiplicand is the aggregate of the employee’s earnings during the entire period of her membership in the pension plan. (For example, if the percentage in the benefit formula is two per cent and the retiring employee had earned $1,250,000 over the course of her career with the employer, her pension income would be $25,000 per year.)
Benefits under defined benefit plans are usually “integrated” with the CPP, meaning that the pension amount that was calculated using the basic defined benefit formula is reduced to reflect the assumed receipt of CPP benefits.[10] Effectively, in such cases, the basic formula indicates what the employee can expect to receive in total from both sources, the occupational pension and the CPP benefit.[11]
There are some plans, called hybrid plans, which combine features of defined benefit and defined contribution plans. This type of plan may provide a retiring employee with a benefit equal to the greater of the amount determined under a defined benefit formula and the amount of contributions and investment yield, or it might provide a benefit equal to the total of the defined benefit amount and what was accumulated under the defined contribution part of the plan.[12] In some cases, an employer might convert a defined benefit plan into a defined contribution plan, with the employee’s benefits earned up to the conversion date being determined under the defined benefit formula and benefits thereafter being the amount of subsequent contributions and returns on investment.[13]
A study prepared for the Ontario Expert Committee on Pensions (OECP) cited a report prepared by Statistics Canada indicating that roughly 34% of employees in Ontario jurisdiction were members of an occupational pension plan as of 2005.[14] Noteworthy, however, is the public sector-private sector divide on this score; while 80% of public sector employees were members of an occupational pension plan, only 25% of private sector employees had such coverage.[15] Also interesting is the fact that while the number of defined contribution plans is slightly greater than the number of defined benefit plans, defined benefit plans collectively have far more members,[16] although membership in defined contribution plans has been increasing at a much faster rate than membership in defined benefit plans.[17]
With respect to the demographics of pension plan membership, while currently the number of males who are members of a pension plan (928,000) is slightly greater than the number of females (832,000),[18] it appears that over the long term the number of males has not been growing, while the number of females has been increasing fairly dramatically;[19] further, the percentage of pension plan members who are members of a defined benefit plan as opposed to some other type of plan is approximately 80% for both sexes.[20]
This is not to suggest that a sanguine view of the position of women in our pensions and retirement income system is warranted. Occupational pensions are by their nature linked to income from employment, and women continue not only to have a lower labour market participation rate than men but also continue to earn less then men when they are employed.[21] In comparison to men they are over-represented in so-called “non-standard” working arrangements, such as part-time employment, temporary employment, casual and seasonal employment and agency employment,[22] where pay tends to be lesser and pension plans less likely to be on offer.[23] Women also tend to perform more unpaid work in the home and in care-giving than do men, which is, of course, a factor both in their labour market participation rate and their greater propensity to be involved in non-standard work situations. The result is that on average pension income for females is substantially lower than that for males.[24]
B. Jurisdictional and Legislative Framework
Under the Constitution Act, 1867,[25] occupational pensions, like other aspects of employment and labour law, are a matter of property and civil rights and so generally their regulation would fall under provincial legislative jurisdiction. However, in the case of some industries, including atomic energy, banking, inter- and extra-provincial transportation on land or water, aviation and telecommunications, as well as the federal public service and employment in the three territories, Parliament has jurisdiction.[26] With respect to most employees who are employed in Ontario and who are members of a pension plan within provincial regulatory jurisdiction,[27] the province’s Pension Benefits Act[28] (PBA) requires the plan to be registered and establishes minimum standards relating to, among other things, entitlements under the plan and plan administration and funding. (Section 6 of the PBA makes it illegal to administer a plan that has not been registered.) The federal counterpart to the PBA is the Pension Benefits Standards Act, 1985[29] (PBSA), although it does not apply to employees of the federal government.[30]
In some cases, employers who carry on business in more than one province or territory have a single pension plan covering all of their employees rather than a separate plan for each jurisdiction, potentially making the pension benefits standards legislation of more than one jurisdiction applicable. Under subsection 95 of the PBA, the Financial Services Commission of Ontario (FSCO), which is responsible for the administration and enforcement of the PBA, may make agreements with the federal authorities or the authorities of another province (there is no reference to territories) to provide for the reciprocal application and enforcement of pension benefits legislation, and agreements relating to administration and enforcement were in fact entered into by the Pension Commission of Ontario (the predecessor body to FSCO) with the pension authorities of other provinces in 1968 and with the federal government in 1970. Subsection 23(1) of the General regulation[31] under the PBA designates all of the other provinces (except Prince Edward Island[32]) and the three territories as jurisdictions where “there is in force legislation substantially similar to [the PBA]”, while subsection 23(2) provides that where an agreement is made between the Ontario authorities and the authorities of a designated jurisdiction, a pension plan is exempted from the PBA registration and audit requirements if a plurality of members of the plan are employed in a jurisdiction so designated.[33] It would appear, however, that provisions of the PBA other than those dealing with registration and audit requirements continue to apply in respect of Ontario members of a multi-jurisdictional plan even though the plan is registered in another jurisdiction and vice versa.[34]
Putting aside federal jurisdiction plans (where registration, if required, would be under the PBSA) and those multi-jurisdictional plans registered under another jurisdiction, most pension plans covering Ontario employees are required to be registered under the PBA. However, some such plans are not required to be registered at all because they are exempted from the PBA, either directly or through exclusion from the PBA definition of “pension plan”. These include group RRSPs and the plans that cover members of the Legislative Assembly and the provincial judiciary, as well as plans that only provide benefits that exceed the maximum benefit limits applicable to plans registered under the federal Income Tax Act[35] (ITA) or that only permit contributions in excess of the contribution limits for plans registered under the ITA.[36] The latter type of plan is sometimes referred to as a “supplementary employee retirement plan” (SERP) because it supplements benefits provided for by another plan and membership in it is conditional on being a member of that other plan. Such plans are sometimes established by employers in order to provide relatively high income earners with a pension commensurate with the income they enjoyed before retirement, as the ITA limits mean that the plan to which the SERP is supplemental will pay a pension that is smaller than that which would otherwise result from the application of the basic defined benefit formula.
Registration of a pension plan under the ITA is not compulsory,[37] but it does confer certain advantages. Contributions made by employers and employees are deductible in calculating income subject to taxation; further, plan earnings are exempt from taxation and employees are not taxed on benefits until the pension is in pay.[38] However, as was alluded to in the preceding paragraph, there are limits on the quantum of benefits that can be provided and on the amount of contributions that can be made in the case of plans registered under the ITA.
C. Timing of Retirement
The PBA generally requires that a pension plan provide for a “normal retirement date” of not later than one year after the employee reaches the age of 65.[39] This does not mean that the employee must retire at that date;[40] it simply means that the employee is entitled to retire and begin receiving a full pension at that date. She could instead decide to continue working, although she could not both be in receipt of a pension and be continuing to accrue service credits under the same plan.[41]
Alternatively, an employee might decide to retire before reaching the normal retirement date. Under the PBA, an employee who is within 10 years of that date may, upon termination of employment, elect to begin receiving an early retirement pension.[42] The PBA implicitly permits the monthly amount payable under an early retirement pension to be reduced from the amount that would have been payable had the employee waited until normal retirement age to begin receiving the pension,[43] reflecting the fact that a pension taken earlier will likely be in pay longer.[44] Some plans, however, offer an unreduced early retirement pension to employees who meet a specified threshold based on age or years of service or some combination of the two. (For example, a plan might offer an unreduced early retirement option to an employee who satisfies a “factor 90” qualification, whereby the sum of his age and years of service equals at least 90.)
Because defined benefit plan pensions are typically integrated with CPP benefits and CPP benefits usually do not commence until age 65, it is not uncommon for defined benefit plans to offer so-called “bridging benefits” to employees who take an early retirement pension. These benefits supplement the pension being paid under the plan for a temporary period that ends when the employee begins to receive CPP benefits, with the effect that the total monthly amounts being received by the employee before age 65 and after remain roughly the same.[45]
D. Vesting, Locking-in and Portability
A pension benefit is said to be “vested” when the plan member has an enforceable right to receive a pension upon reaching retirement age; at the point at which the benefit is vested, it can no longer be lost, even if the employee’s employment is terminated prior to his reaching retirement age (although where the termination is the result of death, the right to a pension is replaced by a death benefit, as to which, see below). The vesting rules under the PBA were changed as of January 1, 1987, but on a prospective basis only. As a result, vesting of benefits accrued prior to 1987 occurred once the individual was at least 45 years of age and had been a member of the pension plan for at least 10 years, while vesting for benefits accrued after 1986 occurs once the individual has been a member of the plan for two years.[46]
At the same point at which a pension benefit becomes vested, the member’s benefits are “locked in”. The locking-in rules have two aspects. The first is that even if the member resigns from employment or has her employment terminated, she cannot obtain a refund of contributions made to the pension plan in respect of her employment;[47] the contributions must remain in the plan fund, to be used to provide income in retirement. The second aspect is that during the member’s lifetime the pension entitlement cannot be commuted or surrendered in return for an immediate lump sum payment;[48] even if her employment ends long before she is ready to retire, she cannot choose to withdraw the value of her accrued entitlement from the plan instead of taking it as a deferred pension payable when she reaches retirement age.[49] There are, however, certain “portability” exceptions to the locking-in rules that provide the former employee who is not entitled to an immediate pension with alternatives to a deferred pension from the plan. These exceptions, like the locking-in requirement itself, reflect the social policy concern that pension funds be used to provide an income for the employee in retirement; they allow an amount equal to the commuted value of the pension benefit to be transferred to another pension plan (if the other plan will accept the transfer) or “a prescribed retirement savings arrangement” (such as a locked-in retirement income fund) or to be applied to the purchase of a deferred life annuity.[50]
Among other exceptions to the locking-in rules are those that allow an employee to take the commuted value in cash if he suffers from a disability that shortens his remaining life expectancy to less than two years[51] and that allow the pension plan to pay an employee a lump sum equal to the commuted value of the pension if the amount of the pension that would otherwise be payable to the employee annually on retirement would not exceed two per cent of the “Year’s Maximum Pensionable Earnings” under the CPP[52] in the year that employment is terminated.[53] These latter two exceptions are not necessarily inconsistent with the retirement income rationale, in that they apply where the individual concerned is unlikely to survive until retirement age or where the pension amount would be too meager to provide any significant support in retirement in any event (although the main purpose of the so-called “small pension” commutation provision would seem to be to reduce costs for plan administrators[54]).
As was noted in the preceding two paragraphs, the locking-in rules and the portability exceptions to them are based on the social policy concern that pension funds should be used to provide an income for the employee once he retires. The same rationale lies behind the rules that moneys payable under a pension plan cannot be assigned or attached, set out in, respectively, sections 65 and 66 of the PBA. These prohibitions are subject to certain exceptions in the family law context; subsection 66(4) creates an exception to the prohibition on attachment in the case of support orders (to a maximum of 50 per cent of the amount payable under the plan), while subsection 65(3) establishes a broader exception covering any FLA court orders or “domestic contracts” (a term that would include a separation agreement following marriage breakdown).[55] However, while subsection 65(3) contains no limit on the amount of pension moneys that can be assigned, the exception must be read in conjunction with section 51,[56] which limits the reach of orders and contracts made under the family property provisions of Part I of the FLA.
E. Limits re: FLA Part I Domestic Contracts and Orders
Section 51 of the PBA, which specifically addresses marriage breakdown, imposes both temporal and quantitative restrictions on the effect of domestic contracts and orders made under Part I of the FLA insofar as pensions are concerned.
Subsection 51(1) provides that such a contract or order cannot require payment of a pension benefit before the date that the spouse who was a member of the pension plan in question actually begins to receive the benefit or the date on which she reaches the normal retirement date under the plan, whichever date is earliest. However, where the member’s employment is terminated, subsection 51(5) gives the non-member spouse the same options in relation to his interests as established by the contract or order that are available to the member in relation to the member’s interests (such as, for example, transfer of his share of the commuted value of her pension to a “prescribed retirement savings arrangement”).
Under subsection 51(2), a domestic contract or Part I order cannot give the non-member spouse more than 50 per cent of the benefits accrued during the period when she and the member were spouses. Regulations under the PBA prescribe the manner in which the benefits so accrued are to be calculated.[57] This “50 per cent rule”, like the locking-in rules and the prohibitions against assignment and attachment, is rooted in the view that a pension exists to provide retirement income for the pension plan member.[58] However, it has been seen as a potential obstacle to the full implementation of certain kinds of family property settlement arrangements involving pensions,[59] a point which is discussed in more detail below.
. Death Benefits
Under section 48 of the PBA, pension plans must provide a pre-retirement death benefit where a plan member whose right to a pension has vested dies before reaching retirement. The entitlement, which is payable to the member’s spouse provided that the member and the spouse were not living separate and apart at the date of death, is either a lump sum payment equal to the commuted value of the pension or a pension having an equivalent commuted value. A spouse may waive his right to the death benefit. In that case (as well as in the case where the member had no spouse with whom she was living at the date of death), if the member had designated a beneficiary, the beneficiary would be entitled to a lump sum payment; where no beneficiary had been designated, the lump sum would be paid to the member’s estate.
It should be noted that under subsection 48(13), the entitlement to a death benefit is subject to the rights of a former spouse established by a domestic contract or order made under Part I of the FLA.[60]
If a former member in receipt of a pension has a spouse with whom he is cohabiting on the day the pension payments are due to commence, the PBA requires that the pension be a “joint and survivor pension”.[61] Such a pension is payable during the joint lives of the spouses, as opposed to being payable only during the member’s lifetime. The PBA implicitly permits the initial amount payable under a joint and survivor pension to be reduced from the amount that would have been payable had the pension been for the employee’s life alone;[62] this is because of the possibility that the pension will be in pay for a longer period.[63] The amount payable to the surviving spouse of the former member must be at least 60 per cent of the amount that was being paid to the former member while both were alive.[64]
Section 46 of the PBA allows the member and the spouse, acting jointly, to waive the right to a joint and survivor pension prior to the commencement of the pension payments. Where such a waiver is given, the pension will be paid as a single life pension (that is, it will continue only for as long as the member lives).
G. Inflation and Indexing
Even relatively low levels of inflation can have a profound impact on the real value of a given sum of money. An annual inflation rate of a mere two per cent would reduce the purchasing power of a dollar to just 75 cents in 15 years; such a reduction would occur in just 10 years at an inflation rate of three per cent.[65] Obviously this could have a very adverse effect on a pensioner who is afforded no inflation protection; if the pensioner lives for many years after retirement (as she surely hopes to do), her standard of living could be severely eroded in her later years.
On first impression, the PBA may seem to make inflation protection mandatory; subsection 53(1) provides that pensions
….shall be adjusted in accordance with the established formula or formulas…to provide inflation-related increases….
However, subsection 53(2) goes on to say that a formula can be established only by an amendment to the PBA, a stipulation that would seem to make subsection 53(1) meaningless, given that no such amendment has ever been enacted.
Fortunately, despite the lack of statutory compulsion many pension plans provide inflation protection in the form of indexing, whereby the monthly pension amount in adjusted annually to compensate, to some extent at least, for the effect of inflation. Such protection may be contractual, in the sense that indexation is a matter of entitlement under the pension plan, as is typically the case in the public sector.
With private sector plans, ad hoc indexing is more common; while the employer purportedly does not offer inflation protection as of right, the amounts of pensions in pay are occasionally adjusted upwards to preserve (or more precisely, perhaps, restore) their real value (or at least some of it).[66]
H. Funding
The PBA provides that a defined benefit pension plan must be funded; in other words, the plan’s assets must be sufficient to pay for its liabilities, as determined by a triennial actuarial valuation.[67] The valuation must be done both on a solvency basis, under which assets and liabilities are valued as if the plan is terminated on the date of the valuation, and on a “going-concern” basis, under which valuation proceeds on the assumption that the plan will be continuing.[68] Where liabilities exceed assets under either type of valuation, “special payments” will be required; these are payments, additional to the employer’s usual contributions, which are required to be made to the pension plan in order to eliminate the solvency deficiency or going-concern unfunded liability, as the case may be.[69] Under the PBA, a solvency deficiency can be amortized over a five-year period, while a going concern unfunded liability can be amortized over a 15-year period. [70]
Sometimes a valuation will show that the plan in fact has a surplus, a situation that may cause an employer who is not contractually committed to indexation of pension benefits to make an ad hoc adjustment to offset the effect of inflation;[71] alternatively, the employer may feel that the surplus justifies a “contribution holiday”. (An employer generally cannot withdraw the surplus from an ongoing pension plan without obtaining the consent of all current and former members of the plan; this is so even if the plan provides that the employer is entitled to the surplus.)[72]
Whether the employer is entitled to forgo making contributions while the plan is in surplus will depend on whether the language of the pension plan in question explicitly or implicitly authorizes it.[73] Potentially, employees might also benefit from a surplus by being accorded a contribution holiday, but their right to one will likewise be a matter of interpretation of the plan wording.[74]
I. Wind-up of Pension Plans
Section 1 of the PBA defines “wind up” as the termination of a pension plan and the distribution of plan assets. A plan can be wound up at the instance of the employer or by order of the Superintendent of Financial Services.[75] However, while the employer can wind up a plan as of right for any reason,[76] the Superintendent may order a wind up only where certain grounds exist; these grounds include failure on the part of the employer to make required contributions to the plan, bankruptcy of the employer, the fact that a significant number of employees have lost their employment as a result of the reorganization or discontinuance of all or part of the employer’s business or the fact that the employer has sold its business to a purchaser who does not provide a pension plan for the employees concerned.[77] A wind-up may be full or partial; in the case of a partial wind-up, the pension plan is effectively divided into two parts, with one part continuing as before and the other being terminated and its assets liquidated.[78]
On a wind-up, benefits of all employees in the plan or part of the plan concerned are immediately vested (that is, regardless of whether they would otherwise satisfy the requirements for vesting)[79] and the portability rights available in the case of the termination of employment of an individual who is not entitled to an immediate pension may be exercised by any employee who is entitled to a benefit, including one who is entitled to an immediate pension.[80]
A very important wind-up right for employees with long service is the “grow-in” right or “rule of 55”, under which an employee whose years of service and age total at least 55 is entitled to receive an unreduced or reduced pension at the date on which she would have been entitled to such a pension under the plan had the plan not been wound up and had she continued in employment until that date.[81] For example, consider a plan with a normal retirement age of 65 that offers an unreduced early retirement pension for employees who meet a “factor 90” qualification (that is, the sum of the employee’s years of service and her age is at least 90) and an employee who is 50 years old and has 20 years of service at the date at which the plan is wound up. Were it not for the grow-in right, the employee would not be entitled to receive an unreduced pension until she reached age 65, as the pension plan terminated before she could qualify under factor 90; however, because the employee satisfies the rule of 55, she will be entitled to receive an unreduced pension commencing at age 60 because that is the point at which she would have been eligible for it had the plan not been wound up and had she continued to be employed. (For employees who meet the rule of 55 and who have at least 10 years’ service as of the wind-up date, there is additionally an entitlement to any early retirement bridging benefits for which they would have been eligible had the plan not been wound up and had their employment continued.)[82]
An actuarial valuation is required where a pension plan is to be wound up. If the valuation shows that the assets of the plan are more than sufficient to take care of all of the plan’s liabilities, including those added by employees’ wind-up rights, the resulting surplus in the plan will be distributed. If the plan does not address how surplus is to be distributed on wind-up, it must be distributed proportionately to “members, former members and any other persons entitled to payments under the pension plan”.[83] Under current rules, the surplus may be paid to the employer if the agreement of at least two-thirds of the plan members (or their union) and an “appropriate” number of pensioners and other persons having an entitlement is obtained.[84]
If the valuation shows that the plan is in a deficit position, the employer is obliged to pay into the plan the amount necessary to ensure that the pension entitlements under the plan will be paid. It may be, however, that the employer is insolvent and not able to make the payment required. In that event, “subject to the application of the Guarantee Fund”,[85] the PBA requires that the benefits under the plan be reduced in proportion to the wind-up deficiency.[86]
The Pension Benefits Guarantee Fund insures the pension benefits of Ontario employees who are members of defined benefit plans registered under the PBA or the legislation of a designated province, subject to certain exceptions and limits. Perhaps the most important limitation is that which excludes from coverage benefits that are in excess of $1,000 per month.[87] Some plans are excluded; among them are MEPPs and plans where the employer contribution is fixed by collective agreement (as is usually the case with JSPPs).[88]
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