A recent Ontario Court of Appeal decision raises new cautions—and underscores existing ones—for administrators of registered pension plans with members employed or last employed in Ontario.
In April, the Court released its decision in Welsh v. Ashley, It confirmed for the first time that the Pension Benefits Act (Ontario) (PBA) may grant priority to a purported assignment of 100% of a member’s pre-retirement death benefit through a domestic contract (such as a separation agreement) to the exclusion of another designated beneficiary.
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Background
The deceased, Michael Poisson, was a member of a pension plan referred to in the decision as “the Ontario Ironworkers/Rodmen Benefit Plan Administrators Corporation.” He died on June 30, 2012 before pension commencement.
The dispute concerned competing claims to Michael’s pre-retirement death benefit. The applicant, Robin Welsh, Michael’s married but separated spouse, sought the court’s declaration that she was the sole beneficiary. The respondents, Michael’s two children from a previous marriage and the purported designated beneficiaries of the benefit, contested the application. Michael had designated the children as the beneficiaries of his pre-retirement death benefit in 2002. However, in December 2007, Robin and Michael entered into a written separation agreement that, she argued, took precedence and operated to make her the sole beneficiary.
At all times relevant to the dispute, the PBA’s former marriage breakdown rules applied. These were the so-called “if and when” or “wait and see” rules, under which a member’s pension entitlement could not be immediately divided. Rather, the agreed-upon division was paid “if and when” the member began receipt of his or her pension benefits.
The separation agreement provided that Robin was to receive 50% of the portion of Michael’s retirement pension accrued during Robin and Michael’s co-habitation when the pension actually began. However, paragraph 16(5) of the separation agreement indicated that should Michael die before Robin while still employed, Robin “would be considered the surviving spouse even if there is another person who would qualify as a spouse.”
As noted above, Michael did die before pension commencement. The administrator of the plan determined that, given the provisions of the separation agreement, Robin should be the sole beneficiary of the pre-retirement death benefit, a position that the children contested.
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The PBA
Subsections 48(1) and (2) of the PBA provide (and provided at the relevant times) that a member’s “spouse” within the meaning of the PBA is automatically entitled to the member’s pre-retirement death benefit unless either the spouse is living separate and apart from the member on the date of his or her death or the spouse has signed a waiver in the form approved by the Superintendent of Financial Services. If either of these exceptions apply, then the pre-retirement death benefit becomes payable to the member’s designated beneficiaries. Subsection 48(13) of the PBA provides (and provided at the relevant times) that an entitlement to a pre-retirement death benefit is subject to a right to or interest in the benefit set out in a domestic contract. There was no issue in this case that the separation agreement was a “domestic contract.”
The decision
The Ontario Superior Court found that the separation agreement as a whole showed an intention that Michael’s pre-retirement death benefit be divided between Robin and the children, with 50% of the portion of the benefit tied to Robin and Michael’s cohabitation being the amount intended to be paid to Robin. The trial judge accordingly ordered the pre-retirement benefit to be split in these proportions.
In a short decision, the Court of Appeal overturned the lower court and found in Robin’s favour. Specifically, the Court of Appeal found that, on a plain reading, the separation agreement entitled Robin to receive the entirety of the pre-retirement death benefit (and not just a portion as the children argued).
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What does it mean for administrators?
The Court of Appeal’s ruling has come as a surprise to many in the industry. In particular, the Court of Appeal appears to have departed from its 2004 holding in Ontario Teachers’ Pension Plan Board v. Ontario that a domestic contract may assign no more than 50% of a member’s pre-retirement death benefit.
Nevertheless, the Welsh decision is now law, and administrators must adjust. The chief concern in this regard is what administrators can do to limit liability, including the risk of paying a death benefit to the incorrect recipient, which may in some cases be difficult to recover.
Both subsection 48(10) and section 45 of the PBA purport to provide the administrator with a statutory discharge on the payment of a benefit in accordance with the information in its records, so long as the administrator does not have “actual notice to the contrary.” Owing to its wording though, there is some uncertainty as to the full scope of this discharge and whether it would always be available where the recipient of the benefit is incorrect and the correct beneficiary later comes forward.
So what’s an administrator to do when an active or former member dies? While the answer will always depend on the particular circumstances, Welsh emphasizes that one of the most prudent courses is to look into the existence of any domestic contract or potentially more recent beneficiary designation. Welsh is simply a variation on an old theme: the legal risk to administrators of imperfect information.
Arguably, the administrator may rely on its records and seek to take advantage of the statutory discharge (if it does not have actual notice to the contrary). The discharge will, however, be of little help in a Welsh scenario, where the administrator has actual notice of two competing claims. In this case, if one of the competing entitlements arises due to a domestic contract, the administrator may choose, on the basis of Welsh, to favour that claim.
Finally, in the alternative, and while by no means an easy process, the administrator may choose to pay the disputed amount into court; independently apply to a court for directions (likely a costly endeavour); or hold the death benefit pending the competing beneficiaries’ receipt of a court order resolving their dispute.
Although the PBA has been amended to allow for immediate divisions of pension entitlements for domestic contracts made on or after Jan. 1, 2012, the issues raised in Welsh will continue for years to come given the very large numbers of pre-2012 “wait and see” domestic contracts in existence.