In the case of a marriage breakdown, some separating spouses must share accrued pension benefits to divide family property equitably. However, the options for how and when to split a pension differ depending on the member, plan and province. Bill 133, which received royal assent in May, will simplify the way pensions are valued and split following a marriage breakdown.
Clean Break
Under current Ontario rules, it is rarely possible to transfer a share of a member’s pension to a former spouse at the time of separation. Spouses who use a pension to divide their net family property must usually resort to “if and when” arrangements, meaning that the member’s pension cannot be split until he or she ceases employment, retires or dies.
Ontario is unlike most other provinces in that a former spouse’s pension payments are linked to the member’s pension payments. Under an “if and when” arrangement, then, monthly payments would cease with the member’s death. Of course, if the member dies shortly after retirement, the former spouse might receive far less from the pension than expected.
Bill 133 adds a new Pension Benefits Act section to allow a former spouse of an active plan member to apply for an immediate lump sum transfer (generally to a locked-in vehicle) out of the plan. Pension plans can also allow a former spouse to keep his or her share of the member’s pension in the plan.
For retirees, the bill will allow a pension split, but the lump sum transfer is not an option. If the plan permits, a former spouse of a retiree can also apply for a single pension (which would replace the split and any entitlement to a joint and survivor pension) or waive the joint and survivor pension, presumably in favour of an increase in value elsewhere.
Streamlined Valuations
While many are applauding the changes that will streamline pension valuations, some warn that the new rules will oversimplify pension realities and may lead to inequities.
Currently, to determine the net family property to be divided, the two parties usually hire an actuary to estimate a range of values for the member’s pension, taking into account vested and non-vested pension rights, then use those values to determine an appropriate estimated value for the pension.
If the parties decide to use the pension to satisfy the required equalization of the net family property and ask the plan sponsor to make payments to a former spouse when the member retires, the plan administrator must recalculate the value of the vested benefits at that time and ensure that no more than 50% of the pension accrued during the marriage is paid to the former spouse. This second calculation may be based on different assumptions because time will have passed and the two amounts may be inconsistent.
Under the new rules, separating spouses can request a pension valuation from the plan administrator. The administrator will calculate a preliminary value of the pension (typically, as though the member terminated employment at the family law valuation date) and then provide the member or spouse with an imputed value of the portion of the member’s pension attributable to the marriage.
The value to be paid to the spouse must then be set out in the divorce order, arbitration award or domestic contract. The value will not be recalculated if the former spouse applies for a lump sum transfer, thus eliminating inconsistencies. While this new method is simpler, the property could be undervalued and spouses could be shortchanged, since the valuation won’t include most increases and improvements that could arise after the marriage breakdown.
Plan administrators can prepare for the new rules (which won’t be in force until new regulations are completed) by deciding who will provide pension valuations; developing new processes for gathering the necessary information; drafting new communication tools; and determining whether or not plan amendments will be required.
The Bill 133 amendments will move Ontario toward a simpler, more accessible regime—one that is more consistent with that of other provinces. However, while former spouses will have new options that provide them with greater independence, the new rules may have a negative impact on their financial interests. It remains to be seen whether the regulations, when finalized, will safeguard those interests.
Alisa Kinkaid is a lawyer with Hewitt Associates’ legal consulting group in Toronto.
alisa.kinkaid@hewitt.com
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the August 2009 edition of BENEFITS CANADA magazine.