In this article we will be talking about employment pension plans, and how they are valued and divided when spouses separate or divorce.
Starting Point Where Pensions Are Involved
First we need to identify which type of pension that you may have. They’re not all the same, and it’s important to understand the differences.
When we say pension, you may think of a few different kinds of pensions – there’s pensions available through the government, like CPP and OAS, and then there’s employment pensions.
In this article, we’re going to narrow in on employment pensions, which are considered “family property” and divisible along with other forms of family property that a former couple may own.
Within employment pensions, there’s 2 different types of pensions that you may be familiar with:
- Defined Benefit – this is a pension where you are guaranteed to receive a certain amount of income payable to you upon retirement, based on a formula guaranteed by the employer. Things that affect that formula are such things as length of employment, salary during your employment, age, and other factors.
- Defined Contribution – this is a pension much like an RRSP where there are contributions made during a person’s employment, which may be employee-only or a combination of employer and employee. However, in the end there’s no formula, it’s just contributions plus growth over time.
So, the first thing to determine is what type of pension you have, so that the divorce professionals can work out the value for the purpose of division of property in a separation or divorce.
How to Value Employment Pensions
It will depend on the type of pension we’re talking about.
Let’s start with the easy one, the defined contribution pension plan. To value this pension, a member simply needs to get their statements from the pension administrator. For instance, for a Husky Employee who’s a member of the defined contribution pension plan, they would get statements from SunLife, and they’ll be at certain intervals – annually, quarterly, monthly. Your divorce professional will tell you the date range that you need to provide – it may be the most recent statement, or it may be a range of dates. The value at the bottom of the statement is the value as of that date.
Now for the more challenging one. The defined benefit pension plan. In order to value this pension, the starting point, and I emphasize starting point, is to request a pension estimate from your pension administrator.
How you do this will vary from pension to pension. I always recommend for clients to do an online search for their pension plan name, and then within that site they can type into the search bar the word “divorce”. Usually that brings up a set of instructions not only to get a value estimate, but also how to divide the pension if that’s what you and your former spouse decide to do in the end.
We just updated our resources section of our website to include some of the common pensions that we see our clients are members of, so they have the link right there. But any internet search should bring up the pension plan easily.
Usually to get this estimate you will need to complete and send in a form, with certain details. The most important one will be what’s called the period of joint accrual which is the start and end date for the value you’re requesting. You will definitely need some advice on that period of joint accrual before requesting the statement. Sometimes there are restrictions as to how often you can ask for this pension value estimate, so be careful that you enter the correct dates on that form.
What’s Next – Once the Pension Value Estimate is Received
There will be a pension value on the form when you receive it. It might be called “Total Entitlement” or “Commuted Value” or a variety of other wording.
It’s important to remember that the number on the form is not an exact value of the pension, it’s the pension administrator’s estimate based on their own set of criteria and assumptions, and it’s meant to be just that an estimate. It has nothing to do with the individual member’s circumstances.
I highly recommend that when there’s a defined-benefit pension plan involved in a separation or divorce, that they get a pension actuary involved in providing their opinion on the value of their pension, based on the individual member’s circumstances. That is the most reliable way to determine the value for the purpose of the division of family property.
Restrictions on Dividing Pensions Between Spouses
There’s a couple restrictions that former couples will want to consider before finalizing their agreement. First is the maximum that can be transferred to a spouse under the applicable legislation, and second is the way that the pension division can occur.
The maximum transfer issue
For a defined-contribution pension – the simple one, typically any amount can be transferred from the member to the spouse.
For a defined-benefit pension – the formula one, it will depend on the legislation under which the member’s pension is regulated. It’s anywhere from 50-100% that’s allowed to be transferred to the member’s spouse
The reason that the number from the pension value estimate form is important is that it will tell us the legislated maximum amount that is able to be transferred to a former spouse in accordance with a division of property.
If the legislation says that the maximum transferrable amount is 50% of their estimate of $200,000, then you and your former spouse cannot decide yourselves that more than $100,000 of pension value would be transferred.
If you decide to get your pension valued by an actuary, and they tell you that your pension is worth, say, $250,000 and not the $200,000 on the pension value estimate, the member can still only transfer to the former spouse up to $100,000, which is 50% of the pension administrator’s value from the form. In that case, you’d have to find other ways to equalize the asset base if that’s your situation.
How the transfer occurs
For a defined-contribution pension – typically the spouse receiving the funds will receive a lump sum which will have to be deposited into a locked-in retirement account (a LIRA).
For a defined-benefit pension – it will depend on the pension rules as to how the recipient spouse can receive the funds.
Some pensions allow the member’s former spouse to choose between a lump sum or becoming a limited member of the pension plan to receive monthly payments from the plan once retirement time occurs. Other pensions will have limitations on the options available.
There’s so much involved in pension plan valuations and division. Of course, the best thing is to get advice that’s specific to your particular pension plan to make sure that you’re getting the right information right from the start.
Henka Divorce Law & Mediation is a Collaborative Law and Family Mediation firm that helps families thrive as they transition to separation, divorce, or cohabitation. Understanding that every journey is different, we guide families through the right legal or mediation process that fits their unique situation.
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