There are several situations in which a plan member may receive a value for their pension benefits from their pension plan administrator; in many cases this value is not a fair value to the assign to the pension from an actuarial/economic perspective. In most cases this value represents the maximum amount of money that can be transferred from the pension plan to the non-member spouse to assist in property settlement.
In addition, as outlined below, the value that is provided by the pension plan administrator on marriage breakdown is calculated differently depending on the regulatory jurisdiction of the pension plan (i.e. federal government employees are provided with a value on marriage breakdown that is not consistent with the value provided by any other pension plan administrator). As a result, if the couple simply uses the value of the pension as provided by the pension plan administrator, the values provided from different pension plans may be inconsistent with each other and may result in an unfair settlement. For more information on your specific situation, click on the link below:
- Federal government employee
- Federally regulated pension plan (i.e. banks, airlines, railways)
- British Columbia regulated pension plans (the majority of pension plans in British Columbia)
Federal Government Employee
Federal government employees who are members of any of the federal public service pension plans where the Pension Benefits Division Act applies (i.e. federal public service employees, Canadian forces, RCMP, members of parliament) may apply to the pension plan administrator to have a portion of their pension benefits transferred out of the plan to their spouse. The maximum value of the pension that can be transferred out of the plan to the spouse is referred to as the Maximum Transfer Value (the “MTV”). The MTV under the Pension Benefits Division Act is not calculated based on a member’s individual circumstances; it is based on the retirement/termination experience of the plan. In addition, the MTV is calculated based on service and earnings information up to the date of separation (not the entitlement date as specified in the Family Relations Act of British Columbia) among other differences and is calculated using different assumptions than those specified by the Canadian Institute of Actuaries for pension valuations on marriage breakdown. Consequently, the MTV is not necessarily a fair value to assign to the pension benefits and may be higher or lower than the value of the pension calculated in accordance with the Family Relations Act of British Columbia. Unlike the values provided by the pension plan administrator in almost every other situation, however, the MTV is not calculated by assuming that the member terminates employment and for many members the MTV can be similar to, or even exceed, the fair value of the pension. Additionally, unlike other pension division processes, when the member retires the reduction in their pension is calculated based on the amount of pension earned during the division period and not on the lump sum amount that was actually transferred to the spouse (although a transfer of less than the full MTV will result in a smaller reduction in the member’s pension as the reduction is pro-rated in this case). This means that if a lump sum is paid to the spouse and the member retires before/(after) the typically plan member (which is how the MTV is calculated) then the plan will gain/(lose) money as a result of the transfer to the non-member spouse; it is not the plan member who will lose or gain since the reduction in their pension is based on the amount of pension that has been divided and not on the actual value of their pension at retirement.
The purpose of the Pension Benefits Division Act and the MTV is to provide the couple with a way to settle their pension assets, not with the goal of provided a fair value for property purposes. The MTV can vary substantially depending on the calculation date (the valuation is only done when the transfer is requested) and will not necessarily be consistent with the valuation of other pensions (i.e. the value will not necessarily be consistent with the buy-out value of a spouse’s pension from a non-federal pension plan). The Pension Benefits Division Act permits a member to transfer up to 50% of the MTV to their ex-spouse; if the fair value of their pension is higher, the member will need to settle the remaining amount using other assets. Although the MTV is not necessarily an unfair value to assign the pension, it is not possible to know if the MTV value is a fair value without having an actuarial valuation performed based on the member’s individual circumstances. If the parties want to ensure that a fair value is being assigned to the pension from an actuarial/economic perspective (that is consistent with the value assigned to other pensions), an actuarial valuation would need to be performed (click here for more information).
Federally regulated pension plans
Pension plans that are regulated by the federal Pension Benefits Standards Act, such as the pension plans of banks and airlines, are considered to be ‘local plans’ under the Family Relations Act of British Columbia; consequently, the pension division provisions of the Family Relations Act apply to these federally regulated pension plans.
Many of these federal regulated pension plans, however, do not believe that this provincial legislation applies to them, and they will only administer the pension division provisions under the federal Pension Benefits Standards Act. If this is the situation, then the pension plan administrator can make an immediate transfer of a lump sum value from the pension plan to the ex-spouse (in accordance with the Federal Pension Benefits Standards Act). This value is calculated by assuming that the member terminates from the pension plan at the date of separation and is referred to as the ‘commuted value’; the commuted value of a member’s pension is calculated in accordance with a specific standard of practice of the Canadian Institute of Actuaries (which is different than the standard of practice for determining pension values on marriage breakdown). The different standards of practice have different purposes which lead to different assumptions. The commuted value is often the lowest value (which can be very unfair to the non-member spouse), but this isn’t necessarily the case depending on the age of the member and the differences in the specified assumptions between the two different standards of practice (which vary month by month based on the movement in bond interest rates). If the member is eligible for early retirement, the commuted value will include early retirement benefits and may very well overstate the value of the member’s pension if they are not likely to retire early. In many cases, if the non-member spouse only receives half of the commuted value of the member’s pension earned during marriage (and the member is not yet eligible for early retirement), they will have insufficient funds to provide them with a pension equivalent to half of the pension the member earned during marriage.
The Pension Benefits Standards Act permits a transfer of up to 100% of the commuted value of a member’s pension benefits to their ex-spouse; the spouse’s share of the fair value of the member’s pension will likely be less than the maximum possible transfer, and a transfer of less than the maximum is the norm. If the member is most likely to terminate their membership in the pension plan, the commuted value provided by the plan administrator is a fair value to assign to the pension. Otherwise, if the parties want to ensure that a fair value is being assigned to the pension from an actuarial/economic perspective (that is consistent with the value assigned to other pensions), an actuarial valuation would need to be performed (click here for more information).
British Columbia regulated pension plans
On marriage breakdown the plan administrator of a British Columbia regulated pension plan is required by law to implement the pension division options available under the Family Relations Act of British Columbia. If the member does not want to involve the pension plan administrator, they can choose to provide their spouse with a compensation payment in exchange for keeping their entire pension, in which case they will need to hire an actuary to determine the value of their pension.
The Family Relations Act of British Columbia has specific regulations that must be followed when determining an appropriate compensation payment; the amount of the compensation payment needs to reflect possible future increases in the pension. Any value provided by the pension plan administrator is typically the commuted value since the plan administrator needs to calculate this value whenever a member terminates form the pension plan. If the member is not likely to terminate from the pension plan, however, this value typically does not reflect the true value of their pension (and is not the correct value for a compensation payment under the Family Relations Act of British Columbia). For example, many pension plans permit members to retire from the pension plan with an unreduced pension prior to age 65 if the member retires from active service; an unreduced pension prior to age 65 is often unavailable to members who terminate from the pension plan. The commuted value that a member may receive from their plan administrator assumes that they terminate and does not include the value of any benefits that they will become entitled to in the future if they continue to work (such as the unreduced early retirement pension). If a member and their spouse intend to use a compensation payment to settle the pension (and not involve the pension plan administrator) they should have the pension valued by an actuary to ensure that a fair value is being assigned to the pension from an actuarial/economic perspective (click here for more information).
Note that if the non-member spouse elects to become a limited member of the pension plan, they will become eligible for a transfer out of the pension plan when the member becomes eligible for retirement (click here for more information). The plan administrator will determine this value by assuming that the member terminates employment (i.e. retires from the plan since they are eligible for retirement), as prescribed under the Family Relations Act. This value will include early retirement benefits because the calculation is done after the member becomes entitled to these benefits. In fact, this is the reason for this transfer option; it ensures that the limited member will not lose the value of early retirement benefits even if the member spouse delays retirement.