Pensions are often people’s most valuable asset, and are considered to be a family asset under the Marital Property Act of New Brunswick.
Defined benefit pensions are complex assets and can be difficult to deal with on divorce. There are two fundamental issues to consider: the mechanisms available to actually divide the pension and whether these mechanisms divide the pension fairly.
There are two primary mechanisms to divide a defined benefit pension: the actual pension payment can be split at retirement or a lump sum payment can be made from the pension plan to the non-member spouse. The law in New Brunswick only provides the option of an immediate lump sum payment to the non-member spouse. In addition, the member spouse can “buy-out” the non-member spouse and not divide the pension at all. In order for a “buy-out” to occur, a fair value needs to be assigned to the pension (so the correct amount of the buy-out can be established).
Fair Value for the Pension
Assigning a value to a defined benefit pension is not a straight forward task (click here for more information). There are many different ways to value a defined benefit pension. This leads to much confusion when couples are attempting to assign a value to a defined benefit pension on marriage breakdown. The value that is provided by the pension plan administrator is calculated in accordance with New Brunswick’s Pension Benefits Act and is intended to assist the couple by allowing a portion of the member’s pension to be divided. In addition, it seems that this value has also been widely accepted as the correct value to use for property settlement purposes under the Marital Property Act of New Brunswick, so an actuarial valuation is not required as the member can get the value of their pension from the plan administrator.
Even if the value provided by the New Brunswick pension plan administrator is considered to be the value of the pension for the purpose of determining the family property on marriage breakdown, there are still situations in which independent actuarial advice may be required to assist in ensuring that the pension is dealt with in a fair manner.
Interestingly, in other provinces that have extremely similar pension division schemes as New Brunswick, such as Alberta and Saskatchewan (click on the province for more details), the pension regulators have indicated that they do not believe that the commuted value is necessarily a fair value to assign to the pension benefits and the courts have accepted actuarial valuations by independent actuaries to determine the value of the pension for the purpose of marriage breakdown; if the value of the member’s pension exceeds the amount that can be transferred out of the plan (i.e. the commuted value), the member has to trade other assets to satisfy the remaining value of the pension.
Foreign pensions/pensions from other provinces
In the case of foreign pensions, it is likely that an actuarial valuation by an independent actuary would be required. Actuaries can assist clients by valuing pensions from other countries and providing the lump sum value of a foreign pension in Canadian dollars and ensure that the valuation is in accordance with the standards of practice of the Canadian Institute of Actuaries; this valuation will enable the couple to include the fair value of their foreign pension with the rest of their family assets.
Click on the links below for more information:
- How is a pension divided in New Brunswick?
- Supplemental pension plans are often overlooked
- Additional information on defined benefit pension valuations
- Does the value of person’s pension assets need to be adjusted for income tax?
- Information for RRSPs
Valuation of stock options and restricted stock units (RSUs)
Some employers provide stock option and/or restricted stock unit grants as part of an employee’s compensation. If stock options or restricted stock units have been granted during the period of marriage and have not been exercised at the date of separation, these options/units are generally considered to be a family asset and may need to be valued. For more information, click the link below.
After a divorce there is often a need for regular support payments to be made from one spouse to the other (either child support or spousal support). Please click the link below for more information on support payments.
It is important to consider the long-term financial implications of a separation agreement for both spouses; it is important that both spouses understand the impact that any settlement proposal will have on their future cash flow and net worth. For example, if a spouse keeps the matrimonial home as part of the settlement it is important that they have adequate cash flow to maintain the home and pay for their living expenses. Please click on the link below for more details.