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Is the value of the pension a fair value?

From an actuarial/economic point of view, the value provided by the pension plan administrator is not necessarily a fair value to assign to the pension (click here for more information). The situations described below illustrate how the commuted value provided by the New Brunswick plan administrator could lead to an unfair property settlement.

There can be a problem with the consistency between pension values when both spouses have pensions and these pensions are not from the same jurisdiction (i.e. both pensions are not from New Brunswick regulated pension plans). Take a couple where one spouse (John) is a federal civil servant and the other spouse (Jane) has a defined benefit pension from her employer (a New Brunswick pension plan). Suppose that both John and Jane are 40 years old and have similar accrued pensions of about $20,000 per year fully indexed to inflation. After separation, John’s plan administrator informs him that the maximum value of his pension earned during marriage that can be transferred to Jane is $120,000 (this value is calculated based on the typical retirement/termination experience in the pension plan and is referred to as the Maximum Transfer Value). Since Jane is not yet eligible for early retirement benefits, on termination of employment she would only be entitled to a deferred pension beginning at age 65. So in accordance with New Brunswick’s Pension Benefits Act, the pension value provided by their plan administrator is calculated assuming that she terminates employment (i.e. retires at age 65) and her plan administrator informs her that Joe is entitled to a lump sum payment from the pension plan equal to $75,000, representing his half of her pension benefits earned during marriage. The $45,000 difference is mainly due to the different calculation methodologies, not due to the fact that the assets have substantially different actuarial/economic values. This situation would not arise if both pensions were valued on the same basis.

In addition, in some situations the value provided by the pension plan administrator of a New Brunswick pension plan may be a very unfair value to assign to the pension. For example, assume that a pension plan in New Brunswick (XYZ Pension Plan) allows a member to retire with an unreduced pension if they retire from active service after age 55 with 30 years of service. If a member terminates membership prior to age 55, they are only entitled to a deferred pension beginning at age 65. Assume that Joe is a member of such a pension plan. Joe is 53 years of age and has accrued a fully-indexed pension of $30,000 in the XYZ Pension Plan. Joe has been married to Susan for the entire time he earned this pension (Susan is also 53 years of age). At age 53, the plan administrator would calculate the value of Joe’s pension assuming retirement at age 65 since that is all he would be entitled to if he terminated his membership in the pension plan at that time. Assume the value provided by his plan administrator is $200,000. If Joe is assumed to retire at age 55 (i.e. with an unreduced pension), the value of that same $30,000 pension is $400,000 (since the pension will be paid for 10 years longer). In this situation, if Joe is not likely to terminate his membership in the pension plan and is planning to retire at age 55, it certainly does not seem fair that Susan would only receive $100,000 in exchange for her share of Joe’s pension (which is what she would receive in accordance with New Brunswick’s Pension Benefits Act). In fact, if Susan went to her financial planner, they would tell her that with that $100,000 she could only expect to withdrawal approximately $7,500 per year beginning at age 55 to ensure that it lasts for her expected lifetime. The above situation is not necessarily relevant depending on the pension plan and the age of the member; if the member has earned the right to early retirement benefits at the date of calculation, the value of these benefits will be included in the commuted value (i.e. the member would be assumed to retire at the date which maximizes the value of their pension).

Whether or not these situations should be addressed (and if they should be addressed, how they should be addressed) is a legal issue and not an actuarial issue. The above observations are from an actuarial perspective; it is advisable that legal advice be sought prior to retaining the services of an actuary as the appropriate method to deal with a pension on divorce is ultimately a legal issue.