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)
- Newfoundland and Labrador regulated pension plans (the majority of pension plans in Newfoundland and Labrador)
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 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 of the pension and may be higher or lower than the fair value of the pension from an economic or actuarial perspective. 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 typical 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 providing a fair value for property purposes. The MTV can vary substantially depending on the calculation date. 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 for certain industries under federal jurisdiction such as those of banks, railways and airlines are regulated by the federal Pension Benefits Standards Act. This Act has provisions that deal with the division of pensions on marriage breakdown which permit the transfer of a lump sum value from the pension plan to the ex-spouse. Provincial law applies to these federally regulated pensions to some extent, but the relationship between federal and provincial law has not been completely worked out. It is not clear whether these federally regulated plans are required to follow provincially specified pension division schemes; many of the federally regulated pension plans have established nationwide administration policies which are consistent with the pension division provisions under the federal Pension Benefits Standards Act, and refuse to follow provincial pension division rules.
The value that is permitted to be transferred to the non-member spouse under the federal Pension Benefits Standards Act 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).
Newfoundland and Labrador regulated pension plans
Newfoundland and Labrador regulated pension plans are regulated by Newfoundland and Labrador’s Pension Benefits Act. Under this Act, the lump sum value of the pension that can be transferred from the plan to the non-member spouse on marriage breakdown is calculated by assuming that the member terminates their membership in the pension plan at the date of application for the transfer (not at the date of separation). The non-member spouse also has the option of becoming a limited member of the pension plan and receiving a pension from the plan when the member retires based on the member’s actual pension in retirement (click here for more information on the pension division options available in Newfoundland and Labrador).
If the parties decide to divide the pension and the non-member spouse is intending to elect a lump sum transfer from the plan, they may be losing money from an actuarial perspective (and be better off electing to become a limited member). If the member is far from retirement when the lump sum transfer occurs, the lump sum value will typically be less than the fair value of the member’s pension from an actuarial/economic perspective because it does not include future earnings increases and early retirement benefits that the member will likely become entitled to in the future (unless the member is likely to terminate their membership in the pension plan). However, if the member is close to retirement at the date of application for the transfer, the lump will be close to the actuarial value of the member’s pension since it will be calculated based on information (i.e. earnings and service information) that is more representative of the actual pension that the member will receive in retirement. The non-member spouse may want to seek advice prior to making this decision (please contact us if you require our assistance).
On the other hand, if the member is planning to “buy-out” the non-member spouse and not divide the pension, in most cases an actuarial valuation would need to be performed to ensure the value being assigned to the pension is fair from an economic/actuarial perspective (click here for more information).