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Answers to Frequently Asked Questions
Can I hire an independent actuary to value my Ontario regulated pension in accordance with the new law (instead of going to my pension plan administrator)?
You can, but there are major downfalls with doing so. The law in Ontario specifically states that the plan administrator of an Ontario regulated pension plan must provide the marriage breakdown value (this does not apply to federally regulated pensions plans). As a result, there are several issues with having an independent actuary provide a valuation for an Ontario regulated pension plan:
- Only the plan administrator can divide the pension, so an independent valuation will not permit a division of the pension. Other assets will need to be traded against the pension.
- The value provided by the independent actuary will not be exactly the same as the value provided by the plan administrator due to some possible differences in calculation methodology and assumptions; in most cases the values should be close. This will become less of an issue in time as the assumptions and methodologies used by plan administrators become known.
- If a division of the pension is desired in the future, the value will need to be requested from the plan administrator and the regular process followed (which includes paying any fees required by the plan administrator).
- The value provided by the plan administrator would override a value provided by an indepedent actuary. The report provided by the indepdent actuary would be qualified since they are not the plan adminstrator (who is required to provide the value under the current law) and cannot certify that the value is the same as would be provided by the plan administrator.
Due to the issues outlined above, it is advisable that most pension plan members of Ontario regulated pension plans request the marriage breakdown value from their plan administrator. However, there are reasons why a plan member would want an independent valuation: they cannot wait for the value from the plan administrator, confidentiality reasons (when the value is requested from the plan adminstrator, both spouses recieve the value by mail).
If you are interested in having us value your pension benefits, you will need to sign our waiver acknowleding that you understand the issues with having us provide a valuation. For additional information on requesting a pension valuation, click here.
How does an actuary determine the value of a defined benefit pension?
An actuary can determine an income tax adjustment for a member’s defined benefit pension (i.e. the contingent income tax) using a method which is consistent with the new pension valuation rules in Ontario. Please click here for information on how to retain us to do this calculation.
Prior to retirement, income tax has not been paid on the funds in an employer pension plan or the funds in an RRSP. The contributions made to these registered pension plans were tax deductible and the investment income earned has not been taxed. As a result, income tax will be paid on any payments the person receives from these plans. So $100,000 in an RRSP (or a $100,000 defined benefit pension) is not equal to $100,000 in a chequing account because the person will have to pay income tax on the $100,000 from their RRSP (so the $100,000 in their RRSP is worth less). In order to compare the value of pensions to other assets, they must be reduced to reflect the anticipated income tax that will be paid in the future. This reduction to the value of the pension is also referred to as an income tax liability or contingent income taxes.
Be aware that even in the situation where a couple equalizes the pension assets (i.e. and agree to leave the pension assets out of the equalization calculation), in some cases income tax calculations would need to be performed to ensure that both spouses end up with the same after-tax amount of pension assets. This is because a pre-tax asset is worth more to the spouse with lower income (in the lower tax bracket). For example, suppose a couple had earned $100,000 in RRSPs during marriage and one spouse is projected to have significant employment income in retirement (and not the other spouse). Suppose that they decide to equalize the $100,000 in their RRSPs by each taking $50,000. In retirement, the spouse with the employment income will be in a much higher tax bracket and will receive much lower after-tax payments from the $50,000 in their RRSP compared to the spouse with no employment income in retirement. To equalize the after-tax value of the RRSPs, a larger amount would need to be transferred to the spouse in the higher income-tax bracket.
In the previous situation, however, it is advantageous for the couple to transfer RRSP assets to the spouse without the employment income as they will pay much less tax on withdrawals from the RRSP which will effectively increase the after-tax value of the family assets. In general, a separating couple can increase the after-tax value of their family assets by transferring all tax-deferred assets (i.e. RRSPs) to the spouse with the lowest regular income and in exchange, transfer after-tax assets to the spouse with the highest regular income. In addition, this often this makes sense from a financial planning perspective since the spouse with the low income will be provided with assets that can be used as income.
In accordance with Canadian actuarial standards, when an actuary performs a defined benefit pension valuation, they will estimate the effect of income tax on the pension. This will depend on the member’s assumed retirement income. The more income they are expected to earn, the higher their assumed tax rate, which will result in a lower after tax value of their pension. For other retirement assets such as RRSPs, an income tax calculation would need to be performed to determine a fair adjustment.
Do supplemental pension plans need to be valued by an actuary?