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Pension valuations
Pensions are often people’s most valuable asset, and are considered to be family property under the Family Law Act of Prince Edward Island.
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.
Pension Division
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 which reflects the fair value of the pension. Currently, Prince Edward Island is the only province in Canada that does not have a legislated pension division scheme on marriage breakdown (as Prince Edward Island’s Pension Benefits Act has never been proclaimed). The pension division options that are available will depend on the particular pension plan; for example, the Princie Edward Island Civil Service Superannuation Fund permits a lump sum payment to be made to the non-member spouse (the lump sum option is the only option avaiable, even for division of pensions in payment).
If the pension plan does not provide for a division of the pension benefits on marriage breakdown, the only pension option that is avaiable is to split the pension in retirement (or termination/death, if earlier); many pension plan administrators may not agree to split the pension at source (since they are not required to by law and their contractual obligation is to the plan member) so the pension may have to be divided outside of the pension plan using and “if and when” agreement. Under an “if and when” agreement, the member would be required to pay the member spouse a certain amount of their pension in retirement; these agreements are very problematic as they are complex (what happens on pre-retirement death, etc.), they can be difficult to enforce and do not allow a clean break between the couple. The only other option available is for the the member spouse to “buy-out” the non-member spouse out of their pension by trading other assets with the pension not being divided 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). Please note that if the member’s pension plan is federally regulated or is a federal government pension plan, there are pension division options available as these plans are regulated by different legislation (click here for more information).
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 Family Law Act of Prince Edward Island does not specify the value to assign to a defined benefit pension on marriage breakdown. The value that can be transferred to the non-member spouse from the Prince Edward Island Civil Service Superannuation Fund (now as a monthly pension for the former spouse) is calculated ignoring unvested benefits and will often understate the fair value of the pension from an economic/actuarial perspective. Ultimately the value that should be assigned to the pension for the purpose of property settlement under Family Property Act of Prince Edward Island is a matter of law. However, if the parties want to ensure that a fair value is being assigned to the pension from an actuarial/economic perspective, in many cases a full actuarial valuation by an independent actuary is required.
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 property.
Please read the information below and contact us if you have any questions.
- How are federal pensions divided?
- Why should a defined benefit pension be valued by an actuary?
- Can we use the value of the pension provided by the pension plan administrator?
- Does the value of person’s pension assets need to be adjusted for income tax?
- Pension valuations frequently asked questions
- Information for RRSPs and LIRAs
- Information on our services and fees
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 are considered family property and may need to be valued. For more information, click the link below.