The Canadian Source Of Employee Pension Fund Investment And Benefits Plan Management

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May 2007

B.C. Re-thinks Pension Division Legislation

By: Thomas G. Anderson

In 2003, the Canadian Institute of Actuaries established a task force that reviewed Canadian pension division law and recommended model legislation, urging Canadian jurisdictions to adopt a uniform approach. In 2003, Alberta Finance reviewed the operation of the pension division legislation that had been enacted in 2000. Many jurisdictions (most notably, Saskatchewan) have recently made substantial changes to their pension legislation that affects matrimonial disputes (from extending the basic rules to include common law partners to fundamentally revising when and how benefits can be accessed). The Ontario bar is also deeply involved in developing recommendations to government for the implementation of modern pension division legislation. The latest effort is taking place in British Columbia where the province is currently reviewing its Family Relations Act.

Some History About Family Law

Until the early 1970s, spouses divided their property according to legal ownership when a marriage ended. However, several high profile cases highlighted the unfairness of the law. Possibly the most famous was the Supreme Court of Canada decision in Murdoch v. Murdoch. The Murdochs had, over the years, acquired substantial ranch holdings, all placed in the husbandʼs name. The wife was active in all parts of running the ranch, as well as raising the children and looking after the home. Even so, the SCC held that the wife had no interest at all in the property the parties had acquired through their mutual efforts.

The unfairness of such a result was widely recognized and led, in the late 1970s, to Canadian jurisdictions enacting legislation giving courts power to divide matrimonial property, including pensions. The legislation, however, typically failed to say how pensions should be divided.

The initial methods adopted were ʻjudge made,ʼ the member would pay the spouse compensation, or give another asset, in exchange for the pension interest.

Slightly more complicated was requiring the member to pay part of each pension payment to the former spouse once the pension started.

Neither of these methods of pension division involved the plan.

By the early 1980s, however, it was recognized that some plan involvement was necessary to achieve fair results and Canadian jurisdictions began enacting pension division legislation that provided, in way or another, for one spouse to be able to claim directly an interest in pension benefits owned by the other.

B.C. rethinks pension division

Methods Of Pension Division

Most Canadian pension division schemes are similar in the way they treat an ʻun-maturedʼ Defined Contribution pension plan and all matured pensions.

The spouse receives a share of an ʻun-maturedʼ DC plan immediately, by a transfer to a prescribed pension vehicle, such as an RRSP, based on the current value of the pension.

For a matured pension, most jurisdictions provide that the spouse receives a share of the income stream. The administrator makes separate withholdings and cuts two cheques, one for the member and one for the spouse. Quebec, in contrast, provides that the spouseʼs share must be satisfied by a lump sum transfer of the commuted value.

Where Canadian pension division legislation departs most markedly, however, is in the treatment of ʻun-maturedʼ Defined Benefit pension plans. Here the two main methods of pension division are the Immediate Settlement Method (ISM) and the Deferred Settlement Method (DSM). These are quite different in approach and philosophy.

Both methods usually determine the spouseʼs share by a formula – typically 50 per cent of A/B (where ʻAʼ is pensionable service that accrued during the relationship and ʻBʼ is all pensionable service that accrues up to the date the pension is divided.

Just as with un-matured DC plans, the ISM provides that the commuted value of the spouseʼs share in a DB plan is transferred from the plan immediately (to, for example, an RRSP). The pension is valued as of separation, assuming that the member terminated employment on that date and will retire at the normal retirement age (usually 65). If the benefits are vested, the transferred funds are locked-in.

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