Demystifying Pensions in Family Law
Under the BC Family Law Act, benefits in a pension plan are” family property,” which means that separating spouses are entitled to equally share the benefits accumulated during cohabitation. Sometimes, pension plans are one of the largest and most significant family assets to be divided upon spousal separation. However, pensions are complex and are often misunderstood. Frequently the true value of a pension is underestimated by family law clients.
What type of pension is it?
There are two broad types of pension plans: defined benefit plans and defined contribution plans. In DBP, retirement benefits are based on a formula set out in the plan, for example, 2% x years of service x highest average earnings. In DCP, both the employer and employee contribute a percentage of earnings to the plan, (for example 5%) and the balance available at retirement is the net total of contributions plus earnings, net of fees. Both types of pensions can be highly valuable assets when the aggregate value is considered, even though the value may not feel significant on the date of separation.
Where is pension registered?
The options available for pension division vary significantly depending on where and how the pension is registered. The best way to determine the rules that apply to dividing a pension is to contact the pension plan administrator. When a recipient spouse files a Form P1 Request for Information, the plan administrator will provide information about the plan, the most recent benefits statement and information about when and how the benefits can be divided. If the parties ultimately negotiate a family law settlement which involves a pension division, the plan administrator charges a fee to divide the pension, usually $500 to $750.
Has the Pension commenced?
The framework and options available for dividing the pension depend on whether the pension has “commenced.” If the plan member has retired and is in receipt of monthly pension benefits, the plan is considered to have “commenced.” Generally speaking, before a pension has commenced, the recipient spouse has several options available: transfer his or her share of the pension to a prescribed locked in vehicle, commence a separate pension for life or defer a decision until the member retires. After commencement, the income stream from the pension plan is divided; and income security may be lost to the spouse because it may be too late to change an earlier election to forgo survivorship benefits.
What about Survivor Benefits?
Upon retirement the pension plan member usually has the option of choosing between various payment options and survivor benefits. The amount of monthly benefits the plan member receives will vary depending on the option chosen. After separation, a retired plan member may wish the survivor benefits to go to a new partner rather than the former spouse. Similarly the retired plan member may wish to maximize his or her monthly benefit payment. However under BC law, the member must elect a pension that pays the former spouse a survivor benefit in the event the member dies first, unless the former spouse expressly gives up that right by signing a survivor waiver. Before signing a survivor waiver, it is strongly encouraged for the recipient spouse to obtain independent legal and financial planning advice.
How much is the pension really worth?
Pensions can be highly valuable but unfortunately it is impossible to understand the true value of a pension unless it is professionally valued by an actuary. In practice I find that most clients don’t understand why a valuation is necessary. Parties are often misled or confused because they simply look at the last plan statement and erroneously believe the amount listed on the statement (contributions made) is a true reflection of the value of the pension. Similarly I frequently encounter clients who either dismiss the pension as unimportant or tell me they “don’t want to touch” the other spouse’s pension upon separation. When I ask clients why, they often have concluded the pension is insignificant since both spouses have some form of pension or retirement savings. Other times the sentiment is based on a sense of fairness or entitlement: he or she earned it at work. However I explain to clients just like any other family asset they are entitled to share in the contributions made during cohabitation. Therefore before they relinquish their claim to a pension I urge my clients to obtain an actuarial valuation of the pension so they fully understand what they would be giving up. The valuation usually costs approximately $500 to $750 which is the same as the fee for the pension administrator to divide the pension at source. Frequently the valuation illustrates that the pension is far more valuable than the client realized. Once a pension valuation is done the parties may decide instead to leave the pension undisturbed, preferring to set off the difference in value between the assets.
Monica McParland is a member of our Family Law Department and can be reached at firstname.lastname@example.org