Securing Income for Old Age: Pensions, Pension Division, Annuities and Insurance

Transcription

1 THE INTERPLAY BETWEEN AGING, DEATH AND DIVORCE PAPER 1.1 Securing Income for Old Age: Pensions, Pension Division, Annuities and Insurance These materials were prepared by Thomas G. Anderson, QC of Anderson Pension Law Consulting, North Vancouver, BC, for the Continuing Legal Education Society of British Columbia, June Thomas G. Anderson, QC

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3 1.1.1 SECURING INCOME FOR OLD AGE: PENSIONS, PENSION DIVISION, ANNUITIES, AND INSURANCE I. Overview... 2 II. Types of Pensions... 2 III. If the Relationship Ends Before Pension Commencement... 4 A. Overview... 4 B. Lump Sum Transfer Option... 4 C. Separate Pension Option and Average Age of Retirement... 4 D. How Does the Former Spouse Choose?... 4 E. Integration with Support... 5 IV. Using Locked-In Benefits... 5 A. Meaning of Locked-In... 5 B. Earliest Age Locked-In Funds Can be Used Exceptions in BC... 7 a. Small Locked-In RRSPs and LIFs... 7 b. Age 65 and Small Total Entitlement... 7 c. Permanent Departure from Canada... 7 d. Commutation for Shortened Life Expectancy Exceptions in Other Jurisdictions... 7 a. Financial Hardship... 7 b. One Time Transfer... 7 V. If the Relationship Ends After Pension Commencement... 8 A. How Pension Elections Affect What Can be Done... 8 B. Optional Forms of Pension Single Life Pension Guarantee Period Joint Annuities Bridge Benefits Pension Division Options Joint Annuity after a Short Relationship Adjusting the Part 6 Matured Pension Rules that Apply on the Death of a Party Survivorship Benefit Payable to a Spouse Waiving Post-Retirement Survivorship Benefits VI. Property Division or Income Equalization? VII. Division of CPP VIII. Dividing Pensions under Different Rules... 16

4 1.1.2 I. Overview Aging, death and divorce, where they cross-sect, usually land on what for most parties is their most valuable asset: pension benefits. When a relationship breaks down and questions of lifetime support arise, naturally the parties consider the extent to which their retirement assets (pensions, RRSPs, government benefits such as CPP and Old Age Security, and so on) are sufficient for that purpose. When dealing with younger clients, the family lawyer s focus is on making sure the client receives a fair and secure share of benefits that the client will access some years in the future, and although the adequacy of the future income steam should be considered, this question is often overshadowed by other concerns that are more immediately pressing. When dealing with older clients, the family lawyer s attention is more firmly fixed on adjusting the parties current income levels and must have regard not only to ensuring that those are adequate during the parties joint lifetimes, but that the pension division arrangements also operate sensibly on the death of a party. There is often enough flexibility to deal with these issues when neither party is yet receiving pension benefits. But things become more complicated when one or both parties pensions have commenced. After pension commencement, elections have been made that cannot now be changed, and decisions were made anticipating that the relationship would continue, not end unhappily. I will be discussing pension division issues and the extent to which these can be used directly to secure support for both spouses. These materials are based on a CLEBC paper I presented in 2007 (Aging, Death and Divorce, The Perfect Storm, Feb. 2, 2007, Securing Income for Old Age: Pensions, Pension Division, Annuities and Insurance ). In some places, these materials are adapted from my two part article, Pension Basics for Family Lawyers, published in vol and 26.2 of the Canadian Family Law Quarterly. For useful resources about pension division, see the following: CLEBC course materials Fundamentals of Pensions and Pension Division for Family Lawyers in Pensions and Benefits (May 2011); Q&A about Pension Division on the Breakdown of a Relationship in BC (2013, BC Law Institute, available online at Family Law Agreements Annotated Precedents (CLEBC, 2013), chapter 12; and the Family Law Sourcebook for British Columbia (CLEBC, 2013). II. Types of Pensions Part 6 of the FLA adopts different rules for pension division depending on the kind of plan involved and whether the pension is matured. (Although this terminology does not appear in the Act, when a pension has commenced being paid it is said to have matured. Until it is being paid, it is referred to as unmatured. ) There are two basic types of plans. One type determines the benefits by a formula, usually tied to the member s years of service and often also based on salary levels. This type of plan is called a defined benefit plan ( DBP ). The other type is similar to an RRSP. Its value consists solely of contributions made to the plan, plus investment returns on those contributions. When the member retires, the funds in the account are usually used to purchase an annuity for the member (although often the member has the option of keeping the funds in the account and making withdrawals). This type of plan is called a defined contribution plan ( DCP ). See the Table for a summary of the pension division rules. Some of the pension division rules have been modified under the FLA. Some of the more important changes are noted below. The Q&A should be consulted, however, for more detailed information about the pension division under the FLA. The Q&A, for example, in addition to commentary on a wide array of issues that can arise on pension division, includes a detailed table comparing the FLA and the FRA.

5 1.1.3 Table: Summary of BC s pension division rules Type of Plan Unmatured Matured Defined Benefit Plan ( DBP ) Defined Contribution Plan ( DCP ) The division is deferred. The spouse becomes a kind of member of the plan (called a limited member ) and, at any time after the member is eligible to have the pension commence, can either: (a) take the share by a lump sum transfer from the plan (by a transfer to a prescribed plan, such as an RRSP), or (b) take the share by a separate pension payable for the limited member s lifetime. [Under the FRA, the separate pension option was available only if the former spouse waited until the member s pension commenced] The spouse s share is transferred immediately in a lump sum to a prescribed plan, such as an RRSP. [No change from the FRA, although the FLA clearly provides that the transfer could be made to a separate account in the same plan, with the administrator's consent] The spouse becomes a limited member of the plan. The plan divides each monthly pension cheque between the limited member and member (after making separate withholdings for tax). If the limited member dies first, the member keeps all of the pension. If the member dies first, the limited member keeps all of the survivorship benefits (if any). [No change from the FRA] If the funds in the DC account have been used to purchase an annuity, the spouse becomes a limited member and receives the share in the same way as a matured DB pension. If the funds are still in the DC account (and the member is receiving benefits by making withdrawals) the spouse s share is transferred to a prescribed plan (in the same way as for an unmatured DC account). [Under the FRA, it was not clear what happened if funds remained in the DC account] Tip: The Table shows the basic outline of pension division. For a more rigorous breakdown, dealing with all of the types of pension benefits that may be divided under Part 6, see Table 3 in the Q&A. It is beyond the scope of this paper to provide a detailed overview of differences between the FRA and the FLA pension division rules.

6 A. Overview III. If the Relationship Ends Before Pension Commencement If one of the spouses has pension benefits, and the relationship ends before the pension matures, the pension division rules under Part 6 provide a great deal of flexibility in allowing each spouse to take separate shares, which can then be used according to their individual needs. The non-member spouse s share, depending on the circumstances, will be either a lump sum, transferred to a prescribed pension vehicle, or a separate pension payable for the spouse s lifetime. In either case, the asset is the non-member spouse s to use. Once division is completed, neither party will be affected by elections made by the other, nor by the death of the other. B. Lump Sum Transfer Option The lump sum transfer is used if the pension is in a DCP, or if the pension is in a DBP and the member has not yet elected to have the pension commence. The spouse is given several options for receiving the lump sum: purchase an annuity, transfer the benefits to another pension plan or keep them in the pension plan in a separate account (if the plan administrator consents), or transfer the benefits to a registered plan, such as an RRSP. The funds are typically locked-in meaning that they cannot simply be cashed out, but must be used to provide the spouse with a life income. Information about using locked-in funds is set out below. C. Separate Pension Option and Average Age of Retirement The separate pension option is available only for DBP s. Under the FRA, the former spouse had to wait until the member elected to have the pension commence to receive this option. The FLA provides greater flexibility by permitting the former spouse to elect a separate pension at any time after the member is eligible to have the pension commence. To protect the plan, however, the former spouse s share is adjusted to reflect the value of the benefits had the pension commenced at the average age of retirement for members of the plan. For example, if the average age of retirement for the plan is 62, and the member is 55 when the former spouse elects to take the separate pension, the plan administrator will value the benefits assuming pension commencement at age 62, and then convert that value into a pension payable at the earlier date. This reduces the monthly payments available to the former spouse, but ensures that the former spouse's entitlement is within the plan's funding assumptions. The plan administrator can elect to use an age other than the average age of retirement, provided the age selected is not older than the average age of retirement. Some plan administrators have advised that they will continue to apply the FRA rule, which would place the optimal value for the benefits (often assuming pension commencement at the member s current age). The Pension Corporation, which administers the BC public sector plans, for example, has adopted this policy. D. How Does the Former Spouse Choose? A question often arises as to what is the best financial choice for the spouse: take the lump sum transfer or the separate pension? In principle, the values are, from an actuarial perspective, supposed to be the same, so the decision is usually made based on other considerations.

7 1.1.5 Personally, if I had the choice between receiving a pension, where the plan administrator has all of the responsibility of investing the plan resources, or taking the lump sum transfer along with the burden of investing the funds to produce a life income, I would take the pension. This is a question that the spouse must decide in consultation with the spouse's financial advisor. Often the financial advisor is of the view that a better return can be achieved through investing the lump sum. Other considerations arise if the plan is faced with solvency issues. Another common question is when should the former spouse access the benefits. Under the FRA, the approach to valuation meant that in many cases (where the plan subsidized early retirement) the highest value would be placed on the former spouse s share the earlier the share was received. Where the value of the benefits is determined by reference to the average age of retirement, there will be no advantage to taking the benefits before the average age of retirement is reached. Tip: If the member is planning on retiring before the average age of retirement, a better financial result might be achieved by the member buying out the former spouse s share of the benefits. You would need to consult an actuary to determine if this is the case (and if the former spouse has a large share of the benefits, this may not be financially feasible). Tip: If the parties have separate pension entitlement and are planning on taking retirement before the average age of retirement, they will be better off if they set-off pension entitlement rather than divide both pensions under Part 6. E. Integration with Support A point of conflict between the member and former spouse arises if support is being paid. The member will usually take the position that the former spouse should take the pension share as soon as possible, and that this should reduce or eliminate the support obligation. From the former spouse s perspective, if benefits are based on the average age of retirement, taking the pension before that date would prejudice the former spouse, whose lifetime monthly income would be reduced to reflect early receipt. In these circumstances, it is common to structure the payment of support until the member reaches the average age of retirement, or elects to retire. Judicial consideration of these types of issues is still evolving, but at this point the principle that seems to apply is that the former spouse (unless the parties have otherwise expressly agreed) is permitted to defer using the share of pension benefits for support until that is no longer a reasonable financial decision, or at the very least, until the date that the member elects to retire. Tip: If the agreement is addressing these issues, it should also address what happens to support if the member elects to take early retirement. To the extent that this issue has been addressed in litigation, BC courts tend to take the view that early retirement (absent health reasons, or the parties agreement) does not affect the obligation to continue paying support: see, for example, Emery v. Emery, 2010 BCCA. For more information on these topics, see my paper referred to in the introduction, Fundamentals of Pensions and Pension Division for Family Lawyers (in Pensions and Benefits, CLEBC, 2011), Section XVI, Integration of Pension Division Arrangements with Support Obligations. A. Meaning of Locked-In IV. Using Locked-In Benefits When benefits are transferred to an RRSP, they are typically locked-in, which means that the funds cannot simply be withdrawn, but must be used to produce a lifetime income. This is intended to protect the retirement income security of the owner of the funds.

8 1.1.6 Benefits in an RRSP do not have to be used immediately to generate an income. They can be retained in the RRSP until the end of the year in which the owner reaches age 71. At that date, they must be used to produce an income. If the benefits are not locked-in, they can be rolled over into a Registered Retirement Income Fund ( RRIF ). If they are locked-in, then the transfer would be to a Life Income Fund ( LIF ). An alternative is to purchase an annuity. Because of low interest rates used to calculate the value of an annuity, this is commonly not considered the best financial option. However, because of market volatility, more people today are considering annuities as part of their financial planning, particularly if they are in good health and have a family background of longevity. An RRSP, RRIF and LIF each provide a tax shelter for investments. An RRSP has no requirements concerning the withdrawal of funds (until the owner reaches age 71). A RRIF requires annual minimum withdrawals. A LIF similarly requires an annual minimum withdrawal, but also sets a maximum on the amount that may be withdrawn in any one year (ostensibly with the view to ensuring that the benefits will last for the person s lifetime, based on average mortality, but criticisms have been made that the current LIF rules frequently require the owner to withdraw funds too soon). B. Earliest Age Locked-In Funds Can be Used The locking-in rules are determined by the jurisdiction that had regulatory authority over the pension. Rules vary between different jurisdictions about when locked-in benefits can be accessed, and when they can be unlocked. There are usually age requirements as to when locked-in benefits may be used. A common provision is that the former spouse who receives a share of a pension on marriage breakdown by a transfer to a locked-in RRSP may transfer the funds to a LIF when the spouse reaches the same age as the member could have commenced a pension under the terms of the pension plan (usually 55). In some provinces, such as BC, it is the date that either the spouse or the member reach the age at which the member would have been eligible to have the pension commence. (For BC s rules, see Pension Benefits Standards Regulations, B.C. Reg. 433/93, in particular, ss and ) Under the federal PBSA (Pension Benefits Standards Regulations, 1985, SOR/87-19, para. 20) and in Manitoba (Pension Benefits Regulation, Man. 188/87 R, s. 18.1(4)), there is no age restriction on using locked-in funds. However, the younger the plan owner, the smaller the annual benefits will be, so there may be financial reasons to postpone accessing the funds. Tip: Read the previous paragraph again. I frequently see mis-information on when benefits that are subject to the federal rules can be used (in case reports and correspondence between family lawyers). Even if the former spouse is far from a retirement age, the federally locked-in benefits can be used by transferring them to a Life Income Fund. However, because the amount that can be withdrawn from a Life Income Fund is determined by the age of the owner, with a view to ensuring that the funds will provide a life income, starting withdrawals at an early age means that annual amounts available are only a very small percentage of the funds in the account. For example, under the current rules, at 40 years old, the maximum that can be withdrawn in a year is %. A number of exceptions to the lock-in rules are recognized (again with some variation from jurisdiction to jurisdiction). Some jurisdictions (but not BC) allow the owner to unlock up to 50% (and in some cases, more) of the funds on reaching a specified age (typically 55). This is discussed in more detail below. Unlocking the funds means that they can be cashed out (or withdrawn at a faster rate than specified for locked-in funds). There are usually prescribed forms for effecting the withdrawal. If the person has a spouse, a spousal waiver is also usually required. Trap: As with any withdrawal from a registered plan, it would be fully taxable as income in the year the funds are withdrawn. A common mistake is to assume that the amount withheld by the financial institution is an accurate measure of the taxes payable on the withdrawal. The taxes payable on the

9 1.1.7 withdrawal will be determined having regard to all of the plan owner s income in that tax year, and will often be significantly higher than the amount withheld. Tip: A new Pension Benefits Standards Act has been enacted in BC, but not yet proclaimed. The regulations to that Act will address the unlocking rules that apply in BC. The information in these materials describes the current rules. If a question about locked-in funds arising after the new PBSA comes into force, you must consult the new legislation. 1. Exceptions in BC The following is a list of situations in which locked-in funds that are subject to BC law may be unlocked. More information about these exceptions can be found on the BC Financial Institutions Commission website (which has a great deal of helpful information generally). a. Small Locked-In RRSPs and LIFs If the locked-in funds are less than 20% of the Year s Maximum Pensionable Earnings ( YMPE ) as defined under the Canada Pension Plan Act, they can be withdrawn. For 2013, the YMPE is $51,100. This means that if the account is less than 20% of YMPE = $10,220, the funds can be withdrawn. The test is applied to the funds in a specific account, and not on the total of all of the owner s locked-in funds. However, another rule prevents this exception from being abused. An existing account cannot be divided into portions smaller than 40% of YMPE (or $20,440 in 2013): see Pension Benefits Standards Regulation: ss. 29(9.2) and (9.3), 30(10.2) and (10.3). b. Age 65 and Small Total Entitlement A person who is 65 (or older) may unlock funds if the total of all of the owner s accounts are less than 40% of the YMPE = $20,440. c. Permanent Departure from Canada A person who has permanently moved from Canada can cash out locked-in funds. This would be established by being absent from Canada for two or more years, or otherwise acquiring non-resident status (see the CRA publication NR73 - Determination of Residency Status (Leaving Canada)). d. Commutation for Shortened Life Expectancy A contract for an RRSP or a LIF can provide for funds to be un-locked if a physician certifies that due to a physical disability the life expectancy of the owner is likely to be shortened considerably. 2. Exceptions in Other Jurisdictions a. Financial Hardship Although not recognized in BC, some jurisdictions will permit unlocking because of financial hardship. Ontario and Alberta, for example, allow registered plans (other than pensions) to be unlocked on this ground. In Alberta, for example, the entire benefits are transferred from the plan to a locked-in account in a financial institution, but only enough is unlocked to address the circumstances of financial hardship. b. One Time Transfer Manitoba and Alberta allow a one time transfer of up to 50% of locked-in funds.

10 1.1.8 The Manitoba legislation came into force May 25, It permits a person who is over 55 to make the one-time transfer of 50% of locked-in funds from a LIF or LRIF to RRIF (PBA, s. 21.4, Reg. 76/2005). Alberta, as of Nov. 1, 2006, permits a person who is over 50 a one-time transfer of 50% of locked-in funds from a pension or LIRA to a RRIF. Saskatchewan, since April 1, 2002, goes even further. It allows all benefits in pension plans (or in an LRIF or LIF) to be transferred to a RRIF at any time after the member turns 55 or reaches the early retirement age established by the plan: Pension Benefits Amendment Regulations, 2002, S.R. 32/2002. Transferring benefits to a RRIF means that they would be subject to minimum withdrawal requirements, but there would be no ceiling on the amount that may be withdrawn. As mentioned, typically if the plan owner has a spouse, spousal consent for the transfer is required. This option would be useful when a relationship breaks down, although there is the possibility that it might encourage parties to use resources that more prudently should be saved for old age. My contacts in provinces that provide this option advise, however, that it is not being used sensibly. V. If the Relationship Ends After Pension Commencement A. How Pension Elections Affect What Can be Done If the relationship ends after pension commencement, options available to the parties are restricted by the elections made by the member at retirement. (In some cases, the member is permitted to re-elect if retirement was very recent, but these are rare.) B. Optional Forms of Pension When electing to have the pension commence, the member is usually permitted to select to receive the pension in one of a variety of optional forms. If the member has a spouse at pension commencement, pension benefits legislation requires the member to elect a minimum survivor benefit. Most provinces, including BC, require that the survivor benefit payable to a spouse on the death of a retired member must be not less than 60% of the monthly payment made during the parties joint lives. If a member dies after retirement, then whether a death benefit is payable depends upon the form of pension the member has elected. Benefits payable on the death of a member after retirement are often referred to as postretirement survivor benefits. It is worth spending a few moments reviewing the various optional forms of pension a member may elect to take on retirement. 1. Single Life Pension A single life pension is paid only for the member s lifetime. If the member elects a single life pension, no benefits are payable after the member dies (except, possibly, for a refund of unspent contributions and net investment returns). If the pension is payable for only the life of the member then, when the member dies, the pension ends. A surviving spouse, or former spouse, would be entitled to receive no further share. Since legislation requires a member with a spouse to elect a minimum survivor benefit, unless the spouse waives the benefit, one might assume that the decision to select a single life pension will usually be because other resources (life insurance or other assets) are considered adequate to fund future income needs without the security of a survivorship benefit. My colleagues who are directly involved in pension administration advise, however, that the decision to take a single life pension is more often

11 1.1.9 motivated solely by the idea of receiving a slightly larger monthly payment without sufficient thought being given to what is to happen when the pension is gone. Tip: A member who has a spouse must elect a form of pension that pays a 60% survivor benefit, unless the spouse signs a prescribed waiver. In BC, for common law partners, spousal status for pension purposes ends when they separate. For legally married spouses, spousal status ends after two years separation. If you are representing the former spouse, and the member is close to retirement, you must make sure a Form P1 is filed so that the spouse will be given 30 days advance notice of a decision by the member to have the pension commence. You should also consider obtaining a restraining order, to ensure that the former spouse is not prejudiced by the member electing a single life pension. Tip: If you are representing the member who is about to retire, and the former spouse has lost spousal status for pension purposes, it may seem like a good thing (from the member's perspective) to not have to worry about the former spouse's income security. However, it is important to recognize that electing a single life pension removes often the only asset that can be used economically to provide that security for the former spouse. A member who decides to do this may find that a court will order that alternative (and much more expensive) security be provided. An application for such an order was unsuccessful in Verwoord v. Verwoord, 2011 BCSC 573, but my expectation is that this issue will arise in the future. My advice would be that a plan member would be better off to preserve options for using the pension benefits to protect both parties. The FLA permits a pension commencement date to be preserved, and pension division to take place on a retroactive basis, which protects both parties if time is needed to finalize pension division arrangements and the member has reached a retirement age: FLA, s Guarantee Period If the member elects a form of pension guaranteed to last for a minimum period of time (for example, 5, 10 or 15 years), then any portion of the guarantee period that remains unexpired at the date of the member s death is payable to the beneficiary designated by the member. For example, if the member elects a 10 year guarantee, and dies eight years after pension commencement, the pension will be paid for two more years to the designated beneficiary. 3. Joint Annuities As mentioned, if the member has a spouse at the date of retirement, both federal and provincial legislation require the member to elect a survivor benefit for the spouse, unless the spouse waives that benefit. If the member dies first, the survivorship benefit will provide continued income to the spouse for the spouse s lifetime. This form of pension is referred to as a joint annuity, and the parties are referred to as joint annuitants. The survivorship benefit is typically a reduced amount. A joint and 50% survivor pension would pay the survivor 50% of the amount paid during the member s lifetime. A joint and 60% survivor pension (the usual statutory requirement) would pay the survivor 60% of the member s pension. A joint and 100% survivor pension would pay the survivor the same amount that was paid during the member s lifetime. Under any of these options, however, if the spouse predeceases the member, payments to the member under the pension are unaffected. (A few plans provide a survivorship benefit under which benefits will reduce on the death of the member or the spouse, an arrangement that usually allows a higher monthly value to be paid during the parties joint lives.) Typically, the monthly payment under a pension reduces the greater the survivorship benefit provided, so that, whatever optional form of pension elected, the plan s overall financial obligations remain constant. The survivorship benefit is being funded by lower pension payments during the parties joint lives.

12 This is not always the case, however. Some older plans were set up to provide the survivorship benefit as a kind of bonus for married employees, where the amount paid during the parties joint lifetimes would be the same as the amount paid under a single life pension (or only marginally less). This is the case, for example, with the 50% survivor benefit provided under the Air Canada pension plan. Although it is possible to find exceptions, typically a joint annuity may be elected only between a member and spouse. For that reason, this option is usually not available if the parties have become former spouses by the time the pension is to commence. 4. Bridge Benefits Another frequent component of a pension that is divisible as part of the pension is called a bridge benefit or bridging benefit. See, for example, Vestrup v. Vestrup, [1999] B.C.J. No (S.C.). Bridge benefits are a temporary monthly supplement paid in the early years of the pension and designed to provide level income. Probably the most common example is the Canada Pension Plan bridge benefit. This is an additional monthly payment that ceases when the member reaches 65, to take into account the CPP benefits that would then be payable (although no adjustment is made if the member elects to have CPP commence at an earlier age). Some plans make similar arrangements for Old Age Security benefits. Some plans are structured to provide the bridging benefit automatically. Others allow the member to elect the option. Where the benefit is optional, what essentially is taking place is that the member elects to front load the payment of part of the pension. 5. Pension Division Options Obviously, the form of pension elected determines whether it will be possible to protect the spouse for lifetime income or not. In some cases, the survivorship benefits will be more generous than is needed, and it is unfortunate that there is no way to divert some portion of those benefits so they can be enjoyed during the parties joint lifetimes. This issue was considered in the BCLI Report on the 10 Year Review of Part 6 (2006). The response from plan administrators was that it would be far too difficult to require commuting the pension that had been selected and converting it into another form. For that reason, it was concluded that the current law not be revised. Under the current Part 6 Rules, if the pension is matured, the spouse is entitled to: (a) a proportionate share until the earlier of the death of the spouse or the termination of the pension, (b) if the spouse predeceases the member, the member is entitled to resume receiving all of the pension payments, (c) if the member predeceases the spouse, and the spouse is the designated beneficiary of the survivor benefits, the spouse is entitled to all of the survivorship benefits, and (d) if the member predeceases the spouse, and another person is the designated beneficiary of the survivor benefits, the spouse may be entitled to a proportionate share of the survivorship benefits (this is a highly unusual situation that requires too much space to explain here, but is canvassed at para. 5.7 of the Q&A). If the member elected a single life pension, then the pension will end with the member s death. In that case, there is no way to secure the former spouse for a lifetime income using the pension itself. If there is a guarantee period, this will help somewhat, but will still not guarantee lifetime income. Only the joint annuity in favour of the spouse will do that.

13 6. Joint Annuity after a Short Relationship A recurring problem is where the member elects a joint annuity after a short relationship and then the relationship ends. In these cases, the member typically argues that the spouse has been benefitted by the survivorship election which should be taken into account and the member has been prejudiced (because the pension during the parties joint lifetimes has been reduced to pay for the survivorship benefits). Where these arguments are made, however, typically the court takes into account the parties support needs, which may be the deciding factor. See, for example, Ree v. Ree, 2001 BCCA 603. Even if the court is prepared to accept that an adjustment should be made, how should that be carried out? One way of dealing with this might be to value the pension and value the survivorship benefits, set them off and divide the difference in value between the parties. However, this has the effect of requiring the spouse to pay up front for benefits that may never be enjoyed. As a general principle, in the similar situation where the spouse requests the court to have the member pay the spouse compensation for the pension benefits, the principle in BC is that the court will decline to make such an award without the consent of the member, because it is perceived as being unfair to require the member to pay in advance for benefits that may never be realized: Strahl v. Strahl (1985), 60 B.C.L.R. 197 (C.A.). It strikes me that the same principle is equally applicable in each case. Moreover, although these types of comparisons can be made on an actuarial basis, the nature of an actuarial calculation is that it holds true over large groups of people. There is no way of predicting what will happen with the specific parties. Although it is reasonable to expect, for example, that a younger wife will outlive an older husband, and therefore is more likely to enjoy the survivorship benefits, it is not unknown for the reverse to occur. It must also be recognized that the Part 6 rules provide only rough justice on this issue: if the member predeceases the spouse, the spouse takes all of the survivorship benefit. This seems very generous. For example, suppose the pension is to be divided equally and the member elected the usual J&S60% paying $4,000/mo. during the parties joint lifetimes. This would mean that each will receive $2,000/mo. during their joint lifetimes but, if the member predeceases the spouse, the spouse will receive $2,400/mo. Viewed in isolation, an obvious question to ask is: why is an increase in the spouse's payment in these circumstances considered to be fair? However, equally, if the spouse predeceases the member, the member will receive all of the pension ($4,000/mo.) which is also disproportionate. 7. Adjusting the Part 6 Matured Pension Rules that Apply on the Death of a Party Does this mean that the parties should make special arrangements in most cases to over-ride the Part 6 rules? Some take the view that the Part 6 rules can be improved by providing that the pension division not stop with the death of a party, but payments continue to the deceased party s estate. Typically, the plan administrator will not assist in administering the division after the death of a party, so this must be done by the survivor. While it achieves an equal division in a property sense, it does so at a cost: it delays the administration of estates, and it provides for benefits to be conferred on a deceased party after they are of little use. My usual recommendation, barring exceptional circumstances, such as a dependent who must be provided for, is to simply adopt the Part 6 rules. Where the parties life expectancies are not too different, focusing on the apparently disproportionate results achieved by the Part 6 rules can be misleading. In those cases, the survivor is unlikely, on average, to outlive the other by much. Does it really matter if one party or the other enjoys a disproportionate amount of the pension in the last year or two of that party s lifetime?

14 Survivorship Benefit Payable to a Spouse Trap: Some plans provide a survivorship benefit only if the member has a spouse at the date of the member s death. Usually, a former spouse no longer qualifies as a spouse and is ineligible for the benefit. This structure is typical, for example, of many federal public sector plans. If the member has retired and is receiving a pension, the survivorship benefit payable to the spouse is lost when the parties divorce. While the loss of survivorship benefits presents problems when structuring pension division arrangements (particularly using an if and when approach ), those issues were largely superseded by the enactment of the federal Pension Benefits Division Act, which provides for dividing the pension by the transfer of the spouse s share in a lump sum. This structure paying a survivor benefit only to a person who qualified as the member s spouse at the date of death was also once common in many federally and provincially regulated private sector plans (for example, many bank plans were set up this way, as were the Air Canada plans). However, Canadian pension benefits standards legislation governing private occupational plans now typically provides that, as a minimum standard, a plan must provide a 60% survivor benefit for the person who qualifies as the member s spouse at the date of retirement. In my experience, not all plans have revised their texts appropriately. However, any private plan that purports to revoke the survivorship benefit if spousal status is subsequently lost would be non-complying: see, for example, Smiley v. Ontario (Pension Board) (1994), 4 R.F.L. (4th) 275 (Ont. Gen. Div.) dealing with the provisions of the Ontario Pension Benefits Act. The minimum pension benefits standards legislation would override the terms of such a plan. Trap: Air Canada, which formerly provided that any survivorship benefit was lost on divorce, has since revised its plan text to provide, as required under the federal PBSA (s. 22(3)) that a 60% survivor benefit is unaffected by a subsequent change of spousal status. However, it continues to provide the parties with the option of electing a 50% survivorship benefit which, under its plan text, is lost if there is a subsequent change of spousal status. Air Canada s view is that the spouse, in waiving the 60% survivor benefit, has also waived all aspects of the statutory minimum survivorship benefit requirements. This presents something of a trap for dividing an Air Canada pension. The parties frequently agree on an if and when division, incorrectly assuming that the 50% survivor benefit will be available for the protection of the member s former spouse. My expectation is that a waiver made without adequate disclosure concerning how loss of spousal status would affect entitlement would not be effective, but it is important to be aware of this issue. Tip: Plan materials often state that there is a survivorship benefit for the member s spouse, which sometimes creates a misleading impression. It is important to verify whether or not the benefit remains payable after a spouse becomes a former spouse (Yates v. Air Canada, 2004 BCSC 3, 5 E.T.R. (3d) 281). Tip: The new BC PBSA, s. 81(2) will provide that a spouse who signs a waiver, choosing other benefits that depend upon spousal status, keeps those benefits even if there is a later loss of spousal status ( despite any provision to the contrary in the plan documents ). 9. Waiving Post-Retirement Survivorship Benefits This problem may be more common in agreements, but I have also seen it in orders made in reported judgments. When the relationship ends after pension commencement, frequently the matured pension provides for a survivorship benefit. The member will often request that the survivorship benefit be waived. Some jurisdictions permit a joint annuity to be commuted, into two single life pensions, for example, or permit the spouse to receive the share of the pension by a transfer of the commuted value, and commute the balance remaining into a single life pension for the member. BC, however, does not permit changes to be made to the survivor benefit election.

15 Trap: If the governing legislation does not permit either of these options, what is the effect of a waiver, or an order depriving the spouse of the survivorship benefit? Who is to receive the survivorship benefit if the spouse does not? In most jurisdictions, an agreement or an order that purports to deprive the spouse of the benefit of the survivorship benefits is effectively a nullity (see T. G. Anderson, Comment on Margetish v. Margetish (2002), 28 R.F.L. (5th) 381 (B.C.S.C.)). In some cases, the plan administrator has taken the position that the waiver is effective, and the plan retains the benefits that would otherwise be payable, which would be a very unfortunate outcome if upheld by a court. Although Part 6 does not permit the survivorship benefit to be commuted, it does permit the former spouse to waive entitlement and hold the benefits for a third party. Form P5, Waiver of Survivor Benefits after Pension Commencement is used for this purpose. It is important to understand the limited purpose served by Form P5. The FLA adopts the following policies: (a) it is not possible, by agreement or court order, to undo the survivorship benefit election made by the member at pension commencement, (b) it is possible for the former spouse to waive the benefits, and hold them in trust for, and pay them to, a third party. But because these benefits are so important (the reason why legislation requires the 60% survivor benefit in favour of the spouse in the first place) waiving these benefits can only be done with full and informed knowledge, so a prescribed form (P5) must be used, (c) it is possible for the court to order that the former spouse holds the survivor benefits in trust for, and pay them to, a third party. But again, so that this is done as a considered matter, the legislation requires that court order expressly refers to the operative part of the legislation (FLA, s. 126(2)(a)). This is similar to the rules about waiving CPP credit splitting (which is permitted only if there is an express reference to the credit splitting rules). Although my practice consists primarily of dealing with pension division issues, so far I ve encountered only two occasions where it made sense for the former spouse to waive the survivor benefits in favour of a third party. This arrangement, however, has also been recognized in the case law (see Wice v. Wice, 2009 BCSC 655). In my opinion, a well-advised former spouse should not sign a Form P-5. The survivor benefits are valuable and, if the former spouse is deprived of those benefits, what security is there for income in old age? There is no obligation on a plan administrator who receives a Form P5 to assist in paying them to a third party. And a well-advised plan administrator would not consent to assist (because of the numerous problems that will arise from this arrangement in terms of taxes and determining whether benefits continue to be payable) the benefits remain those of the former spouse, who will be taxable on them, and the payments to the third party can continue only so long as the benefits are payable (and they cease on the death of the former spouse). Trap: A similar issue arises where the court order provides that a spouse is no longer entitled to benefits under federal legislation after the pension is divided. In some cases, if spousal status continues after division, the spouse may continue to be entitled to benefits (such as preretirement survivor benefits relating to part of a federal public sector pension that was not subject to division under the PBDA). Where there is a conflict between the terms of the court order and the express terms of the legislation, it is a good question which is to prevail. My understanding is that, in these circumstances, federal public sector plan administrators view that part of the order as having no effect. Whether this administrative practice would be upheld in court remains to be seen. The federal PBSA says that pension division issues are governed by provincial law, and in BC, when parties make arrangements about pension benefits as a result of the breakdown of their relationship, spousal entitlements

16 automatically end (FLA, s. 145). However, when drafting an order or agreement involving benefits in federal public sector pensions, I will typically provide: that the former spouse is not entitled to the benefits, will sign such prescribed waivers as may be required and, if not permitted to waive, will hold them in trust and pay them to a specified third party. Of course, there are cases where the parties want the former spouse to continue to be protected by survivor benefits, so adopting this approach must be carefully considered. VI. Property Division or Income Equalization? The approach under Part 6 is primarily based on dividing property. Formulas are set out for determining the spouse s share of the asset and then conferring an interest in the asset, or in the income stream produced by the asset. As such, applied blindly, the Part 6 rules are not focused on ensuring that each of the parties receives roughly equal income from the asset. This can be seen most clearly from the application of the Part 6 rules discussed in the last section, that apply on the death of a party where a matured pension is being divided. Another situation would be where one spouse earned most, if not all, of the pension before the marriage. For example, if the member was in the plan for 30 years, marries and works for another 5 years before retirement, and the relationship ends sometime thereafter, the spouse would be entitled to ½ * 5/35 x the pension or about 7% of it. Taking into account the duration of the relationship that might be an appropriate division. However, the longer the relationship, the more likely that a court will find that the correct approach is not property division, but providing the spouses with similar standards of living. In these cases, personally, I find it easier to think of the approach as being support oriented rather property division. The whole rationale for how the property is to be divided changes. So, for example, if the member wholly earns a pension before a lengthy marriage (not an uncommon situation) the fact that the ½ A/B formula would give the spouse only a small share of the pension is irrelevant. The focus of the court will be on income needs, which will be met either through a support order, or directly with an interest in the pension. FLA, s. 129, expressly permits the courts to take support considerations into account in adjusting pension entitlement. Tip: Under the FRA, the starting point for determining a former spouse's share of pension benefits was to take into account the benefits that accrued from the date the parties married to the date of the triggering event, and if the court order or agreement did not specify the dates to be used, these dates could be determined objectively and would apply. Entitlement could be reapportioned based on specified factors, and courts often included in the division benefits that accrued during a prior period of cohabitation. The FLA provides that the benefits to be divided are those that accrued from the date that the parties marriage-like relationship commenced to the date of separation. These dates frequently cannot be determined objectively. A court order or agreement dividing pension benefits, therefore, will be rejected unless it specifies the dates to be used. Tip: At one time, it was quite common to provide a spouse with a share of a pension in the form of support. Before deciding whether the arrangement should take the form of a support order or an interest in the pension, it would be a good idea to review the BC Court of Appeal decision in Zimmerman v. Shannon, 2006 BCCA 499. The case provides a valuable summary of the evolution of pension division principles in BC, as well as valuable guidance on what is to happen if the pension is divided through a support arrangement. In Zimmerman, the husband had several pensions and the parties entered into an agreement providing that the husband would pay the wife her share by a specified amount of support. Over time, the husband s pension income became depleted. The wife, in the meantime, was earning a good salary, far in excess of the husband s income. The husband applied to terminate the support payment and was successful at trial. The Court of Appeal held that the court has no jurisdiction under the Divorce Act to terminate contractual support. Based on the legal analysis in Zimmerman, however, it would appear that the court would have such jurisdiction if the arrangements had been set out in a consent order instead.

17 VII. Division of CPP Under the Canada Pension Plan, when a relationship ends, the parties unadjusted pensionable earnings accruing during the relationship can be equalized. Equalization is available after a divorce, or once the parties have lived separate and apart for more than one year. Typically the result of equalization is fair to both parties, and is based on the view that, for the years during their relationship, each should benefit equally from CPP. In some cases, however, as discussed below, it is to the advantage of both parties to waive equalization because of the way CPP calculates benefits. It is unfortunate, therefore, that not all jurisdictions permit waiver. To help former spouses decide whether to waive the equalization, a simulation of the projected pension under the QPP (the Quebec equivalent of CPP), showing benefits before and after equalization, may be obtained from the Régie. I do not believe the CPP administrators provide a similar service. It is possible, however, to estimate whether or not the division will be advantageous, although where the parties are years from being able to receive CPP, any such estimate would necessarily require making assumptions about future contribution rates. Where the parties are close to retirement, or are already receiving CPP benefits, these estimates can be made with precision. There are companies providing these services and have added links on my website if you are interested in following up. Benefits under the Canada Pension Plan are determined by contributions made by the person from age 18 over their working career. The total benefits payable are determined by a formula based on each year s pensionable earnings adjusted to take into account the fact that, with inflation, the pensionable earnings, and maximum required contributions, have increased over the years. Entitlement to maximum CPP benefits, however, does not necessarily depend upon making maximum contributions in every year. Benefits are adjusted by dropping out specified years in which a person may not have been able to contribute fully. These drop out adjustments include: (a) (b) (c) Lowest Years Dropout: 15% of the years in which lowest contributions were made (this percentage is gradually being increased with the changes introduced to CPP in 2011), Child Rearing Dropout: years in which the person had a child under seven (this is usually claimed by the parent who was entitled to receive Family Allowance payments or the Child Tax Benefit). CPP will not deduct any year that benefits the parent. (If both parents apply, they have to apply for different periods. In such a case, the parent who received the child tax credit would have to write to CPP advising that the claim is only for a specified period, and authorizing the other parent to claim for the balance), and Disability Dropout: years in which the person was entitled to receive CPP disability benefits. A person who is disabled may have other disability benefits which will reduce by the amount received under CPP, which may discourage an application for the CPP benefits (unless other benefit providers insist). However, even where there is coordination of benefits, an application for CPP disability benefits is essential in order to protect the value of the disabled person s CPP when it becomes payable at age 65. In BC, it is open to the parties, or the courts, to waive division in appropriate cases. In other cases, it makes sense to defer the application for division. Tip: It may be advantageous to the parties to waive division where both are working, and one party s only period of low contributions is due to looking after children in their younger years. The Child Rearing Dropout will often protect that parent, by excluding those years from the calculations. Dividing CPP in this situation may result in an overall value loss (subtracting benefits from one spouse, with no benefit conferred on the other). Tip: If one spouse is currently receiving CPP disability benefits, determine whether division will increase or decrease that spouse s CPP. If it will increase CPP, it will also increase the disability

18 benefit and division should take place immediately. But if it will decrease CPP, then it will be advantageous to defer division of CPP until the date the other spouse is eligible to claim: Coulter v. Coulter (1998), 60 B.C.L.R. (3d) 6 (C.A.). The disability benefit is based on a flat rate, plus an additional amount determined with respect to the spouse s unadjusted pensionable earnings. If, however, equalization results in reducing the disabled spouse s unadjusted pensionable earnings, it will cause an immediate reduction in the disability benefits, even if the other spouse cannot use the CPP entitlement until years later. In that case, the parties should often agree to defer the application for division until the younger of them is eligible to apply for benefits. Tip: If the spouse with greater CPP contributions during the marriage is older, then deferring the division until the younger is able to claim CPP will benefit the older spouse without any prejudice to the younger. The older spouse will enjoy a period of unreduced CPP until the division takes place. Tip: In some cases, to avoid an overall value loss, the parties agree not to credit split, and compensate the former spouse by allocating a larger share of another asset. For example, if foregoing credit splitting will save one spouse $150/mo., while conferring on the other spouse only an additional $50/mo., it makes much more sense to not credit split, and to compensate the spouse who would have benefitted with $50/mo. from another pension asset. Trap: As with any legislation, it is possible for statutes to be amended. It is also important to determine what the applicable limitation periods are. Limitation periods are different for married and unmarried spouses. On or after January 1, 1987 (a) if the marriage ends by divorce or annulment: there is no limitation period to apply for credit splitting (even if former spouse dies), (b) if the marriage ends by separation: there is no limitation period during the parties joint lives, but an application must be made no later than three years from date of death of the former spouse, (c) if a common-law partnership ends in separation: the limitation period is four years from the date of separation. For common law partners, therefore, the option of deferring division is usually not available (unless the spouse s are within a year or two of eligibility). Trap: Different rules apply if marriage ended or parties separated before January 1, Tip: Limitation periods can be waived. VIII. Dividing Pensions under Different Rules Tip: If each spouse has a pension that are subject to different pension division schemes, it is important to consider whether any adjustment must be made to reflect differences in those schemes. If one spouse has a pension subject to BC rules and another has a pension subject to another province s legislation, the BC rules often provide a much more generous share than the rules applied outside BC. Tip: Where different approaches lead to placing differing values on each spouse s share of the other s pension, my recommendation is to take this into account. One approach is to provide that each of the parties to keep their pensions, and divide only the difference in value.