XX. Compensation Payments. A. When will a compensation payment be made in lieu of division under Part 6?

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1 XX. Compensation Payments A. When will a compensation payment be made in lieu of division under Part 6? The general rule is that, barring exceptional circumstances, the court will not require a member to give up capital in exchange for retaining future benefits that the member may never live to enjoy. In Andrews v. Andrews (1995), 11 R.F.L. (4th) 117 (BCSC) Tysoe J. made the following observations: [125] Counsel for Mrs. Andrews referred me to the following passages from Syrette v. Syrette (Aug. 30, 1991) New Westminster No. D (BCSC) [at pp. 4 and 7] A person with pension entitlement and this should include separated persons, must ordinarily wait until the pension s time has come to collect what they are due. This is unless, in a court s discretion, there are exceptional circumstances otherwise. I find no exceptional circumstances in the instant case which would compel me to depart from what I consider the correct rule to be - without the consent of the parties a pension should not be distributed before it is payable. I agree with this statement of the general rule. The spouse with the pension may never receive it if he or she dies prior to retirement. If the spouse with the pension retires early the amount of the pension payments would be less and a present day valuation of the pension would be inaccurate to the extent that the calculation is based on the assumption that the spouse will retire at the normal retirement age. A distribution of an interest in a pension at the time of divorce would essentially deprive the spouse with the pension of present day capital when they may have a desire to use the capital prior to the time the pension becomes payable. B. Exceptions to the General Rule The dicta from Andrews acknowledges the possibility of exceptions to the general rule, but refers only to the situation where the parties otherwise agree that compensation should be paid instead of dividing the pension. Some other situations where courts have ordered compensation to be paid: (1) the pension is not of great value, and the member is years from retirement: Redpath v. Redpath, [1994] B.C.J. No. 582 (BCSC); Samson v. Samson (1996), 27 B.C.L.R. (3d) 363 (BCCA); Osborne v. Osborne, 2002 BCSC In these cases, the reason for making an exception to the general rule is probably the fact that the spouse s share can be satisfied with a relatively nominal compensation payment. (2) the pension is not of great value, and compensating the former spouse for an interest in the benefits would avoid complications of dividing a pension located outside Canada: Wilson v. Wilson, 2011 BCSC 202. (3) it will assist the spouse in achieving economic self-sufficiency: In Freeman v. Freeman, [1996] B.C.J. No. 532 (BCSC), the court ordered that the husband would keep the pension (which had a present value of about $200,000) and the wife would keep the family residence, which had a similar value. These arrangements were seen as promoting the wife s ability to be economically self sufficient.

2 (4) there are sufficient assets, and sufficient security cannot be provided if the non-member spouse was awarded a share of the pension itself: Touwslager v. Touwslager (1992), 63 B.C.L.R. (2d) 247 (C.A.); Holenchuk v. Holenchuk (1985), 49 R.F.L. (2d) 17 (B.C.C.A.), para [Member kept all of the pension and spouse received the family residence as compensation.] In Klang, Huddart J., (as she then was), expressly stated that the order made in Touwslager was appropriate because of the concerns over securing the non-plan member s interest in the pension: It is clear from the decision of the Court of Appeal in Touwslager v. Touwslager, 1992 CanLII 220 (BC C.A.), (1992), 63 B.C.L.R. (2d) 247, that the court may divide family assets under Part [6] of the Family Relations Act by awarding the family residence to the non-pensioned spouse and the pension to the other spouse, despite the fact that the family residence is a current asset while pension benefits are essentially a future stream of income contingent on various events, if such a division is required to accomplish a fair division of the family assets. In Touwslager the court emphasized the enforcement difficulties regarding a deferred pension benefit split of a federal government employee s pension plan. Klang v. Klang, 1992 CanLII 2105 (BC S.C.); see also the similar dicta in Forbes v. Forbes, 1993 CanLII 700 (BC S.C.). [Huddart J. declined to make such an order because, in the circumstances, it was possible to secure the non-plan member s interest.] One reason for the general rule in favour of dividing the pension itself is that B.C. courts usually expect to be able to secure the non-member s interest in the pension. In the Rutherford case, the seminal B.C. decision dealing with pension division, the decree expressly reserved to the court...power to make further orders, including security... : Rutherford v. Rutherford (1981), 23 R.F.L. (2d) 337 (C.A.), para. 15; see also Edgar v. Edgar (1984), 39 R.F.L. (2d) 436 (B.CS.C.), para. 5 [court made detailed order respecting the division of the pension under which the security arrangements specifically contemplated spouse would receive the protection of survivorship benefits.]; Shirran v. Shirran (1999), 46 R.F.L. (4th) 371 (BCSC), para 25 [wife secure for survivor benefits until they divorced. Application could be made at that time for security.] In Rutherford, Seaton J.A. explained: [66] Section [66](2)(f) permits security in an appropriate case. The factual foundation for an order for security must include knowledge that the spouse is capable of giving security. We know little about Mr. Rutherford s capacity other than that there is property being sold in which he has a one half interest. That is not enough for us to say that the trial judge erred in not ordering security. I would hold the door open by reserving to the respondent the right to apply for security in the future. If there is reason to fear for the safety of the pension, the court will not be powerless. (Emphasis added) Implicit that the court s concern over securing the non-member s share of lifetime income under a pension is a paramount consideration, although typically the question cannot be dealt with until closer to the time the pension actually commences. At that date, if the non-member s pension share cannot be secured, some alternative arrangement that provides sufficient security must, if possible, be found. C. How to Calculate a Compensation Payment: Termination or Retirement approach? In Stokes v. Stokes (1986), 6 R.F.L. (3d) 342 (B.C.C.A.), it was decided that when a spouse elects to have the share of the member s pension satisfied by an immediate compensation payment, the spouse also elects

3 to rely on the facts as they existed at the valuation date (at p. 349). Taking into account future increases in the respondent s income with virtually no evidence before us as to future contingencies, would be to assume a very large risk of making an inequitable division of the pension (at p. 349). There is some suggestion that the Court of Appeal s decision turned on the fact that the member s retirement was 18 years away (at p. 350). Stokes left many questions unanswered and was the subject of much criticism. Some of the questions included: 1. Should the same approach be adopted if the member is closer to retirement? 2. Would the court take future contingencies into account if sufficient evidence was led on the actuarial issues? 3. By their very nature, actuarial calculations involve the consideration of future contingencies, such as mortality. Exactly what future contingencies and factors did the Court of Appeal intend be ignored? Criticism leveled at Stokes centered primarily on the fact that the decision seemed based on a misapprehension of fundamental principles involving actuarial valuation: see, for example, Ian M. Karp, Division of Pension Rights Upon Marriage Breakdown; Two Important Issues, (1990) 48 Adv The court s hesitation in accepting a valuation of the pension that takes into account future contingencies rests on the hazards of predicting future events and reflects a suspicion of actuarial science. Actuarial principles are sophisticated enough, however, and well enough accepted, that they can be relied upon in personal injury and fatal accident law, and multi-billion dollar industries such as the insurance industry, as well as for all pension valuation issues, apparently excepting, according to Stokes, those arising in family property litigation. These issues have now been resolved by legislation in B.C. The Regulation to Part 6 of the Family Relations Act (B.C. Reg. 77/95) effectively reversed Stokes. S. 11 of the Regulation provides: Calculation of a compensation payment 11.(1) This section applies if provision is made for satisfaction of pension entitlement by any of the following: (a) (b) a compensation payment under section [66] [determination of ownership, possession or division of property] of the Act; a compensation payment under section [80](1)(d) [written agreements between member and spouse] of the Act;... (2) A compensation payment or transfer referred to in subsection (1) must be determined as a proportionate share of an amount equal to the present value of the future pension benefits payable to the member. (3) Without limiting the contingencies that may be considered in making a determination under subsection (2), the determination must make reasonable provision for the following contingencies: (a) the possibility that the member may terminate employment or die before retirement;

4 (b) (c) (d) the possibility that the member may retire at an early, late or normal retirement date; the possibility that benefits being divided as family assets and paid under the plan will increase, whether by an automatic formula or on an ad hoc basis, after the date selected for valuing the benefits; to the extent that benefits being divided as family assets are related to future salary levels, the possibility that salary levels will increase after the date selected for valuing the benefits... The possibilities both of immediate termination of employment and of continued employment to retirement age must be taken into account when valuing the pension for the purpose of making a compensation payment. The Canadian Institute of Actuaries have also adopted Standards of Practice which actuaries are required to follow when valuing a pension for the purposes of determining a compensation payment on marriage breakdown. The Standards of Practice indicate that alternative retirement ages may be used, so the actuary will, in most cases, present valuations based on alternative scenarios. The B.C. Court of Appeal considered the rules set out in the Pension Division Regulation in Park v. Park, 2000 BCCA 92, and held that they were not exhaustive. Other relevant considerations (such as the impact of tax) could be taken into account in valuing the pension provided a proper evidentiary basis were provided for those considerations. D. Evidence of Value It is necessary to provide accurate information to the court concerning the value of the pension if a compensation order is sought. In the absence of accurate information, the court has no choice except to rely upon the evidence that is led. In Dhillon v. Dhillon (1996) 21 R.F.L. (4th) 1 (BCCA), for example, an inordinately low value had been placed on the pension at trial. The appeal was based on the ground that there had been no evidence on which to value the pension. The Court of Appeal, however, held that there was some evidence, and since there was nothing to the contrary, the judge was compelled to accept the low value. At trial, counsel for the spouse had submitted the universal contributor report prepared by the plan, with the consent of the member, who later objected to it as evidence. It was held, however, that by consenting to admit the document, the document was proof of its contents. The report indicated a refund value of $6,924, which was accepted as the value of the pension for the purposes of dividing the family assets. See, however, Armstrong v. Armstrong (1992) 44 R.F.L. (3rd) 141 (BCCA), where the court allowed new evidence concerning the value of the pension on the basis that the trial judge was in error to reapportion entitlement to the pension in the absence of evidence concerning value. Apparently there is a distinction between no, and inadequate, evidence of value. Evidence of value, however, is not necessary when reapportioning the fractional entitlement of a spouse to a division of monthly pension payments under a Rutherford Order. In Weitzel v. Weitzel, [1993] B.C.J. No (BCSC) it was said: 24 It was submitted by the petitioner that an unequal division of the pension without a valuation of the pension should not be considered on the authority of Armstrong v Armstrong (1992) 44 R.F.L. (3d) 141 (B.C.C.A.). In Armstrong, Proudfoot, J.A. at pages pointed out that proceeding to divide unequally a pension without evidence of

5 value created a potential for injustice to occur. I agree, however, the unequal division ordered in this case is with respect to the income benefits only. In this case unequal division of the income rights under the pension is made with evidence as to the value of the payments and as such the potential for injustice does not arise... The same position should be true with respect to varying a proportionate share under Part 6. (See also Mailhot v. Mailhot (1988), 32 B.C.L.R. (2d) 109 (BCCA) where the BCCA specifically acknowledged that the Rutherford formula was a rule of thumb courts were prepared to adopt in the absence of more precise information concerning the value of the pension.) Similarly, where the division of the pension will be under Part 6, there would be no need for evidence of the pension s value. It is only where the spouse s interest in the pension will be satisfied by a compensation payment, or a greater share of other assets, that a valuation is necessary. As a general rule, a statement concerning contributions, or the refund value, of a pension is not a good indication of its true value (typically, the pension will have a significantly greater value). This has recently been expressly recognized by the Court of Appeal. In Bajwa v. Bajwa, 2007 BCCA 632, the appeal challenged the fairness of the division of assets, but the court had no firm evidence concerning the value of the pension benefits. Huddart J.A. said, however, that there were various facts of which judicial notice could be taken because the terms of public sector pensions were matters of public record. Moreover, the evidence of contributions was only marginally helpful in estimating the value of the pension benefits, for the following reasons: 16...Of course, the commuted value of a future stream of income in a defined benefit plan of a member with Ms. Bajwa s employment and contribution record is always substantially more than the total contributions by the employee when employers contributions and net investment return are included. This is because the value of a defined benefit pension is determined by the payment formula under the plan, not by the amount of contributions. The employer s contribution is determined actuarially to ensure sufficient funds invested over a period of years will be available to pay the future obligation. This being so, it is reasonable to infer that the pension division under the order increases the appellant s proportion of total family assets valued at trial (18%) to at least 20% and potentially as high as 24%. See Ian M. Karp, Interpreting Pension Information, Family Lawyer s Guide to Pensions and RRSPs, Continuing Legal Education, February 2000, ch. 4 at Tip: even with these developments, if involved in litigation centering on how to divide a pension, and how much of the pension the spouse should receive, in most cases an actuarial valuation should be obtained.