BY Murray W. Bodnaruk - BODNARUK LAW OFFICE
5th November 2015.
Pension benefits are an extremely important and complex legal aspect of the division of matrimonial property assets, but their value is often unknown, misunderstood or understated by one of the parties.
In order to appreciate how pension division works, it’s important to understand pension types and general entitlement under Alberta’s Matrimonial Property Act, and common mistakes in determining their value.
There are two types of employment pension retirement plans:
- Defined Contribution Plans: defined contribution plans, RRSPs and Group RRSPs are pension plans where the member’s pension entitlement is typically tracked as an account balance.
The value is simply the account balance with adjustments to reflect the periods of the member’s service that weren’t part of the joint accrual period (the span of time from when the relationship began to the date of the marriage breakdown). Market fluctuations will also affect the value of any Defined Contribution Plan.
- Defined Benefit Plans: include registered and unregistered pension plans where the member’s entitlement is usually defined as a lifetime pension, with the pension amount based on some combination of the member’s salary and/or service. Defined Benefit Plans are difficult to value because the pension asset is a promise to pay an uncertain benefit, to start at an unknown date, and to be payable for an unknown period of time (the lifetime of the member).
The value of the pension asset under a Defined Benefit Plan is the present value as of the calculation date, of the expected future payments to be made to the member under the plan. To determine the present value, the pension payment level needs to be determined from the assumed retirement age and payable for as long as the member is projected to be alive and valued by discounting each expected payment. In addition, pre‑retirement death benefits, post retirement death benefits and cost of living adjustments must all be taken into consideration.
Upon a marriage breakdown, a spouse is entitled to a portion of pension benefits accumulated during the joint accrual period. In any pension division, the spouse of the member cannot receive a share in excess of 50% of the benefits which accumulated during this period of joint accrual.
It is important to note that in Alberta, pension division only occurs in matrimonial property division actions between married spouses. Common law spouses are only eligible for survivor pension benefits.
5 Common Mistakes in Determining the Value of Pension Assets
One of the most common errors is to confuse the values that have been provided by pension statements with the actual value of the pension. Some examples of errors in the valuation of pension assets are as follows:
- Calculating the pension value by using contributions with interest
The member’s annual pension statement will often record how much the member has contributed towards the pension plan as a balance with interest, but it is important not to assume that this represents the actual value of the pension. Using this number will almost always grossly underestimate the actual value.
- Commuted Value
Some pension correspondence, such as annual pension statements, online pension estimators, or pension estimates provided by the plan administrator may include a term called the Commuted Value (CV). The Commuted Value is the lump sum termination entitlement of the member if he or she terminates employment at the calculation date.
The Commuted Value will often be significantly different from the value of the pension asset for the purposes of matrimonial property division, because it may not consider several valuable aspects of the pension “promise”, such as:
- Future salary growth, even though the plan may be based on earnings in effect at retirement rather than at the calculation date
- Early retirement benefits that have accrued, but which have not vested in the member, even if such benefits are likely to vest between now and the member’s retirement date
- Non-guaranteed indexing, even if there has been a consistent history of indexing being granted
In some cases, the Commuted Value could significantly overstate the value of the pension asset if the member is eligible to retire early, but is not intending to retire in the near future.
- Non Registered Plans
Some employers offer special supplemental pensions to top‑up pensions for key and/or highly paid employees. These supplemental pension plans have no requirement to provide indications of their value, although their value can be substantial.
- Federally Regulated Defined Benefit Plans
Industries which are federally regulated are under no legal obligation to provide any indication of pension value to members, even if the member specifically asks for that value. This might lead the member to inappropriately rely on other available information, such as the member contributions discussed above.
- Total Entitlement
Alberta registered pension plans have an added complication because “Total Entitlement” under the Employment Pensions Plan Act (EPPA) is determined by a different method of calculation than the value of the pension asset under Alberta’s Matrimonial Property Act.
There is a tendency towards simply dividing the Total Entitlement, which will have been communicated to the member and the non‑member by the administrator of a pension plan. However, relying on the Total Entitlement often grossly understates the actual value of the pension asset and may result in a pension division that is largely skewed in favour of the member and to the disadvantage of the non‑member spouse.
The critical issue is that the calculation indicating Total Entitlement under the Employment Pensions Plan Act is simply a determination of the maximum portion of the pension plan that can be provided from the pension plan itself, but does not address the actual value of the pension asset in accordance with Alberta’s Matrimonial Property Act. The difference in these values could be as much as several hundred thousand dollars for a Defined Benefit Pension Plan.
The division of assets on marriage breakdown is a complex legal issue, particularly regarding the issue of pension entitlements. Seeking sound legal advice is recommended to avoid errors and assumptions that might lead to a miscalculation in the valuation of a pension asset.
Murray considers himself a champion of the underdog.He feels a personal connection to people in vulnerable circumstances, and he takes particular satisfaction in helping people meet adversity, overcome their obstacles, and triumph in a system that seems to be stacked against them.He personally experienced both a divorce and motor vehicle accident, so he knows the difficulties, pain and struggle involved in overcoming these personal and legal challenges.That’s why he is such a forceful advocate for his clients’ rights.
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His firm, Bodnaruk Law is located in Calgary, Alberta, Canada
The content contained in this law blog is intended to provide information about the subject matter and is not intended as legal advice. If you would like further information or advice on any of the subjects discussed in this blog post, please contact the author at Bodnaruk Law at 403.288.0009 or firstname.lastname@example.org
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