Managing Your Pension Through Divorce and Equalization

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Pensions are a significant asset that many individuals will accumulate over the years. In family law, pensions are considered property and will be included in the net family property calculation for equalization and division. The methodology used to complete a valuation of a pension may differ depending on whether the pension falls under provincial or federal regulations. When assessing and dividing the value, spouses should know their options for handling these assets.

 

Ontario’s Pension Valuation Scheme 

In 2012, Ontario simplified the process of valuing pensions for the purposes of equalization by establishing legislated formulas for pension administrators. However, the Ontario rules only applied to provincially-regulated pensions, leaving the valuation of federally-regulated pensions less certain. The Pension Benefits Act sets out the process for valuing Ontario pensions. Where a pension plan is one to which the Pension Benefits Act does not apply, section 10.1(2) of the Family Law Act still requires the PBA approach to be used “with necessary modifications.” 

The case of Van Delst v. Hronowsky dealt with the impact of the Family Law Act on federally regulated pensions. For the Court of Appeal, the phrase “with necessary modifications” indicated a legislative intent that the rules of the Pension Benefits Act be applied with only necessary changes. Further, any departure from the Pension Benefits Act methodology must be justified and should only occur where one of the parties can show that departure is necessary will it be warranted. This signalled that a non-Ontario pension should be valued the same as an Ontario-regulated pension wherever possible.

 

The Impact of the Retirement Date

In the case at Bar, the issue revolved around the meaning of the “normal retirement date.” Provincially-regulated plans are required to stipulate straightforward valuation calculations. Therefore, the “normal retirement date” is not required for plans outside the ambit of the Pension Benefits Act.

Under the provincial scheme, the Court found that the term does not reflect when a member is likely to retire, but rather it represents the date at which the plan entitles members to unreduced pension benefits. The Court of Appeal held that the trial judge erred by determining the parties’ specific retirement dates rather than applying the Pension Benefits Act methodology with modification.

As the federal pension did not stipulate a normal retirement date, the Court was tasked with determining the date at which any member would be entitled to retire with unreduced benefits. An equivalent to the normal retirement date was apparent in the parties’ pension plan, which detailed that both would be entitled to unreduced benefits on reaching 60 years of age. This modification was consistent with the provincial scheme. 

 

Courts Warn of Pension Double-Dipping 

Property settlements and support claims together significantly impact a pension. In Boston v. Boston, the Supreme Court of Canada raised concerns with the treatment of pensions and the possibility of “double-dipping,” where there are both property and support claims.

Double recovery may occur where the pension holding spouse transfers assets to the other spouse to equalize matrimonial property. According to the Court, the receiving spouse will typically use the assets incurred from equalizing the former spouse’s pension entitlement to help generate income. 

If the entire amount of the pension is also considered later as income for the purposes of spousal support calculations, when the pension begins to pay out, there is an opportunity for the recipient spouse to recover from the pension twice. This may occur because the equalization award accounts for the capital value of the future pension income. Further, if the spouse shares in the pension income upon the pension holder’s retirement, they will also have benefitted from the pension twice.

 

Double Recovery May be Permitted in Limited Circumstances

The Supreme Court held that when addressing spousal support following the payor’s retirement, courts should maintain a focus on the portions of the payor’s income and assets which have not been part of equalization so as to avoid double recovery. 

While the Supreme Court found that double recovery is generally unfair and should be avoided, the possibility that it could be permitted in some circumstances was left open. Accordingly, double recovery may be permitted where:

  • the payor spouse has the ability to pay;
  • the payee spouse has made a reasonable effort to use the equalized assets in an income-producing way; and
  • despite this, an economic hardship from the marriage or its breakdown persists.

Double recovery may also be permitted in spousal support orders or agreements based mainly on need as opposed to compensation. 

 

Can Courts Order a Lump Sum Transfer of a Pension? 

As part of equalization, a pension holder may transfer a lump sum out of their pension plan to the other party. Courts may order a spouse to complete a transfer, but there is no presumption that equalization must be made by a lump sum transfer. Section 10.1(3) and (4) of the Family Law Act govern transfers of a lump sum out of a pension plan.

In determining whether to order the transfer of a lump sum out of a pension plan and the amount to be transferred, the legislation lists a set of considerations, including: 

  • the nature of the assets available to each spouse at the time of the hearing;
  • the proportion of a spouse’s net family property that consists of the imputed value, for family law purposes, of his or her interest in the pension plan;
  • the liquidity of the lump sum in the hands of the spouse to whom it would be transferred;
  • any contingent tax liabilities in respect of the lump sum that would be transferred; and
  • the resources available to each spouse to meet his or her needs in retirement and the desirability of maintaining those resources.

 

Considerations for Dividing a Pension at Source

In Nadendla v. Nadendla, the pension constituted more than 50% of the applicant’s assets. The judge found that if the pension was not divided at source, the applicant would have to deplete almost all his liquid assets, leaving his assets tied up in the pension. Meanwhile, the respondent’s assets would all be liquid. If the pension was divided at source, both parties would have a balance between liquid assets and savings for retirement. As a result, the judge ordered 50% of the Family Law Act value of the pension be transferred to the respondent.

 

Similar considerations arose in McNeil v. McNeil. Justice Charney found this was a strong case for both pension division at source and a transfer of the pension funds. Here, the pension represented more than 60% of the respondent’s assets. Both parties were over the age of 50 and the respondent had no savings. The respondent could not realistically save for retirement and if the pension was not divided at source, all of the applicant’s assets would be tied up in the pension while the respondent’s assets were tied to the matrimonial home. In contrast, if the home was sold and the pension divided at source, both would have a balance between liquid assets and retirement savings. 

 

Contact the Family Lawyers at Howie Johnson Barristers & Solicitors in Windsor for Trusted Advice on Pension Division and Equalization

The family lawyers at Howie Johnson Barristers & Solicitors in Windsor routinely help clients navigate and negotiate asset division and equalization. Often, pensions form a significant portion of one’s assets and can be a point of contention in divorce proceedings. Due to their unique legislative and practical considerations, pension division can be a complex issue to resolve. If you have concerns about equalization or asset division, contact us online or call us at 519-973-1500.

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