“My spouse and I are divorcing. Do I have any rights or interest in the pension plan of which he has been a member since before we were married? We live in Ontario.”
The determination of Net Family Property (NFP) is governed by an Ontario Act called The Family Law Act (FLA). People in other jurisdictions or countries would have their pensions affected in different ways. Here’s how the FLA can have an impact on pensions in a marriage breakdown.
First, there are different ways in which a right to a pension benefit can affect your marriage breakdown. Pension income may also be considered with respect to child or spousal support. It can help determine your NFP as of the Valuation Day (generally the date of separation). NFP is the net of your assets minus liability accumulated during your marriage (this excludes your own personal property and liabilities with which you entered the marriage). Each spouse determines their own NFP — which cannot be negative — and the spouse with the higher NFP owes 50% of the difference between the two. This is called an equalization payment.
A vested pension plan is considered property for purposes of determining NFP.
Pension and employment benefits accumulate over a person’s working life. An employer, and/or the employee, can make the contributions. Some people choose to contribute more of their income to accumulate greater future benefits for their retirement.
There are thousands of different pension plans in Canada, but they all generally fall into one of three categories: Defined Contribution Plan, Defined Benefit Plan, or a combination of the two.
Defined Contribution plans clearly define what contributions will be made, who will make them, and when. In a defined contribution plan, each employee receives a separate account. The contributions accumulate and earn interest and investment returns. The pension benefit one will receive depends on the balance of the account.
A Defined Benefit Plan sets out what contributions the employee is to make, if any, and requires the employer to provide the balance of funds required for the payment of benefits due to the retired employees.
Different pension plans have different provisions, which can affect the value of a member’s interest substantially. Pension administrators may provide a printout with some information of a member’s interest in the pension plan, but this information will not provide insight into the value of the interest that has accumulated during the member’s marriage.
Some of the factors one must consider when valuing a pension for divorce purposes are: the options on retirement; the indexing within the pension plan; the amounts accumulated during, before, and after the marriage; the benefits on death; plan improvements subsequent to separation; life-expectancy tables used; discount and interest rates used; survivors benefits; mortality risks; integration with other plans such as Old Age Security and Canada Pension Plan; the income-tax assumptions; valuation dates; special discounts; refunds; and buybacks. Each of these factors can affect a pension valuation. Understanding how each factor influences the pension valuation on divorce is important for the professional valuator.
Gordon Krofchick, CA, CBV is President of Krofchick Valuation Partners and is a forensic accountant with over 30 years’ experience in working with issues that impact a matrimonial separation, divorce, or other complex financial and litigation issues.