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Pension Values for Separation and Divorce – A Common Error – Use the Correct Value!

Do you have the correct pension valuation?

What are pensions and how should they be valued for separation and divorce purposes? This is an issue not well understood among legal and financial professionals, and while I am not a pension valuator, I hope to bring some clarity to common areas of misunderstanding, specifically the difference in values offered by the employer and that by an independent actuary. As a financial professional working with lawyers, accountants and clients in Prince Edward Island, I believe getting the right pension valuation is crucial to reaching a fair settlement upon marriage breakdown.

Pension assets typically include Registered Retirement Savings Plans (RRSPs) or Registered Retirement Income Funds (RRIFs), defined “contribution” pension plans, defined “benefit” pension plans and annuities. Other than the defined benefit pension plans and annuities, all of these plan values are an accumulation of savings or investments within an account. Their value is the amount for which you can sell the investment holdings, with a reduction for income taxes. However, a defined benefit pension plan differs because the pension to be paid is based on a formula, often a percentage of salary multiplied by the number of years of service. The pension will be paid from retirement until death. It may be indexed for inflation, and there will be other considerations such as death and survivor benefits, early retirement benefits, disability waivers, etc. As you would expect, there is no easy way to value such a pension, which is the present value of all payments to be received in the future.

There are two common types of pension valuation – a value for employment termination and a value for marriage breakdown. You need to ensure the correct method is used for your separation calculations.  Pension valuators, particularly actuaries, are trained to prepare pension valuations, and are provided with guidelines by the Canadian Institute of Actuaries to do so. You can review their website at www.cia-ica.ca on which they explain the complexities of the calculations, and I recommend a review of their FAQ (frequently asked questions) section. Of course, provincial legislation and/or court decisions may dictate how a particular pension must be valued, limiting the usefulness of my comments in this article.

If you ask your employer for a pension value because you are separating, the value determined by the employer is called a “commuted” value, and also known as a “transfer” or “termination” value. This value is normally calculated to determine the amount to which an employee is entitled assuming he or she is ceasing employment. Entitlements of a pension member that occur after marriage breakdown, such as early retirement rights, CPP bridging benefits, and inflation adjustments, have a value for family law purposes but may or may not be included for employment termination purposes. When you think about it, some of these benefits disappear on termination, but not on marriage breakdown. The Canadian Institute of Actuaries (CIA) sets out the guidelines for calculating commuted values in Section 3500 of their Standards of Practice.  Section 4300 sets out the rules and assumptions to be used for determining the “capitalized value of pension plan benefits for marriage breakdown.” The two valuations are usually different, with either one being higher or lower depending on the pensioners’ circumstances and the terms of the particular plan.

The “valuation” of the pension must not be confused with the “method of division” allowed by legislation. Once the valuation is determined, the transfer of the pension value from the employee to the spouse can be done by transfer of an equivalent amount of non-pension assets or, if permitted by legislation, by transfer of the pension assets themselves. However, there may still be a difference that would need to be settled using non-pension assets.  For example, the federal government, the Treasury Board Secretariat will provide a “transfer value” of an employee’s pension entitlement in accordance with the Pension Benefits Division Act.  The spouses then have the option of transferring any portion of this maximum transferable amount to a locked-in retirement vehicle of the non-employee, or by settling the obligation with a transfer of other family assets outside of the pension plan. In contrast, in Nova Scotia, pursuant to the regulations of the Public Service Superannuation Act, the non-employee spouse has the same choices, but also has an option to become a limited participant of the pension plan and receive a future pension.

Remember, even though you request a valuation from your employer for divorce purposes, this does not mean that the pension is valued using the CIA Standard 4300.  It is likely a commuted value.

When reviewing a pension valuation, obviously it is important that the valuator has employed the proper standards. Of course, within the standards, there are still variances that can occur, and legal counsel will need to assess the fairness of assumptions chosen, such as the choice of retirement age, the recognition of non-contractual inflation protection, the appropriateness of income tax rates, etc. The valuator may present alternative valuations (e.g. at different retirement ages), and the appropriate choice will need to be made based on the particular circumstances of the separating couple.

In conclusion, a pension can be worth tens or hundreds of thousands of dollars, and it typically costs less than a thousand dollars for an actuarial valuation. The difference between the employer’s value and the value determined by an actuary for marriage breakdown value is often thousands of dollars, and could be higher or lower depending on the pensioner’s personal circumstances. Be sure you have the right valuation before concluding an agreement on equalization of net family assets if you want fairness to both parties. For more information, speak to a qualified pension valuator or an actuary and ask questions about the cost and impact a valuation could have on your situation. Your financial or legal professional may be able to provide you with a reference, or you can visit at www.cia-ica.ca and use their Find an Actuary feature.

Blair Corkum, CPA, CA, R.F.P., CFP, CFDS, CLU, CHS holds his Chartered Professional Accountant, Chartered Accountant, Registered Financial Planner, Chartered Financial Divorce Specialist as well as several other financial planning related designations. Blair offers hourly based fee-only personal financial planning, holds no investment or insurance licenses, and receives no commissions or referral fees. This publication should not be construed as legal or investment advice. It is neither a definitive analysis of the law nor a substitute for professional advice which you should obtain before acting on information in this article. Information may change as a result of legislation or regulations issued after this article was written.©Blair Corkum