Copyright 2008, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Pension & Employee Benefits, October 2008

DIVISION OF PENSIONS

The valuation and division of pension entitlements on marriage breakdown is a complex issue for members and administrators of defined benefit pension plans in Ontario. Pensions are considered family property for equalization purposes under the Family Law Act (Ontario) (FLA). As a result, upon marriage breakdown, a pension must be valued in order to determine the separating spouses' net family property. In addition, where the member spouse's net family property exceeds that of the non-member spouse, the member spouse may want (or need) to use his or her pension to satisfy the non-member spouse's right to equalization of net family property. However, any transfer of pension entitlements to the non-member spouse will be subject to the Pension Benefits Act (Ontario) (PBA), which limits the portion of a member's pension that can be assigned to a non-member spouse on account of equalization to 50% of the pension benefits accrued during the marriage.

The Law Commission of Ontario (the LCO) issued a consultation paper on the division of pensions on marriage breakdown in May 2008 and received numerous submissions in response to the consultation paper. In a September 29, 2008 report, released to the public on October 6, 2008, the LCO set out its recommendations (or decision not to provide a recommendation in one instance) with respect to nine issues:

  1. inclusion of pensions in "family property" for equalization purposes;
  2. valuation of rights under defined benefit pension plans for equalization purposes;
  3. settlements involving defined benefit pension entitlements;
  4. settlements involving defined contribution pension entitlements;
  5. establishment of a government fund to hold pension entitlements of non-member spouses acquired through settlement of equalization claims;
  6. the fifty per cent rule under the PBA noted above;
  7. Canada Pension Plan credits;
  8. double dipping, i.e., using pension plan entitlements to satisfy equalization claims and claims for support; and
  9. division of pensions on breakdown of common-law relationships.

Of particular interest to plan administrators are the LCO's recommendations that are aimed at standardizing settlement methods.

Specifically, the LCO recommends that, subject to certain limited exceptions, settlement of an equalization claim requiring payment of pension benefits under a defined benefit plan to the non-member spouse should utilize the "immediate settlement method" (ISM) which, in general terms, is a settlement method that involves an immediate valuation of the non-member spouse's share of the member's pension and an immediate transfer of the commuted value of the non-member spouse's share of the member's pension from the plan. The LCO further recommends that the "deferred settlement method" (DSM) be available at the election of the member and non-member spouse if the member is within 10 years of his or her normal retirement date under the plan and that the DSM be available where the member is more than 10 years away from his or her normal retirement date under the plan if the member, the non-member spouse and the administrator of the pension plan all agree. The DSM is generally more complex to administer as it results in the actual settlement of the non-spouse's share of the member's pension at a future date, often well after the parties' separation. The LCO recommends with respect to defined contribution plans that only the ISM method be available to settle a non-member spouse's claim to a share of a member's pension entitlement.

The full LCO report on the division of pensions on marriage breakdown, of which the recommendations identified above form part, is expected to be released later this year.

WRONKO

On October 9, 2008, the Supreme Court of Canada denied leave to appeal the decision of the Ontario Court of Appeal in Wronko v. Western Inventory Service Ltd. (Wronko). The Ontario Court of Appeal had held that an employer could not unilaterally amend a fundamental term of an employment contract to the detriment of the employee, even upon substantial notice. The Court of Appeal's decision in Wronko is discussed in more detail in our May 2008 Blakes Bulletin on Pension & Employee Benefits – Important Ontario Court of Appeal Decision Dealing with Unilateral Changes to the Terms of Employment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.