Wednesday, February 18, 2009

Family Law Changes: Pensions

Pension Guy:

"...Dear Valued Clients:

I am writing to discuss a significant development in the area of pension valuations for marriage breakdown purposes. As you probably know, I am an actuary who has worked in the area of pension plans for many years, including performing many pension valuations for family law purposes.

I want to alert you regarding Bill 133 which was introduced recently by the Ontario Government. Click on the following link for details regarding the bill.

Bill 133 effectively permits settling of pension benefits in marriage breakdown situations by the pension plan administrator (much like in federally regulated pension plans) , which up until now has not been permitted under Ontario pension law. (In other words, plan members will be able to access their pension to pay their equalization debt, if necessary.) The bill also requires that pension valuations governed by the Ontario Pension Benefits Act be provided by pension plan administrators for marriage breakdown purposes - a single value based on prescribed assumptions, rather than the current Canadian Institute of Actuaries standard which can result in multiple retirement age scenarios and which reflects the actual circumstances/facts of the case (including projected income tax rates and in rare cases below average health of the member, for example).

I have seen in several publications that some members of the pension law bar and the family law bar are applauding the pension changes in Bill 133, with the hope that the legislation would simplify pension issues in family law cases as well as reduce costs for the parties. Unfortunately, those applauding may not yet fully understand the very significant problems with the proposed legislation, some of which make the legislation unworkable in my opinion.

The option for a plan member to settle some or all of his or her equalization obligation by way of a transfer from a pension plan is a very positive development for separating couples (although this will lead to significant administrative costs to pension plans, which the plans may not yet realize). The proposal to have pension plan administrators perform the valuation of plan members’ marital assets is highly problematic and I believe unworkable for a variety of reasons (including the significant issue of income taxes which has been ignored), and most certainly would not achieve the intended goals of simplicity and cost reduction. Most importantly, whatever valuation method that is chosen would be grossly unfair to one side or the other in the marriage breakdown, and possibly even to the pension plan’s remaining members.

A major goal of the valuation related aspects of the pension legislation changes appears to be to have a one size fits all methodology which would simplify matters. The problem with this goal is that when dealing with the pensions of real people, with real differences in circumstance, this approach will often be very unfair. Basically, close to 50% of separating individuals where one or more of the parties has a pension will be unfairly treated under Bill 133, in many cases very unfairly treated, and in some cases so severely as to make the result absurd / unconscionable. While some may appreciate the simplicity, the party in the divorce who has been treated unfairly would have little or no recourse to right the injustice. This is presumably not a goal of law reform.

Many family law lawyers do not yet realize that the pension valuation provisions proposed would have a significant negative effect on too large a number of their clients (even if somehow the unworkable elements were “worked out”.) Pension lawyers appear to have not yet considered that while it would be a very positive development for them (and their plan sponsor clients) to not have to deal with problematic “if-and-when” division at source agreements any longer in the small minority of divorces where this option is chosen, the proposed legislation would effectively require plan sponsors to be involved with every single divorce that occurs among plan members, with very significant administrative headaches and costs. (Costs would be reduced considerably for plans if only the proposed settlement changes were implemented).

Based on the current design and wording of Bill 133, the valuation problems cannot be mitigated by the development of the corresponding regulations. The current "word on the street" seems to be that the plan administrator provided value may be based on the termination value, i.e. the minimum value which is provided to plan members upon termination of employment. This value does not include non-vested benefits, including in most cases early retirement rights and ad hoc inflation increases (even if they have been granted for decades and are planned for the future), which are currently reflected in pension valuation scenarios for marriage breakdown purposes. In many cases this could have an absurdly unfair effect on non-member spouses. As an example, if under current circumstances, the actuarial present value of a pension assuming early retirement at age 55 is worth, say, $600,000, it is quite possible that the termination value could be only half that amount, or $300,000, as it would likely be based on age 65 (and therefore reflects 10 years less pension payments to the member). If it is plainly evident in a particular case that $600,000 is most appropriate (for example, if the plan member stated that he/she was going to retire early and then did so), if the $300,000 value is statutorily mandated, the resulting inequity would be unconscionable. Oddly enough, there are some very real scenarios where using the termination value could actually be unfair to the pension plan member instead. Even if the termination value does not end up being prescribed, one can plainly see in the above example that any single value would not be appropriate in all cases and would lead to an unfair result - I must stress, sometimes the result could be absurdly unfair.

As such, as you may have guessed, I and other actuaries have been strongly recommending that the pension valuation related aspects of the proposed legislation be abandoned, while maintaining the revisions to settlement options.

I can obviously be accused of being biased, seeing as I do a lot of pension valuations for marriage breakdown purposes, and the need for independent actuarial valuations would be diminished (though not eliminated) if Bill 133 were enacted; I can understand if that were the perception. I should therefore point out that the Law Commission of Ontario (LCO) recently distributed a thoughtful, detailed report which did not recommend the proposed approach for valuation. The LCO report recommended various settlement options (some of which have been adopted in the proposed legislation), and provided some clarity to some valuation issues, but effectively left valuations in the hands of professional actuaries, providing multiple scenarios where applicable, to reflect the reality of the individuals involved. Their wording regarding the retirement age issue is better than I could come up with: "Given the complexity and diversity of pension plan options and the multitude of different factual circumstances that could arise, the LCO is not convinced of the merits of a presumption regarding retirement age. In our view, any issue as to when a member will retire should continue to be treated as a question of fact, resolved on the basis of the evidence according to the balance of probabilities." This is inconsistent with Bill 133 in a fundamental way.

Click on the following link to review the LCO's report.

There are other issues related to the pension provisions of Bill 133 which will have an impact on separating spouses. I would be happy to discuss them with you if you are interested.
Many of you have been clients for quite a few years, and some have attended my presentations at the Ontario Bar Association and Osgoode Hall. You therefore are familiar with my "no nonsense" communication style - I like to "tell it like it is" - hopefully you can therefore trust me when I say that if the valuation aspects of Bill 133 are implemented, there will be significant inequities imposed on too many of your clients. I urge you to express your opinion, through the family law section of the Ontario Bar Association (Section Chair: Mr. Thomas Dart at who will hopefully be consulted during the legislative process, and directly to Attorney General Christopher Bentley (click on the following link for contact info ) and his staff.

Thank you for your consideration of my comments.


David Wolgelerenter DSW Actuarial Services Inc. 3219 Yonge Street, Suite 311 Toronto, Ontario M4N 3S1 Phone: 416-489-2824 Fax: 416-781-1021 Email: Website:"

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