Angela Walker – November 2017
Pensions are frequently the most valuable asset that a couple owns. Clients are often surprised by the actual value pensions hold prospectively. Pensions are typically funds into which money is invested either by an employer, an employee or both during employment. Upon retirement, these funds are available to the employee to provide ongoing income under pre-determined terms.
There are two main types of employment pensions:
- Defined Benefit Pensions – These pensions provide a guaranteed income through the course of retirement, based on a formula that considers income earned while employed, years of service, and age. For instance, a defined benefit pension plan may provide 60% of the average income earned by an employee over the last five years of employment for life. Defined benefit pension plans are usually quite valuable.
- Defined Contribution Plans – A defined contribution plan means that there is a set amount of money invested into a fund. The employee is not guaranteed a set annual income, as they are with a defined benefit plan. Extractions from a defined contribution pension plan may not be as formulaic but when the funds are gone, they are not replenished.
There is different legislation invoked depending on the type of pension earned. For instance, federally earned pensions, such as those earned by members of the Canadian Forces, the RCMP, or employees of the Federal Government, are governed by federal legislation. Pensions that are earned through provincial employment, such as pensions earned by nurses, teachers, and members of local unions, would be subject to provincial pension legislation. There are nuances depending on the legislation that applies so this is an important area to seek legal advice.
For married couples, the Matrimonial Property Act of Nova Scotia presumes that a pension will be divided equally between both spouses, including any portion that was earned prior to cohabitation. Upon separation, pensions are typically divided equally “at source”. This means the pension will be divided by the pension plan administrator according to the enabling legislation. Under some legislation, the non-pension owning spouse will become a limited member of the pension plan to receive his or her share of the pension. Some federal defined benefit pension plans permit the non-pension earning spouse to receive a lump sum all at once that can be invested and controlled as that spouse deems appropriate (subject to restrictions surrounding when the funds can be extracted). For most provincial defined benefit pension plans, the non-pension earning spouse will only begin to receive his or her share of the pension monthly once the pension earning spouse retires or reaches the age of 65.
Defined contribution plans are easily divided between spouses as they have a clear and identifiable value. The non-pension earning spouse will simply set-up an account into which the funds will be transferred.
Sometimes spouses are very reluctant to divide their pensions and instead wish to provide the other spouse with a greater share of other assets to compensate for retaining the pension. To determine the value of the pension the other spouse would be entitled to receive, we typically must obtain an appraisal of the pension. This is completed by a trained actuary. Once this value is identified, we can determine whether there are sufficient assets against which the pension can be off-set.
There is also the government-run Canada Pension Plan (CPP). All employees and their employers pay into this plan that can be accessed as early as age 60. The CPP credits earned depend on the amount of income you receive, up to a threshold level (currently $55,300). The CPP credits earned during a relationship are subject to division. For instance, if one spouse earned $20,000 per year during the marriage and the other spouse earned more than the threshold level of income, the higher income earning spouse would have accrued more CPP credits. The lower income earning spouse can apply to have these earned credits equalized so that each spouse has the same number of CPP credits upon separation. It is important to note that CPP credits will only be divided if a spouse formally applies to do so.
Self-employed individuals who own corporations may also have a pension plan structured through his or her company, such as an individual pension plan. While these are not commonly seen in our work, they may become more popular in the future. Sometimes individuals who own corporations also “retain earnings” or make passive investments to secure his or her future retirement. These assets may be subject to division. This is a more complex are of the law, so we recommend speaking to a lawyer if this situation may apply to you.
To reiterate, pensions are often the most valuable family asset. It is worthwhile to seek legal advice prior to finalizing any agreement pertaining to the division of a pension.