I feel absolutely compelled to write this post for the simple reason that this past week I was mediating a couple’s separation and shocked at how little information their lawyers provided each of them regarding the division of his pension.
He has a significant pension that has accumulated over the past 15 years while they were living together. She does not have a pension and having hardly worked during their time together, her Canada Pension Plan (CPP) is next to nothing.
When I asked my client what type of pension plan he has, his response was “My lawyer has the documents and I haven’t seen anything. He just tells me I owe half”.
My job as a Mediator is to provide my clients with sufficient information to help them make informed choices. In this case, there was clearly not enough information so I explained some basics about pensions which helped my clients clearly see the importance of getting some answers.
For anyone going through a separation or divorce and who has a company pension plan here are some key considerations in dividing a pension plan.
First off, CPP and a company pension plan are considered a family asset that is to be divided UP TO 50% I have highlighted and underscored this because there is flexibility in this division with consideration given to other family assets division.
When it comes to your pension nest egg, how you divide this asset will determine if you will receive an ostrich egg or a hummingbird egg at the end of the day. BTW, the really large egg is a prehistoric Elefant Bird egg… now that’s the nest egg we want to strive for!
The next consideration is what type of pension plan you have. There are two types of company pensions plans with the possibility of a third that can have a large impact on the final size of the nest egg:
- Defined Benefit Plan
- Defined Contribution Plan
- Supplemental Pension Plan
I”m going to briefly explain the above plans as they pertain to division and provide a link at the end of an excellent website to learn more for those who are interested.
Defined Benefit Plan
This type of company plan provides a fixed-predetermined benefit that factors in things such as
- # of years employed
- Salary Received
- Age of Retirement
Since this is a fixed benefit, it’s valuation is not dependent on market performance.
In terms of dividing a Defined Benefit Plan, it is not straightforward. It is valued at the time of separation using complex formulas. Also, many Defined Benefit Plans are integrated with Canada Pension Plan (CPP) which means that your pension calculated is what you get in total from BOTH your pension plus CPP.
It is extremely important to know if your defined benefit plan is integrated with CPP since a CPP offset formula is required that will subtract CPP from the gross pension amount to determine the real pension number to look at. If you don’t do this then you may be making a decision to split 50% of your pension using the incorrect figure. In effect, the person who has the company pension plan will receive less once they start collecting their pension upon their retirement.
The method of valuation is regulated and the plan administrators need to provide the valuation or sufficient information for actuaries to calculate.
Defined Contribution Plan
This type of company pension plan accumulates based on a specific % of money an employer sets aside each year. While the contribution is a fixed amount, the benefit is not since it’s pooled fund is dependent on market fluctuation. In essence, there is no way of knowing how much you will receive once you start drawing a pension.
A Defined Contribution Plan restricts when and how each employee can withdraw the funds without penalties. This is important to know when making a decision to split this pension based on when the money is needed by each of the individuals and if they are going to become a limited member in the pension plan or if they choose to move it to another registered pension vehicle such as an RRSP. The pension terms may provide this option but states that the RRSP needs to be locked in.
The division of this plan is relatively easy since it looks at the $ amount contributed over the length of time a couple has been together and divides it by 50% to determine the amount of pension the other person can receive.
Both of the above pension plans are governed by pension benefits legislation. But the third one is not…
Supplemental Pension Plan
This pension plan may be provided when a member is a high income earner (i.e. $125,000 or higher per year) or is in a senior or executive position with their company. It could also come in different forms other than cash such as stock options.
The Supplemental Pension Plan is not governed by pension benefits legislation so the plan administrator is not obligated to report the amount on a pension summary for the purposes of division.
The person not receiving a company pension, needs to know if there is a supplemental pension plan to be added into the equation for pension division.
Canada Pension Plan
Many of my clients are very surprised when they learn that Canada Pension Plan is a family asset that is to be considered in their asset division.
Depending on which Province you reside in, you may or may not have a choice as to whether you can credit split. In the Province of British Columbia where I mediate divorce/separation, couples do have a choice.
Credit splitting occurs by looking at the years in which the couple were together, adding up their unadjusted pensionable earning and then equalizing the amounts. Although we can figure out what the equalization amount is, we won’t be able to determine what that equates to in terms of receiving your monthly CPP once you are eligible to receive it.
In the case of my clients I mentioned at the beginning of this post, since she has very little CPP contributions and he has paid the maximum since they have been together, this has a big impact on her retirement income.
Discussing pension division is not easy. People work hard for a long period of time and depend on this future income to support their retirement. Knowing the type of plan and what to use to determine a fair and equitable split is imperative.
Hiring an Actuary to calculate pension division is worth it’s weight in gold. They are in fact the goose that can lay the golden egg (as I attempt to thread my nest egg analogy to this post).
As for my clients….
I sent them to this website that provides some good information as to why you would want to hire an actuary. Spend some time researching and interviewing Actuaries in your area before making a decision as to who to use.
My clients made a decision to share the Actuary cost to provide them with the information they need that supports the outcome they hope to achieve as they move on with their separate lives.