FSRA’s new guidance on pension division on marriage breakdown for plans subject to the Ontario Pension Benefits Act (PBA)
On November 9, 2021, the Financial Services Regulatory Authority (FSRA) released guidance to support the administration of pension benefits in case of marriage breakdown. This guidance could impact the value of pension benefits that can de divided between spouses when they do not reside in the same province as the one in which a pension plan is registered. This guidance adds a measure of complexity to a process that is already burdensome and challenging for some. Administrators will need to review their calculation and communication policies in light of this new guidance if they wish to help plan members navigate the process of dividing of their pensions upon marriage breakdown as smoothly as possible.
Guidance on the administration of pension benefits on marriage breakdown
The Family Law Act (FLA) sets out what must be considered ‘family property’. In the vast majority of cases, applicable legislation will be that of the couple’s province of residence prior to separation. This will be the provincial law that governs the valuation of family property, including pension accruals. It is also this provincial law that will determine the division of property. However, for purposes of carrying out equalization payments to settle this division, the legislative requirements that apply are those of the province in which the pension was accrued. It’s quite possible that the latter requirement could cause some confusion or create delays in certain cases.
Plans that are not multi-jurisdictional
For a registered pension plan to be subject only to a single regulatory authority, all of its members work in the same province. Things can get more complicated when plan members reside in more than one province. First, a member’s pension entitlements must be valued in accordance with the family law of the member’s province of residence. However, when the time comes to make equalization payments to carry out a court order or separation agreement out of plans governed by the Ontario PBA, the division must respect the limits and conditions of Ontario legislation, which aren’t necessarily the same as those used to establish the initial value of the pension entitlements.
For example, take a couple residing in Alberta where one of the spouses worked in Ontario and participated to a pension plan covered by the Ontario PBA. The administrator valued this member’s pension entitlements as being worth $100,000 according to Alberta Family Law and the court order called for 50% of the member’s entitlements to be ceded to the spouse. Before carrying out the division, the administrator of the Ontario-registered pension plan must also value these entitlements under the PBA and can only proceed with the division to the extent permitted under this legislation. If the value of the entitlements under the PBA are $90,000, the administrator will not be allowed to proceed with the transfer of the $50,000 awarded to the spouse since it is not permitted to transfer more than 50% of the Ontario Family Law Value. Albeit that the Alberta court order calls for a $50,000 equalization payment, this order is not enforceable in Ontario and the administrator will be limited to a $45,000 payment. In all cases, the administrator must comply with the pension legislation applicable to the plan, namely the PBA for Ontario-registered pension plans.
Multi-jurisdictional pension plans
The 2020 multi-jurisdictional pension plan agreement specified that the value of a member’s entire pension accrual is deemed to have been subject to the pension legislation that applied to that member at the time the determination of the value of these entitlements is made. While it is possible that the member worked in more than one province over time, the member’s rights are determined by the final work location. If this province is the same as the couple’s last province of residence, the pension will be valued and divided according to this province’s family law regulations and the administration of the division will have to respect the limits applicable under this province’s pension legislation. However, if the final work location is in Ontario and the couple’s last place of residence was in another province, according to FSRA’s latest guidance, the division must respect Ontario’s pension legislation, which would therefore be different from the legislation under which the pension entitlements were valued and equalization payments were determined. For the administrator of such a pension plan, this may require the valuation and ultimate division of its members’ pension accruals may have to take several provinces’ rules into account in light of their various provinces of residence.
Plans not subject to the Ontario PBA
The situation is no less complex for a member residing in Ontario whose pension plan is not subject to the Ontario PBA. In the case of a federally-registered pension plan, subject to the Pension Benefits Standards Act, 1985 (PBSA), the administrator must respect the rules established under the PBSA for the division of pensions on marriage breakdown as well as those established under Ontario’s Family Law Act. For pension plans that are not subject to the PBA, FSRA’s guidance offers little information or support. FSRA asks the administrator of such plans to comply with the PBA, “where reasonably possible” and allows “necessary modifications” where needed.
To ensure that the applicable limits are respected when it comes to the division of pension entitlements on marriage breakdown, it may be useful or even essential for the administrator to provide the spouses going through a separation with the valuation of these entitlements under the terms of more than one legislation. Administrative issues could arise if the values are different and not communicated at the start of the separation process. The administrator will need to ensure its own process used to deal with pension division on marriage breakdown remains adequate and addresses FSRA’s latest guidance. Clear communication of the rules and valuation amounts will be key not only to avoid administrative complications, costs to the pension plan, additional delays in the process, but also member frustration.
Pension legislation under various jurisdictions allow pension plans to charge fees for calculations needed on marriage breakdown. For various reasons – including the relatively low limits applicable to them, many plan sponsors have decided not to pass along such fees to plan members. In light of FSRA’s latest guidance, it may be worthwhile to re-examine whether this decision remains valid - particularly in plans that cover members that reside in multiple provinces.
In closing, FSRA’s guidance does provide some details on their interpretation of applicable rules for the division of pensions on marriage breakdown. This guidance furthermore sets out the extent to which Ontario’s Family Law Value calculations integrate with the Canadian Institute of Actuaries’ Standard of Practice (CIA SOP) concerning the calculation of commuted values effective December 1, 2020. One new feature of the CIA SOP applies when a terminating member is entitled to early retirement subsidies. The standard requires that a commuted value be calculated using a retirement age assumption based on a 50% probability of retirement on the date that results in the highest commuted value and a 50% probability of retirement on the earliest date the member would be entitled to an unreduced retirement benefit (the “50/50 assumption”). The FSRA guidance points out that the 50/50 assumption does not apply for the calculation of the Family Law Value for active members, since the law requires that it be determined using the weighted average of the values of the member’s accrued pension benefits based on three specified commencement age scenarios.
It should be noted that this guidance is intended to support administrators of pension plans subject to the Ontario PBA. Its effective date is November 9, 2021 and it affects court orders, family arbitration awards or domestic contracts from January 1, 2012 onward.