What happens to your pension on divorce?
There are many kinds of pension plans. Most are subject to division upon marriage breakdown. Marriage includes a common-law relationship of two years or longer.
Federal Government plans include the Old Age Pension Plan (OAP), Canada Pension Plan (CPP).
There may be foreign pension plans, military pensions and disability pension plans. These are not discussed here.
There are federally regulated plans and provincially regulated plans. They are all quite complex and each plan requires precise and specific language to effect a division.
The most common pension plans are employment pension plans and we will spend most of our time discussing these plans.
OAP is not divisible. It is payable to most Canadians at age 65.
CPP is divided according to the Canada Pension Plan upon application by either spouse. An equal division of CPP credits earned during a relationship is mandatory unless both parties elect not to divide the pension, for example if both parties have made maximum contributions during the relationship.
Employment pensions are often the largest or second largest family asset after the family home. The portion of the pension earned during cohabitation is a family asset and your spouse is entitled to one half of that portion. The Family Law Act has specific provisions for division of pensions on marriage breakdown. Different rules apply if the pension has already commenced.
The two most common employment pensions are defined contribution plans and a defined benefit plans.
A defined contribution plan is very similar to an RRSP. It is worth what it says it is worth (in pre-tax dollars) and it can generally be easily divided.
A defined benefit plan is a much more complicated investment. It generally pays out based on your best (usually last ) five years of income and so the amount paid into the plan bears little resemblance to what the plan is actually worth. It is often worth 3 to 5 times more than the contributions made.
The Family Law Act has detailed provisions for how a defined benefit plan should be divided. Defined benefit plans are usually divided “at source”. This means the pension plan is required to create a plan in the name of the spouse who becomes a “limited member”. The credits accumulated during cohabitation are then divided equally. The limited member then has the same elections to make as the prime member upon retirement. The pension may be received on the earliest date that the prime member could retire.
In the alternative and generally only if both parties agree, the plan member can buy out the interest of a spouse. This way, the plan member can keep the pension intact and the spouse can be compensated with other assets if there are sufficient assets to do so. This requires hiring an actuary to value the plan. An actuary is a highly trained and accredited specialist. There are a number of assumptions that must to be made to come up with a range of value for the plan.
Once spouses have agreed on how to divide their pension or pensions, the agreement must be put in writing and be signed. The drafting of a marriage agreement, cohabitation agreement or separation agreement is complex and must be tailored to the individual plan. If the drafting is insufficient, the pension plan will ignore a request for division.
Spouses can predetermine what will be done with pensions in a cohabitation agreement or marriage agreement (they amount to the same thing). The agreement would specify what happens with child and spousal support, land, investments, the pension and any other assets that may exist.
Pensions are valuable assets, much more valuable than most people realize. Be sure to incorporate this asset into your thinking.
Garth Edwards is a partner with Cohen Buchan Edwards and has practised family law for 33 years. Garth may be contacted at email@example.com or 604.273.6411.