Fixing Pension Death Benefits

 

 

On January 1, 2017, the Ontario government has changed the definition of spouse under the Pension Benefits Act which will affect the way death benefits are to be paid in the case of pre-retirement death of a member of a registered pension plan.  I am going to share these new rules and point out why the government has failed to get ahead on this issue.

Unwritten Rules

I forget who first told me about the ‘spouse in the house’ rule back in the late 1980s.  It might have been Randy Bauslaugh but after all these years I cannot be sure.  I remember thinking at the time that it was a pretty lame rule that seemed so different than all the clear and logical rules that were written into the Ontario Pension Benefits Act in 1987 to improve conditions for members of registered pension plans.

For those that don’t know, the ‘spouse in the house’ rule was an unwritten rule that allowed you to decide what to do when a member of a pension plan died and had two individuals in their life that could be considered a ‘spouse’ under the PBA.  The resolution was supposed to be that if you were living with the married spouse then they got the death benefit but if you were living with the girlfriend/boyfriend, who qualified as a common-law spouse, then they would be entitled to the death benefit.  The idea was that whoever the member was living with would be the one financially dependent on the member and most deserving of protection under the PBA.

Carrigan

For more than 20 years the pension industry followed the ‘spouse in the house rule’ although I had always been skeptical.  Then along came Ron Carrigan, a man that had two women in his life for whom he had accepted a significant financial responsibility and both were considered spouses under the PBA.  One was a married spouse and the other a common-law spouse.  Mr. Carrigan was an intelligent man and in arranging his affairs, he made clear his intentions to have his pension death benefit paid to his married spouse and in the event the benefit was not payable to her as spouse it was to be shared equally with her and their two daughters as beneficiaries.

Unbeknownst to Mr. Carrigan, the Financial Services Commission of Ontario had a different view, and when Mr. Carrigan died on June 4, 2008 it set in motion a series of disputes over who should be recognized as the recipient of the death benefit.  Carrigan’s married spouse, retained a local lawyer, Rod Godard.  To the best of my knowledge, Mr. Godard was not a pension industry insider which gave him the inherent advantage that he was completely unaware of the ‘spouse in the house’ rule.  He had the good fortune to look at the legislation as it was written and not as many in the industry felt they knew it was intended.  After losing in the lower court, Carrigan’s married spouse (not ‘in the house’) won on appeal.  It is my view that she won because the appeal court was pushed into an ‘all or nothing’ decision and it was clear from the evidence that Mr. Carrigan was expecting his ‘wife’ to receive more than nothing and it was unclear what he was intending for his ‘common-law’ partner.  To me, the most rational decision was a sharing of the benefit between the spouses – but the legislation did not seem to offer the appeal court the opportunity to choose this option and the two spouses failed to negotiate a compromise – probably because both legal teams were sure they were right.  Of course only one of the legal teams was right.

As a post-script to the story, Ontario rushed out and amended the legislation so it is clear they intend the ‘spouse in the house’ to get the death benefit going forward, and they relieved all plan administrators of any liability if they paid the benefits under that unwritten rule prior to passing the legislation.

What now? What next?

As of January 1, 2017, the Ontario government has again amended the definition of spouse, this time to recognize different ways two people can be parents to a child and therefore qualify as spouses.  In theory these are laudable efforts to make sure that as the world changes and the types of relationships evolve we are not stuck back in the 1950s with a man and a woman needing to be married and living together to be considered spouses.  Interestingly, I just met a woman this week who lives in Toronto while her married husband lives in Washington DC.

What is lost in all this maneuvering is that the government should be getting out of the business of telling pension plan members who their beneficiary needs to be.  Designating a beneficiary only to find out later that the government is going to over-rule your designation is a system ripe to cause chaos in financial planning.  In the case of Carrigan, the facts were not consistent with the assumptions the government made to justify its legislation and the appeal court clearly saw that.  In addition, plan administrators that are left to administer the death benefits are left searching for ‘possible spouses’ and spending time on the sidelines while parties argue over their interests.  Finally, plan administrators will increasingly need to advise plan members to get legal advice as they complete their beneficiary designations and it’s my guess that many non-pension lawyers risk getting that advice wrong.

All of these layers create legal costs and planning uncertainty – for what benefit?  Let pension plan members decide who they wish to choose as a beneficiary just like they can choose their beneficiary with life insurance and let’s stop this unnecessary paternalism and bureaucracy.

 

 

Joe Nunes
Joe Nunes
Joseph Nunes, Co-founder and Executive Chairman of Actuarial Solutions Inc, has practiced in the area of pensions and retiree health plans for over 30 years. He has experience with many types of plans including single-employer, multi-employer, private sector, government, unionized, non-unionized, as well as registered and non-registered executive plans.

2 Comments

  1. Avatar Mel Norton says:

    Remember that it is critical that Pension Law and Family Law act in harmony with respect to death benefits

  2. Avatar Bob says:

    Some history may be useful here, back in the 70’s a situation occurred where a GM worker for over 35 years retired with life only pension. A few months later he passed away and his pension ceased leaving his wife who had never worked with little income. This happened often but the issue was seldom raised.

    The Royal Commission Report in the late 70’s came up with the view that pensions were deferred income of the individual and that the pension benefit was a family asset. the individual’s spouse would get full value if death occurred before retirement and the pension would be paid with 60% going to the survivor of the couple.

    The Family Law reform act was being modified at the time the PBA was being introduced and the notion was that an individual would have only one spouse and it was simple, when a relationship ended, all assets would be thrown on the table and split 50/50 and this included the pension assets.

    Thus the PBA was written to identify that there was only one spouse and that was the spouse living with the member in a “conjugal” relationship. Any assets/obligations tied to previous spouses were dealt with previously.

    Of course, the reality was that on separation many did not go through the process of a separation agreement and full splitting of assets. Such would require lawyers, accountants and actuaries and who needed the expense. Thus the situation of multiple spouses became a issue.

    Not only that where an agreement was struck, often those involved did not understand how pensions were determined or split and so often it was not well documented.

    At the plan sponsor level, often the individual would show up complaining that his new spouse was not being covered for a medical or dental claim so the plan sponsor would fix the benefit records for health and dental but not touch the life or pension beneficiaries.

    Thus many problems have occurred overtime as to who the true beneficiary should be.

Leave a Reply

Your email address will not be published. Required fields are marked *