Love, Marriage and Pension Plans
The Financial Services Regulatory Authority of Ontario (“FSRA”) recently released a consultation on Proposed Guidance on Administration of Pension Benefits upon Marriage Breakdown, and a Guide for Members and their Spouses on Pensions and Marriage Breakdown.
Some of you may be asking, why are plan administrators and the pension regulator needing to be involved in marital affairs of plan members? The answer is that, unfortunately pensions are included in the definition of “family property” in Ontario’s Family Law Act, and therefore must be considered as part of the total net assets accrued during a marriage (which are then subject to equalization between spouses). I say unfortunately, because this fact causes a lot of added complications in the pension world.
How Did We Get Here?
Prior to 2012, there was no regulatory process for dealing with a marriage breakdown where pension assets are concerned. The onus was on the plan member and their former spouse to hire an independent actuary (sometimes two) to value the pension that had accrued during marriage, and a court order or separation agreement would then detail how the pension asset was to be divided. That being said, what was formed was really more of an “if and when” agreement, whereby the former spouse had to wait to access their portion of the pension asset until the plan member ultimately terminated or retired from the pension plan.
These “if and when” agreements were less than ideal, and so significant legislative changes to both the Ontario Pension Benefits Act (“PBA”) and Family Law Act (“FLA”) governing the valuation and division of pensions came into effect in Ontario on January 1, 2012. In short, after 2011, the PBA provided the process to both value and pay out a pension asset as equalization for a marriage breakdown. Further, this new process put the onus on plan administrators to provide the formulated calculations and necessary documentation to plan members and their former spouses (rather than the member having to go through an independent actuary). The quasi-good news was that administrators were permitted to charge a fee to the plan member/former spouse to prepare these calculations, up to certain maximums. My general understanding is that the aim of this “new” process was:
- to make things easier for plan members/former spouses, who could now access a portion of the pension benefit while still an active member of the plan;
- that the formulated calculations for determining pension values would provide for a “fair” valuation and equitable division; and
- that plan administrators could prepare these calculations at lower fees than independent actuaries, thus creating efficiencies and cost savings.
This leads us to today – or at least a year or so ago when FSRA established a Technical Advisory Committee to review the process and guidance provided around marriage breakdowns. I had the privilege of serving on this committee, which over the last year has assisted FSRA in providing feedback on a number of issues involving the calculations, process and guidance around marriage breakdowns.
I will say that I was incredibly impressed by this committee, and of FSRA in general. The committee included family law lawyers, independent actuaries, plan sponsors, and pension consultants – there was clear effort to include all stakeholders, even from a wide range of plans (both big and small). Kudos to FSRA for making a real effort to make informed decisions to try to improve the process for all stakeholders.
So, what needed to be improved? Well, as noted above, pensions (in particular, defined benefit pensions) are complicated in nature and issues have arisen which were not fully contemplated (or necessarily clear) in the law as drafted. In addition, I think there has been an awareness that the process can be overly complex at times, with many plan members/former spouses, plan administrators and lawyers unaware of the process in general and their specific responsibilities. Also, from my perspective, this new process has put an undue cost burden on plan administrators and other plan members since the maximum fees which can be charged to plan members can very often be significantly less than the cost required to complete the calculations and provide the necessary information to the plan member/former spouse (at least for those plans that are not extremely large and cannot rely on economies of scale).
New Guidance for Plan Administrators
I’ll deal first with the consultation document that provides proposed guidance mainly for plan administrators (and their consultants) of Ontario registered pension plans. This guide is more technical in nature and deals with to whom and where this process applies (which in itself can be a complicated matter), and various interpretations on issues related to valuation, payment and division, and survivor benefits. I think this guide will be a welcome resource for many and assist in clarifying a variety of issues. A few key highlights are as follows:
- Further to my point on the undue cost burden to plan administrators, I think the aim should be to limit the instances where it may be unreasonable for a plan administrator to be required to prepare the Family Law Value calculations. In particular, I strongly disagree with forcing a plan administrator to provide calculations when the pension assets are no longer in the plan (why should they be required to value anything if they can’t pay it out – I feel like this is a no brainer!). The good news is that FSRA made some excellent calls in this area. In particular, this document makes it clear that plan administrators are not responsible for providing Family Law Value calculations in circumstances where:
- a plan member has terminated and transferred out their commuted value between the Family Law Valuation Date and the application date;
- a plan has wound up and the benefits have been fully settled; or
- an annuity has been purchased (as part of a “buy-out”) for the member, and the plan administrator has received a discharge for said annuity. However, for plans that purchase annuities but do not subsequently obtain a “discharge” in respect of said annuities, the plan administrator is still on the hook to prepare the Family Law Value calculations. While I understand that a discharge will likely be sought in almost all circumstances, I still don’t understand the logic in forcing a plan administrator to provide calculations when they no longer administer the pension benefits and wouldn’t be able to fulfill a transfer even if the member/former spouse wanted one.
- Where a member was active on the Family Law Valuation Date, the former spouse has only the option to transfer their portion as a lump sum. However, this can get complicated if the member has subsequently retired between the Family Law Valuation Date and the application date (this period can be years long in many instances). For example, the amount that is to be transferred to the former spouse as a lump sum may no longer be available in its entirety if the member has been receiving 100% of their pension for a period (when for example, they should have only been receiving 50% because the other 50% was to go to the former spouse). In my view, FSRA also got this one right and won’t force plan administrators to play the role of collection agency in a sometimes-futile attempt to recover past ‘overpayments’ from the ‘wrong’ spouse. Instead, this guidance outlines that a plan administrator has the ability to subsequently limit the amount transferred to the former spouse in this circumstance. The plan member/former spouse are then left to sort out the payment of the shortfall from personal assets – the ONLY reasonable approach in my mind!
New Guide for Plan Members & Former Spouses
The second document released is a guide for plan members/former spouses. It’s not really a document, rather than a well laid out website which walks someone through the process, even providing examples and other resource links. This is very welcome and much overdue in my mind. From my experience, many plan members/former spouses (and even some lawyers) are not aware of this process and don’t understand what is required of them, or what their options are. My hope is that this will not only help plan members/former spouses, but it will also help plan administrators be less involved in explaining the process and correcting issues that come up in the application.
What’s Still Missing?
Unfortunately, none of what was announced addresses the issue of the cost burden to plan administrators and other plan members. While I did voice this as a concern on the committee, it is not clear to me how much power FSRA has to increase the maximum fee that can be charged. I also think that it is much more of an issue for the smaller pension plans, which are not always top of mind. My hope is that the feedback I provided will be considered and that changes will be made in the future. It is unreasonable to expect any party outside of the marriage to subsidize the expense of this process – in my opinion, it should fall solely on the shoulders of the affected member/former spouse going to through the marriage breakdown.
In summary, I think this is welcome guidance that will improve the process for all stakeholders. That being said, I’m not generally a fan of this post-2011 system. While I understand why the 2012 changes were important, I would like to see a system put in place where independent actuaries are again responsible for calculations (funded entirely by the affected plan member/former spouse), but where the former spouse could still access their portion of the family asset. Or – at a minimum, see the maximum fee that a plan administrator can charge be increased to something which better reflects the complicated nature of these calculations – and in particular, the fact that outside consultants/lawyers/actuaries are often required (increasing the cost to the plan).