How a Pension Gets Split Amidst a Divorce

July 25 2018

Westcoast Actuaries Inc. understands that the financial settlement process when ending a marriage-like relationship can be difficult. To support separating spouses in making informed decisions on how to divide pension assets fairly, we have outlined the two methods available for dividing pensions upon marital breakdown:

Pension Division Inside the Plan

Also known as a ‘plan-administered split,’ this method provides the former spouse’s share of the member’s pension value at a future date through a lump sum transfer or separate monthly lifetime pension payments to the spouse from the pension plan, which in turn, reduces the value of the member’s pension. To do so, the former spouse or pension plan member must designate the former spouse as a “Limited Member” by submitting the required forms to the pension plan administrator. The pension plan administrator may also charge a fee to divide the member’s pension at source.

Many pension plan administrators will only perform the final calculation of the Limited Member’s pension value to determine the lump sum payout or monthly payments from the pension plan. If required, our Actuarial Evidence team can perform a pension credit splitting calculation that provides estimates of the monthly pension payments for both plan member and Limited Member. This method is only recommended for members (and their former spouses) that are already eligible for retirement or within a few years of retirement eligibility as the Limited Member’s estimated monthly pension payments become less reliable the further away the plan member is from retirement.

Note that the federal public sector plans that are governed by a federal statute, do not allow the ‘plan-administered split’. Such statutes include the:

The only division settlement allowed for these federal public sector plans is in accordance with the Pension Benefits Division Act (S.C. 1992, c. 46, Sch. II) (the PBDA), which is a transfer of the spouse’s commuted value to their locked-in Registered Retirement Savings Plan (RRSP). An estimate of the commuted value can be requested from the plan administrator.

Pension Division Outside the Plan

Also known as a ‘compensation payment,’ this method refers to a transfer of assets from the pension plan member to the former spouse using assets outside of the pension plan to compensate the former spouse so that the plan member can retain the full value of their pension. Compensation payments can be in the form of before-tax or after-tax assets, or a combination of both. The separation or divorce agreement will indicate that in exchange for the immediate access to the compensated share of the member’s pension value, the spouse has no further interest in the member’s pension. An actuarial valuation must take place to determine the present value of the member’s pension accrued during the marriage period, and the resulting proportionate share the member’s spouse is entitled to.

This division method is often preferred as the former spouse receives immediate access to the capitalized value of their share of the member’s pension, hence immediately settling all financial matters. Division outside of the plan is the most common valuation prepared by our team.

How to Decide

The most suitable method should be chosen on a case-by-case basis taking the current financial assets, current ages, and retirement planning of the member and former spouse into consideration. If you require more information, we encourage you to consult legal counsel and get in touch with our Actuarial Evidence team.