Pensions and Equalization
When a married couple separates, the parties’ property will be divided through a process known as Equalization of Net Family Property. Briefly, each party’s individual assets and liabilities along with the couples’ joint assets and liabilities will be included in a calculation to determine what one spouse will pay to the other to finalize the financial issues associated with the separation. The purpose of an equalization payment is to attempt to ensure that both parties walk away from the marriage in a relatively similar financial situation.
Hello, I’m Andrew Feldstein, the managing partner of the firm. Today I will be speaking specifically about how Pensions are dealt with when a couple separates.
Aside from the Matrimonial Home, in most cases, pensions can be one of the largest assets which need to be equalized upon separation or divorce. Many clients may argue that it is unfair to have to divide the value of their pension or pensions with their spouse as this asset is something they have worked very hard for. The one exception to this is WSIB pensions which are not considered “property” under s. 4 of the Family Law Act. As such, the parties must keep in mind the purpose of equalization and the goal to ensure that neither party walks away from the marriage in a vastly different financial position than the other.
As of January 1, 2012, a new legislative regime was adopted with respect to both how pension value is determined and how equalization payments are settled. These changes to the pension regime came as a result of problems with the old system. For example, under the old system, if the husband had a pension valued at $200,000 and the equity in the matrimonial home was also $200,000 as of the valuation date, the husband would simply keep his entire pension, and the wife would retain the home providing that they did not own any other assets. Going forward, the husband would be required to rent property and he would retain his pension. The new system was adopted, in part, to remedy this unfairness. Now, pensions are equalized like other property, and their value can be more easily split among the parties.
Another change in pension valuation is who does the actual calculation. Whereas the old system used valuators, usually actuaries, to value pensions, under the new regime the value is generally assigned by the pension plan administrator upon request by the spouse. One of the disadvantages of this is that if spouses disagree on the value of the pension, there is no “complaint department” or “second opinion.” The valuation assigned by the pension plan administrator is final. The current system adopts some new general rules for determining the value of pensions. For example, the value of a spouse’s survivor benefit is taken into account and individual differences such as age of retirement and shorter life expectancy play less of a role in determining value.
Additionally, there are new, discretionary rules for determining how a pension that has not begun paying out will be equalized. Now, a lump-sum transfer may be made directly from the pension owner’s pension into a spouse’s prescribed retirement investment fund. So, if we used the example mentioned earlier, the husband could directly transfer $100,000.00 of his pension fund to his wife’s LIRA and then receive half of the proceeds of the sale of the matrimonial home. In this fashion, both parties have a similar retirement fund and similar accommodations.
If you need more information and wish to schedule a consultation, please visit our website or contact our office at 905-581-7222. Thanks for watching. I’m Andrew Feldstein.