When spouses separate they need to determine how they can equitably retain and/or divide their pensions. Pensions usually have significant value and often are one of the spouses’ main assets along with the family residence.
Pensions can be retained by either spouse, divided equally between the spouses or their value can be determined and traded for another asset such as the equity in the family residence.
Pensions are usually one of two kinds, defined benefit or defined contribution. Defined contribution pensions are more common. The amount the employee and the employer are required to contribute each month is set out in the employment contract and the amount of pension which a person will receive on retirement is not predetermined. A defined benefit pension is similar but the “benefit” or amount of the pension which will be received is limited and determined by a formula typically based on earnings and length of employment.
If spouses want to equalize their pensions “at source” they can apply to have their pensions equalized by their employer for the period of service which is from the date they started living together to the date they separated. The employer will either set up a separate pension account in each spouse’s name or they will determine the value of the spouse’s share and pay this amount into a locked-in RRSP of the receiving spouse. If spouses want to trade the equity in another asset such as the family residence the pension needs to be valued. The value of a pension greatly exceeds the spouse’s total contributions which are set out in their annual pension statement as the statement does not include the value of their employer’s contributions nor does it show the present value of the future stream of income.
In order to value a pension properly spouses need to hire an actuary who will provide either a verbal or written report regarding the pension value. This usually costs approximately $800.00 to $1,000.00 per pension and can be obtained within two to three weeks.
Deborah A. Todd