THE ACTUARIAL VALUATION
- What type of pension requires an actuarial valuation?
- Is a valuation required if the pension is in pay?
- How can I obtain a pension valuation?
- How long does it take to obtain a pension valuation?
- What are the main factors considered in a pension valuation?
- In what other ways could GML assist me if a valuation is not required?
- Which retirement age scenarios are presented in a valuation report?
- Why are there so many values in a valuation report?
- Can actuaries arbitrarily select the valuation assumptions?
- Can we use a commuted value provided by the employer?
- Does the pension have to be valued if accrued under the federal public service plans such as PSSA, RCMP, CFSA?
- Under a Defined Benefit plan, are the employee contributions with interest representative of the value of the pension?
- What is the difference between a reduced, an unreduced and a full pension?
- How does GML estimate the average tax rate payable at retirement?
- Do smoking habits have any impact on the value?
THE SURVIVOR BENEFITS
- When does GML value survivor benefits?
- Could there ever be a survivor benefit payable to the former spouse that GML did not value in its report?
SPLITTING THE PENSION
- What are the member spouse’s options for the split of the pension? Is a lump sum amount payable?
- How do I know which legislation applies to the member spouse’s pension?
THE ACTUARIAL VALUATION
An actuarial valuation is required for a pension that has accrued under a Defined Benefit plan in order to calculate the capitalized value of the pension entitlements at the date of separation.
An actuarial valuation is not required for a pension that has accrued under a Defined Contribution plan. Under that type of plan, the value of the participant’s pension at any time should be equal to the sum of employee and employer contributions with investment earnings. The difference between the values of the funds at marriage and at separation is subject to division.
We recommend that you contact the plan administrator or GML if you are uncertain about the type of pension plan to which the member spouse belongs.
The pension in pay could be treated as an income or as an asset. The appropriate approach is a legal question. However, we value pensions in pay on a regular basis.
Note: if the member spouse’s health is such that he/she has a reduced life expectancy, a letter from a physician quantifying the reduction to the life expectancy is needed since this will affect the value of the pension. We can refer you to a physician who performs this type of evaluation.
- Fill out the form entitled Marriage breakdown: Required information for a Pension Valuation.
- We also require a statement of pension entitlements from the pension plan administrator as of the date of separation or within a few months of that date. If you do not have that document, we can obtain it directly from the pension plan administrator if the member spouse completes our “consent form”.
- Return the completed form(s) and statement (if any) to GML either by fax (613-842-5044), e-mail (email@example.com) or in person. Please provide specific instructions as to how you would like to obtain the report (e-mail and/or fax and/or regular mail and/or pick up).
- If required, we will send a request for information letter to the pension plan administrator along with the consent form.
- Our standard turnaround time is within 2 weeks of having all the required information. We will do our best to provide valuation reports in a shorter time frame if required (e. g. scheduled mediation).
- Payment is due upon receipt of your report. Please make cheque payable to GML Actuarial Services.
Our standard turnaround time is within 2 weeks of having all the required information. We will do our best to provide valuation reports in a shorter time frame if required (e. g. scheduled mediation).
1.0 Benefit Formula
Some plans may be based on career earnings or provide a flat benefit per year of service. Others, like a typical defined benefit plan, will provide a percentage of the final earnings of the participant for each year of service in the pension plan, possibly up to a maximum number of years (full pension). In addition, some plans are integrated with the "Canada Pension Plan (CPP) and will provide a lower benefit on earnings covered by the CPP. A bridge benefit may be payable until the CPP starts.
Some pension plans will provide indexation, that is, the degree to which inflation is reflected in the pension by the plan. Indexing may vary between the pre-retirement and post-retirement periods. Most public sector plans provide for full indexation to reflect inflation both before and after retirement. Most private sector plans provide no definitive post-retirement indexing, although many plans grant ad hoc increases to partially reflect inflation.
3.0 Retirement age
Pension plans define the normal retirement age as well as establish criteria to be met by the member in order to qualify for early retirement. In the case of early retirement, the pension is usually reduced to reflect the fact that it is payable for a longer period of time. However, certain plans will allow for early retirement with unreduced pension if the member meets very strictly defined age/service criteria.
4.0 Death benefit
Most plans will provide a death benefit should the member pass away before retirement. A joint and survivor pension must be provided if the member has a spouse at retirement unless both spouses decide to waive that form of pension. Some plans provide for a guaranteed number of payments after retirement for members who do not have a spouse at retirement.
5.0 Tax rate at retirement
Future pension payments will be taxable when received; therefore the value of the pension should be discounted to reflect the impact of income tax in order to accurately compare the value of the pension with other assets of the family property. It should be noted however that the value before adjustment for income tax should be used in the case where there is a transfer of registered funds.
Even though an actuarial valuation is not required when the pension was accrued under a Defined Contribution plan, GML can assist you in at least two ways:
- to estimate the value of the funds at dates of marriage and/or separation and
- to calculate the income tax rate payable at retirement.
The value of the funds may not be available at marriage or separation. We can estimate that value based on the type of investment used, statements at various dates, etc.
Also, if you wish to add the value of the pension assets to the other assets of the net family property, which are all after tax assets or on a cash equivalent basis, you would need to discount the value for the income tax payable at retirement. We can calculate the applicable tax rate.
The standards of practice of the Canadian Institute of Actuaries (CIA) for marriage breakdown purposes require that we show certain retirement age scenarios (unless the pension is in pay at separation). The required retirement age scenarios are:
- the earliest age at which an unreduced pension is payable based on termination of employment at separation,
- the earliest age at which an unreduced pension is payable based on continued service to that age,
- the earliest age at which a full pension is payable based on continued service to that age (if the pension plan limits the years of service that can be accrued), and
- the normal retirement age.
Here are some of the main reasons you will find several values in a valuation report:
- We are required to provide the value of the pension accrued up to the date of valuation and the portion accrued during the marriage based on different retirement age scenarios as well as before and after adjustment for income tax.
- Indexation scenarios for public plans tend to provide automatic indexation. For some private plans, we may have to provide a few scenarios if the pension is indexed on an ad hoc basis.
- If the member has elective service, we may show two different approaches for the buy back of that service (deemed accrued at election or gradually as it is being repaid by the member).
No. To calculate the capitalized value of a pension, the actuary will have to make certain assumptions. Because all actuaries are bound to the standards of practice as defined by the Canadian Institute of Actuaries (CIA), most assumptions used to perform a pension valuation are those dictated by the CIA, therefore ensuring a certain consistency between valuations performed by actuaries.
Some employers/plan administrators may provide a commuted value. It is calculated based on different standards of practice than those used to calculate the capitalized value for marriage breakdown. Therefore, it may not be appropriate to use a commuted value provided by the employer/plan administrator.
In Quebec, plan administrators of provincially regulated pension plans have to provide a value for marriage breakdown purposes.
Does the pension have to be valued if accrued under the federal public service plans such as PSSA, RCMP, CFSA?
Yes. Here are some of the main reasons the value provided by the federal government under the Pension Benefits Division Act (PBDA) differs from the value calculated for marriage breakdown purposes:
- The Maximum Transferable Amount (MTA) calculated by the government is for a different purpose (transfer mechanism) and may not be appropriate for marriage breakdown purposes.
- The MTA does not necessarily reflect the most likely retirement age of the plan member.
- The date of valuation is not the date of separation, but rather the date the estimate is prepared with the interest rates applicable on that date.
- If the pension is in pay, payments received between the separation and the date the estimate is prepared are excluded from the calculations.
- If the member receives a disability pension some pension payments may be treated as income replacement and ignored in the calculation of the MTA.
Under a Defined Benefit plan, are the employee contributions with interest representative of the value of the pension?
No. In most instances, the value of the pension is not equal to the employee contributions with interest.
The only situation employee contributions with interest could be presented, at least as one of the values, is when the pension is not vested.
A defined benefit pension plan will define the amount of pension payable at the normal retirement age. If the member retires before the normal retirement age, the pension will generally be reduced to reflect the fact that payments will start sooner and be made for a longer time period. The reduction may be calculated so that it has an actuarially equivalent value to the normal pension or can be a fixed percentage per month by which the early retirement date precedes the normal retirement date.
The plan may provide that if the member meets certain age/service requirements, the pension will be paid without any penalty for early retirement. The pension is then unreduced.
The plan may also provide that after a certain number of years of pensionable service, the member will no longer be required to contribute and accrue service under the pension plan. The member has then at that point accrued a full pension.
We calculate the average tax rate payable on the estimated taxable income the client will have at retirement. We will include the projected pension under the employer pension plan (if any), the Canadian/Quebec Pension Plan (CPP/QPP) benefits, the Old Age Security (OAS) benefits, withdrawals from RRSPs as well as investment earnings on non registered assets.
In our report, we assess the tax rate based on the retirement income before any transfer between the parties.
Of course, we cannot reflect retirement income that we are not aware of (example RRSPs). That’s why we have that specific question on our form Required Information for a Pension Valuation.
The standards of practice of the Canadian Institute of Actuaries (CIA) for the purpose of marriage breakdown specify that tobacco use (or lack of tobacco use) is not, in itself, a sufficient reason to modify the prescribed mortality rates.
We will only adjust the life expectancy from standard to substandard on the basis of a medical opinion quantifying the reduction.
THE SURVIVOR BENEFITS
We will automatically value the survivor benefits when the former spouse has an irrevocable right to those benefits. This can occur when:
- The pension plan is regulated by the Pension Benefits Standard Act (PBSA) or the Pension Benefits Act of Ontario (PBA), and
- The pension was in pay at the time of marriage breakdown, and
- The spouse had not waived her/his right to survivor benefits
Could there ever be a survivor benefit payable to the former spouse that you did not value in your report?
Yes. There could be instances where the former spouse may be entitled to the survivor benefits or a portion of it even though this was not an irrevocable right at time of separation. It depends on the applicable legislation and on the parties’ situation at the time of the death of the member spouse.
SPLITTING THE PENSION
The legislation that applies to the pension plan will dictate the methods that can be used to divide the pension.
Some pension plans fall under provincial legislation (The Pension Benefits Act of Ontario or PBA, Quebec Supplemental Pension Plan Act), some under federal legislations (Pension Benefits Standards Act or PBSA) while others have their own Act, like the Federal Public Service, the Armed Forces and the RCMP.
The Ontario Pension Benefits Act does not provide for a transfer of a lump sum amount out of the pension plan while the member is still active. Should a situation arise where the member’s spouse does not possess sufficient assets to equalize the pension, thus making an immediate equalization unfeasible, parties may enter into an “if-and-when” agreement whereby the pension payments could then be divided on a monthly basis at retirement. Some plans (ex: OPSEU) have started to offer de-linked pensions.
The Quebec Supplemental Pension Plan Act provides for a transfer of a lump sum amount out of the pension plan. The plan administrators have to provide a value for marriage breakdown purposes.
The PBSA, on the other hand, will allow for an assignment of pension benefits to the member’s spouse upon marriage breakdown and will consider the non member spouse as an actual plan member whose membership terminated on the effective date of the assignment of pension benefits. The plan will therefore either pay the non member spouse a pension or transfer a lump sum amount (if under a certain age). Most employers under the PBSA will not provide a valuation of the pension and will require a court order or separation agreement stating the amount to be assigned. Unlike the Pension Benefits Division Act which we describe below, the assigned amount is not limited to 50% of the value of the pension accrued during the marriage.
Finally, the Pension Benefits Division Act(PBDA) provides a mechanism for recognizing court orders or spousal agreements that require division of pension benefits accrued under a federal public service plan (e.g. federal public service, RCMP, Canadian Forces, MP’s). The plan member or their spouse can request an estimate of the maximum amount transferable from the pension plan, however, under the PBDA’s legislative framework, no more than 50% of the pension benefits accrued during the period of cohabitation can be paid to the member’s spouse. In addition, any lump sum payment must be made to a retirement savings vehicle such as a registered pension plan, RRSP or financial institution for purchase of an annuity. Under the Pension Benefits Division Act, the determination of the Maximum Transferable Amount (MTA) will be done by the government as of the date the calculation is prepared.
The member spouse pension plan will fall under one of the following groups of legislations:
1. The Pension Benefits Standards Act (PBSA)
The PBSA applies to federally regulated pension plans. Members of those plans are employed in connection with certain federal works, undertakings and businesses such as banking, communications or transportation. Examples of federally regulated pension plans are: Canadian Broadcasting Corporation, Air Canada, Canada Post, Export and Development Canada, Bell Canada, Nav Canada, OC Transpo (<99), Canadian National, CMHC.
2. The federal public service acts include The Public Service Superannuation Act (PSSA), The Canadian Forces Superannuation Act (CFSA) and The Royal Mounted Police Superannuation Act (RCMPSA).
3. The Pension Benefits Act of Ontario (PBA)
The PBA basically covers all members of registered pension plans who work in Ontario unless they work in federally regulated industries (see item 1 above) or the federal public service (see item 2 above). Examples of Ontario regulated pension plans are: OMERS, Teachers, HOOPP, Universities and the Ontario Public Service.
4. Quebec Supplemental Pension Plan Act
The registered pension plans in which Quebec workers participate are subject to the Supplemental Pension Plan Act. They are mainly comprised of plans sponsored by employers in the private and municipal sectors and some plans in the parapublic sector, whose activities are under provincial jurisdiction. Some registered pension plans are not subject to the Act, including plans in the Quebec public sector (e.g., the RREGOP) and in the federal public sector (see item 2 above), as well as private plans in sectors under federal jurisdiction (see item 1 above).