By G. Edmond Burrows, F.C.A.
President and
Specialist in Pension Valuators
In July of
1995 Canadian Family Law Quarterly published my article entitled Pension
Considerations on Marriage Breakdown – Retirement Age, in which I
discussed reported cases where the judge had to decide what age of retirement
to assume in valuing a pension for marriage breakdown purposes. I also set out my opinions with regards to the matter.
I was pleased to see that, in the case of Best
v. Best[1],
the Supreme Court of Canada referred to and quoted from that article. They considered my opinions in their deliberations.
Most judges
and lawyers have recognized that valuing a pension for marriage breakdown
purposes is complicated. Only
a specialist who prepares such valuations full-time and is fully cognizant
with case law should carry out such valuations. A proper pension
valuation report will give three or four possible values for the pension with
each one assuming a different retirement age.
The differences in values is often substantial, making it necessary to
determine which age of retirement should be assumed in order to choose the
proper value for the net family property statement.
Many court
cases have dealt with what is the appropriate retirement age to assume.
Some decisions were based on the fact that the person had indicated his
preference or intention to retire either early or late.
Some ruled that it was obvious the person could not afford to retire
early. Still others automatically
assumed the earliest date of unreduced pension.
In this chapter, I will review more recent cases and set out my
updated opinions on the matter, particularly with regards to the earliest date
of unreduced pension.
The courts
now have concluded that in every case,
the judge should determine the proper age of retirement to assume based on the
facts of that case. It is not
acceptable to choose a midpoint value (that is the value that assumes
retirement age half way between normal retirement age and the earliest age of
unreduced pension) simply to avoid choosing an age based on the facts
presented at trial (See Ontario Court of Appeal case of Kennedy v. Kennedy[2]).
This leaves judges having to choose either the normal retirement age or
the earliest date of unreduced pension or some other age, based on the facts
presented, as the judge understands them.
In many cases the conclusion is reached to assume the earliest date of
unreduced pension. However, there
is some confusion as to how this date should be determined, and I will deal
with this in more detail. In
order to consider this matter, it is necessary to understand that some
pensions, such as teachers’ pensions, allow the member to retire on a full
or unreduced pension when his age and years of service added together total 85,
or some other factor. Other
pensions, such as Ontario Government pensions, and Auto Workers’ pensions,
allow the member to retire after completing a certain number of years service,
such as 30.
With regards to the teachers' pensions, the 90 factor has been calculated differently in different cases. Justice Aitken explained this very well in a paper she delivered to a group of judges in Ottawa in April 1998. The question becomes - should the pension be valued assuming that the plan member literally terminated employment on the valuation date and that in order to reach the 90 factor thereafter only the increase in age of the member should be considered? Or should the pension valuator assume, for the purpose of calculating when the 90 factor will be reached, (but not for the purpose of calculating the amount of the deferred annuity), that the plan member continues to acquire years of service following the valuation date? In the latter case the member can start to draw an unreduced pension twice as fast, and as a result the pension valuation will be higher.
The
Standards set by the Canadian Institute of Actuaries in 1993 say,
Accrued benefit enhancements and grow-in ancillary
benefits (such as the right to unreduced early retirement subject to total
age/service combinations, and/or bridging benefits) contingent only upon
future service, to the extent accrued at the valuation date, must specifically
be addressed…The phrase “must specifically be addressed” means that the
actuary must present a separately identified value of such benefits, without
any discount for possible future forfeiture.
There is no explanation in the standards as to how this is to be
accomplished or how the 90 factor is to be calculated.
However, it seems to indicate that values should be produced that
somehow recognizes
the value of being able to retire early.
The case of Salib v. Cross3
involved valuation reports that were prepared by two well-known actuaries.
One assumed termination of employment as of the date of separation with
no future service being considered in calculating the 90 factor.
The other produced values that took into consideration future service
in determining the 90 factor. Chapnik
J. says that if future service is considered in determining the 90 factor, “¼the value of the pension as at the date of separation, assuming early
retirement, would be substantially greater; and the husband would benefit from
the wife’s continued employment with the Board.” She then decides to accept and adopt the first valuation
approach, where future years of service are not considered in determining the
90 factor. She was concerned that
the other values did not include any provision for the possibility that Ms.
Cross might terminate her employment prior to the age of retirement that took
into account future service in determining the 90 factor.
In reviewing this case the Ontario Court of Appeal said,
The second issue was the value of the respondent
wife’s pension. Two qualified
actuaries presented the trial judge with reports; one of whom advocated what
is referred to as the termination method of valuation and the other what is
referred to as the retirement method. In
adopting the former method as advocated by the respondent, the trial judge
gave careful reasons as to why she felt it was the more appropriate method
having regard to the particular facts of this case.
In her own questioning of the appellant’s actuary the trial judge
demonstrated that she was fully alive to the significance of the issue and
demonstrated an informed grasp of its complexities.
We can find no reason for interfering with her treatment of the
valuation of the respondent’s pension.
This case discussed this matter quite clearly and concluded that future
service should not be considered in the calculation of the 90 factor even
though the actuaries didn’t agree on this.
In this now well-known case, Mr. and Mrs. Best agreed that the
termination method would be used to value Mr. Best’s pension.
There is no indication of whether they meant the termination method as
defined in the Standards set by the Canadian Institute of Actuaries (which
seems to indicate that future years of service must be considered in
calculating the 90 factor) or the termination method as described in various
reported cases where future service was ignored in establishing the 90 factor
age of retirement (e.g. Salib v. Cross).
In the Ontario Court of Justice (General Division) Justice Rutherford
pointed out that the
two valuation reports arrived at basically the same value for Mr. Best’s
pension at the date of separation. As
explained by the Judge, both of these values ignored future service in
determining Mr. Best’s 90 factor.
The
Ontario Court of Appeal on reviewing this case said,
In this case, both parties agreed that the
“termination” method be used (as opposed to the “retirement” method).
The termination method requires that the lump-sum value of the pension
as at valuation date be calculated as if the employee had terminated
employment on that date. [See Note 1 below]
Note 1: By contrast, under the retirement method, the
value of the pension is based on the assumption that the pension holder’s
employment will continue until retirement.
It
is apparent that the Ontario Court of Appeal fully understood how the 90
factor was being calculated. It
was their conclusion that future service should not
be considered in calculating the 90 factor.
In
reviewing the lower case decision, the Supreme Court of Canada said, “Had
the appellant terminated employment on the date of separation, February 1988,
he would have qualified for early retirement under the ’rule of 90’ by
increase in age alone on September 9, 1992 at age 57.4”.
“¼the assumption was that the appellant did not
continue to earn pensionable service beyond February 1988”, (ignoring future
service in determining the 90 factor).”
“In choosing a probable retirement date of September 9, 1992, the
trial Judge had to ignore the fact that the appellant was still working on the
date of judgment.”
On
reviewing the decision by the Court of Appeal, the Supreme Court of Canada
said, “Charron J.A. concluded that Rutherford J. had followed this rule by
examining all the evidence before him in choosing a probable retirement date
of September 9, 1992.”
These
comments make it very clear that the Supreme Court of Canada were satisfied
that the lower Court and the Court of Appeal fully understood and considered
this matter carefully.
In
dealing with the calculation of the benefit earned, the Supreme Court of
Canada said,
The “termination” method requires the actuary to
determine the annual pension benefit by assuming the employee spouse stopped
working on the date of separation. The
“retirement” method requires the actuary to consider possible
post-separation increases in the pension’s value in order to determine as
closely as possible what the pension benefit will actually be when the
employee retires in the future.
Whereas, the Supreme Court of Canada gave careful consideration to the retirement age that should be assumed. They said, “¼retirement age is crucial to valuation because it determines both the length of the discounting period and also the length of time that the pension will last. Both factors materially affect a pension’s present value on the date of separation”. They went on to say in paragraph 96, “The presence of an early retirement provision such as the “rule of 90” will almost always be relevant to the choice of a likely retirement age.” They reviewed several reported cases and pointed out that, “Determining when early retirement becomes available if at all, has produced several different approaches in Ontario”. They said,
The trial Judge in this case assumed that the employee spouse terminated employment on the date of separation. That meant that the employee’s years of service were frozen at that point, and the right to early retirement under the “rule of 90” could only be reached by virtue of the increase in the employee’s age.” (ignoring future years of service in calculating the “rule of 90”.
The
Supreme Court of Canada pointed out that the parties did not challenge the
decision of the lower Court to consider the increase in age alone.
They said,
“ As I noted above, the termination method does not incorporate increases in
the pension’s value owing to events occurring after separation, such as
post-separation years of service¼”
The
Supreme Court of Canada then agreed with the lower Court and the Court of
Appeal as to how the 90 factor should be calculated when the termination
method is being used (i.e. ignoring future years of service).
If the actual date of retirement is after the date of separation there
is a temptation to use the value based on that actual retirement date.
This may not be appropriate. In
Best v. Best, Mr. Best actually retired in 1996 and argued that the
value should be based on this. The
courts used the value for retirement in 1992.
The Supreme Court of Canada said,
“The result urged by the appellant would enable spouses with pensions
to reduce the amount of their equalization payments, and profit from the
length of divorce proceedings by delaying their retirement until after the
close of all proceedings. We do not support a rule that could encourage that.”
Conclusion
Obviously when the age of retirement cannot be agreed on the decisions
of the courts must be based on the evidence provided to them.
I believe it is extremely important in many cases that the judge
is made aware of the method used to determine how the earliest date of
unreduced pension has been calculated in the pension valuation.
There must be careful consideration of whether or not future years of
service should be considered in determining that age. I also believe that the courts have carefully considered this
matter. They have concluded that considering future service in the
determination allows the non-member to share in the pension’s increase in
value beyond the date of separation. Whether
or not future years of service are considered in determining the earliest date
of unreduced pension can affect the value of the pension substantially in many
cases. In a 90-factor type
calculation, not
counting future years of service would mean a later date of retirement,
and therefore, a
lower value for the pension. With
a pension that requires a certain number of years’ service in order to
retire early, not considering future years of service would often mean that
the normal age of retirement becomes the earliest date of unreduced pension.
Again, this could reduce the value of the pension substantially.
In any case, not recognizing future years of service would seem to
offend the Standards set by the Canadian Institute of Actuaries.
Probably this will cause most valuation reports to be issued showing
more values than before and leave it to the judges
to determine which value is right if they are to decide the appropriate age of
retirement (Kennedy v. Kennedy5).
Assuming literal termination of employment for the purpose of
calculating the benefit earned will normally be appropriate.
Assuming literal termination of employment for the purpose of
determining the earliest date of unreduced pension often will mean accepting
the commuted value (or transfer value). This
value often ignores early retirement provisions and indexing.
It seems quite clear to me that the majority of problems with pension
valuations are created by the following.
·
Pension valuations are complicated and not widely understood.
·
Coined phrases (such as Termination Method, Hybrid Method and
Retirement Method) have been used by different people to mean different
things. This causes confusion.
· Attempts are
often being made to generalize and make rules that will apply to all pension
valuations. There are too many
variations in the different pensions to make this possible.
It also seems quite clear to me that the solutions to all of this are:
·
More and better education with regards to pension valuations for
the people who must deal with the equalization of property on marriage
breakdown. This is the
responsibility of the half-dozen people who issue a high volume of valuation
reports.
·
Coined phrases should be avoided and replaced with a full explanation
of what is meant.
·
New Standards that deal with specifics rather than generalities should
be developed.
Summary
The value of a definite age of retirement should be determined for
equalization purposes. In some
cases the decision will be whatever age is the earliest date of unreduced
pension. With regards to valuing
the earliest date of unreduced pension, in my opinion:
1. If the plan
provides the opportunity to retire early on an unreduced pension, the pension
should be valued accordingly. It
should then be up to the member to prove that he will not be able to take
advantage of the early retirement provisions.
2. If the early
retirement value is still being considered, it should be valued firstly
ignoring future years of service.
3. The report should
also provide a value that takes into consideration future years of service and
the value should be reduced to allow for the possibility that the person may
leave before that age or retire after that age.
Based on the evidence provided to support each assumed age of retirement,
the courts then would be in a better position to determine which value is
appropriate. Averaging a number of values may not be appropriate to
either party.
Possible Arguments
The following are possible arguments that may be used,
depending on whether one is arguing for or against the early retirement age.
1.
A pension that provides for the opportunity to
retire early on an unreduced pension is obviously worth more than one that
does not provided the person can take advantage of those provisions.
The value of the early retirement provisions should be considered to
accrue on an ongoing basis as it is not reasonable to assume that they are
worthless right up until the last day (when early retirement takes place) when
they suddenly become very valuable.
2.
If the person has always stated an intention to
retire early. However, it should
be remembered that a person can normally change their mind about retirement
right up until the time they hand in their resignation.
3.
The earlier that retirement on an unreduced pension
starts, the more the person will stand to collect.
Therefore, a person may be inclined to retire early in order to collect
the highest total amount possible and get the most from their pension.
4.
Many reported cases support assuming the earliest
date of unreduced pension.
5.
The early retirement provisions of a pension plan
are there whether the particular person takes advantage of them or not.
It would not be fair for the spouse to suffer just because the person
decides not to retire early.
6.
If the pension payments are generous and fully
indexed, the person will not suffer a drastic reduction in their income on
retirement.
7.
A high percentage of people do retire early.
8.
If the particular person is in poor health or has a
short life expectancy, they would be more inclined to retire early.
9.
A person who hates their work would be more
inclined to retire early.
10. A person
who has a hobby to follow will be more inclined to retire early.
11. A person
who is young enough at retirement to get another job would be more inclined to
retire early.
12. The
older the particular person is and the closer they are to qualifying for early
retirement, the more likely the chance that he or she will qualify for early
retirement.
13. The only
way to establish for sure that the person will take early retirement is to
wait and see. But if one waits
for this post-separation event, one should wait for all possible
post-separation events. This
means waiting until the person dies, which of course, is not acceptable.
14. One
should normally assume early retirement and the onus of proof otherwise should
be on the person who alleges otherwise.
1.
The Sanders[6]case,
and others, supports the proposition that there may be cases where it is not
proper to assume early retirement.
2.
It may be that the particular individual cannot
afford to retire early because of the support payments he or she must make.
3.
It may be that because of the marriage breakdown
and the age of the particular person, he or she will not have sufficient years
to accumulate enough assets to be able to retire early.
4.
The amount of the pension payments may be too small
to live on until the person qualifies for Canada Pension Plan and the Old Age
Security.
5.
The person may love their work and be a workaholic
and be unable to accept retirement psychologically.
6.
The early retirement provisions of the pension plan
may be cancelled or changed before the person qualifies.
7.
The person may die or the company may cease
business before the person qualifies for early retirement.
8.
A person who is in good health may be more inclined
to continue working until retirement is mandatory.
9.
If the person has remarried a younger person they
may be inclined to work until their mate is eligible for retirement.
10. If the
person has no hobby to follow they may find retirement unattractive.
11. The
person may be too old at early retirement age to get another job.
Retirement Age
– Actual Retirement
Retirement Age –
Earliest Date of Unreduced Pension
Retirement Age –
Earliest Date of Unreduced Pension
Retirement Age - Mid Point
Age
Retirement Age – Normal
Age
[1]
(1999) S.C.J.
No. 40, File No.: 26345, (1997) 31 R.F.L. (4th)
1 (Ont. C.A.), (1993) I.C.C.P.B. 8, 50 R.F.L. (3d) 120 (Ont. Ct. Gen. Div.)
Court File No.: 32962-D.
[2]
(1996) Court File No.:
C12114 (Ont. C.A.), 19 R.F.L. (4th) 454 (Ont. C.A.)
4
Ibid.
5
Ibid.
[6]
(1987), 11
R.F.L. (3d) 121 (Ont. H.C.)