A closer look at the Report on Pension Division: Disability benefits
29 April 2021
By Kevin Zakreski
This post is part of a series highlighting key recommendations in the Report on Pension Division: A Review of Part 6 of the Family Law Act. For other posts in the series click here.
Brief description of the issue
This issue is concerned with the application of section 122 to a specific fact pattern, which is best expressed as a hypothetical scenario.
A spouse agrees to become a limited member of a pension plan. At the time this agreement is made, the member isn’t disabled and no one contemplates the member becoming disabled. But the member does become disabled and receives disability benefits from the pension plan until age 65. Because the agreement is silent on this issue, the Family Law Act’s default rule applies and the member is entitled to all of the disability benefits. The agreement may provide that the spouse is entitled to division of the pension when the member turns 55 years old, but the member is receiving disability benefits and wants to continue receiving disability benefits and not commence a pension. (In most cases, the member in this position has a financial incentive to continue receiving disability benefits for as long as possible.) So the question becomes whether the spouse will have to wait until the member turns 65 years old (or ceases to be disabled) and starts receiving the pension for it to be divided.
The committee understands that, in practice, many plan administrators take the position that the answer to this question is that the spouse will have to wait. Could section 122 be extended to expressly cover this scenario and explicitly state that the spouse is entitled to a share of the pension even though the member is receiving disability benefits?
Discussion of options for reform
This issue presents readers with a clear-cut set of two options.
The first option would be to amend section 122 to have it expressly cover the hypothetical scenario described above. The rationale for this amendment would be to enhance the fairness of part 6 and to clarify the law. An amendment addressing this scenario would have benefits for the limited-member spouse. It may also have advantages for some plans, by helping to spread the risk that arises in a small number of cases.
The second option would be to retain the status quo. Relatively few pension plans feature both disability benefits and pension benefits. (Though, those plans that do tend to have a lot of members.) There doesn’t appear to be a groundswell in favour of such a narrowly tailored reform, which would apply only to a small number of cases.
The committee’s recommendation for reform
The committee wrestled with this issue, ultimately coming around to favouring an amendment.
The committee is aware that the scenario likely only describes a small number of plans. And it may be technically challenging to implement a recommendation to address the scenario.
That said, the kinds of plans that do offer both disability benefits and pension benefits are likely to be large-scale plans, with benefits determined by a benefit formula provision (which are often informally called defined benefit plans). While these plans might be relatively small in number, they do cover a large number of people. The proposed amendment could amount to a fine-tuning of part 6, which enhances its fairness for a significant group of people.
In the end, the committee also decided to propose an amendment as a means of stimulating discussion of this issue. It formed its recommendation primarily for the purpose of consulting with the public and gauging its reaction to the recommendation.
While responses to this proposal favoured the committee’s approach by a large majority, those responses also raised some issues that the committee wanted to address in this report.
Responses from pension administrators raised a concern that the committee’s proposal would be creating a subsidy for members and limited members in these circumstances, which would ultimately have to be paid by all the other members of the plan. The subsidy would arise because the member would be collecting disability benefits and, under the committee’s proposal, the limited member would be entitled to a share of the member’s pension. While this share was being paid to the limited member there wouldn’t be a corresponding reduction of the member’s disability benefits. The committee took this point. But this situation happens so rarely, and it’s one of the most delicate life events, so the policy of wanting the limited member to access a share of the pension benefits in the ordinary course shouldn’t be trumped by the fact that the plan has a cost associated with the unreduced disability benefit.
Another respondent pointed out that there is nothing in the current provision that explicitly says a limited member isn’t entitled to a proportionate share in these circumstances. So that provision shouldn’t be invoked as a means to deny the limited member a proportionate share. The committee agreed with this interpretation, but noted that many of the responses that opposed the committee’s proposal appeared to be premised on an interpretation of the current law as creating a barrier for the limited member to obtaining a proportionate share in the pension benefits. It struck the committee that there may be competing interpretations of section 122 that may be operating in practice. This insight gave the committee another rationale for its recommendation, which in its view is also justified as a way to clarify the purpose of the law.
The committee recommends:
If an agreement or order dividing benefits is silent on entitlement to disability benefits, all of a member’s disability benefits should be allocated to the member and the limited member should have all the rights under the Family Law Act, including timing to commence the limited member’s share of the pension benefits.