Spotlight on pension division: commuted value transfer
September 3, 2020
BY Kevin Zakreski
This post is part of a series that spotlights issues discussed in the Consultation Paper on Pension Division: A Review of Part 6 of the Family Law Act. To read other posts in the series please click here.
Brief description of the issue
If the pension benefits to be divided are under a local plan, are determined under a benefit formula provision, and the pension hasn’t commenced, then section 115 of the Family Law Act gives a limited-member spouse the option “to have the limited member’s proportionate share of the commuted value of the benefits transferred from the plan to the credit of the limited member.” The limited member may choose this option “no earlier than the earliest date that the member could elect to have the member’s pension commence.”
Section 115 opens the door to a limited member taking a commuted-value transfer even in circumstances in which this option, under the terms of the plan, isn’t available to the member. Should the section be amended to foreclose this possibility?
Discussion of options for reform
Addressing this issue boils down to a choice between amending section 115 to provide that the limited member’s options mirror those of the member or retaining the current provision.
The arguments in favour of amending the section were canvassed in the BCLI 2006 Report, which contained a recommendation for such an amendment. The report noted the following reasons as support for its recommendation:
- the limited-member spouse may lack the capacity to manage a large lump-sum payment, resulting in the spouse becoming worse off financially than would have been the case if the spouse had remained a limited member;
- the commuted-value transfer in these circumstances can be difficult for plan administrators to administer; and
- there are concerns about the perceived lack of fairness in a provision that gives a limited member rights that the member doesn’t have.
Conversely, there may be advantages to the status quo. The current provision does give greater flexibility and control to the limited member. The BCLI Q&A noted some circumstances in which these qualities might be particularly prized by a limited member:
- the limited-member spouse may prefer the control afforded by this provision and may feel, with professional assistance, better able to invest the funds effectively than the plan;
- the limited-member spouse may have health concerns and a reduced life expectancy, effectively placing a higher value on a lump-sum transfer;
- the limited-member spouse may want to ensure that financial resources are available for a dependent after the former spouse’s death;
- the limited-member spouse may, in some cases, have greater flexibility about the amount of income received on a lump-sum transfer;
- the limited-member spouse may be concerned about the plan’s solvency.
The committee’s tentative recommendation for reform
The committee favoured amending section 115. The committee noted that giving the limited-member spouse greater flexibility under the option to take a commuted-value transfer made a certain amount of sense under the previous act, because it took a relatively rigid approach to the other option (receiving a separate pension). Now, section 115 of the Family Law Act gives the limited member more flexibility in choosing when to receive a separate pension. In view of this change, the committee views the rationale for giving a limited-member spouse greater flexibility with respect to a commuted-value transfer to be attenuated.
The committee was also concerned about the legislation indirectly making the option of a commuted-value transfer more attractive to limited-member spouses. The committee noted that many people can fail to appreciate the value of a pension with benefits determined under a benefit formula provision. In many circumstances, a limited-member spouse could end up being financially disadvantaged by electing a commuted-value transfer.
Finally, the committee was concerned about the fairness of a provision that gives an option to the limited-member spouse that is not available to the member spouse.
The committee tentatively recommends:
The Family Law Act should be amended to make the limited member’s options with respect to commuted-value transfer mirror those of the member.