Personal Business

Pensions and divorce

A recent court ruling in Ottawa highlights one of the hidden costs of marriage breakdown

Ross Laver January 19 1998
Personal Business

Pensions and divorce

A recent court ruling in Ottawa highlights one of the hidden costs of marriage breakdown

Ross Laver January 19 1998

Pensions and divorce

A recent court ruling in Ottawa highlights one of the hidden costs of marriage breakdown

Ross Laver

Personal Business

Anyone who has suffered through separation and divorce knows how profoundly shattering the experience can be. Feelings of anger, betrayal and grief collide with a long list of practical concerns, from where you and your ex-spouse will reside to the highly charged issue of child custody and support.

With so many pressing problems, it’s hardly surprising that most people who are wrestling with divorce spare little thought for their pensions. At the best of times, the intricacies of pension planning can seem mind-numbingly complex. In the emotional maelstrom of marriage breakdown, pensions are probably the last things on most people’s minds.

Unfortunately, divorcing partners sometimes wind up paying a big penalty for that oversight, as illustrated by a recent case before the Ontario Court of Appeal.

In 1988, Ted and Marlene Best of Ottawa separated after 12 years of marriage, when they were both 52. A former high-school principal and chairman of the Ottawa Board of Education, Ted Best had been contributing to the teachers’ pension plan for 32 years. The accumulated value of his pension at that point was more than $400,000.

The issue before the courts was how to divide that asset. Best’s lawyer, Jirina Bulger, insisted that the pension should be pro-rated based on the number of years her client had paid into the plan and the duration of the marriage. By that formula, Marlene Best would be entitled to one-half of 12/32nds of the pension, or $75,740 before tax.

Marlene Best’s lawyer, Jennifer Lynch, argued for a radically different approach that involves calculating a pension’s accrued value at the date of marriage and deducting that amount from its value at separation. What’s left is the “value added” to the pension during the marriage, which is split 5050 between the husband and wife.

For years, actuaries and family law specialists across Canada have hotly debated the pro rata and value-added approaches to pension valuation. Why the controversy? In most plans, the value of a member’s pension grows exponentially. In part, that is because pension contributions start off small in the early years, then increase with earnings. A few years of plan membership during a marriage can account for most of a pension’s value, even if the employee contributed to the plan for many years before the marriage.

Using the value-added approach, the amount of Ted Best’s pension that was accumulated during the marriage was calculated at $372,041. Instead of $75,740, Mrs. Best would be entitled to a pretax payment of $186,020.

In its ruling last fall, the Court of Appeal sided with Marlene Best, awarding her $147,649 as an equalization payment as well as monthly spousal support of $2,500 and legal costs of $45,000.

Ted Best, whose own legal costs to date exceed $50,000, is now seeking leave to appeal the decision to the Supreme Court of Canada. Wayne Woods, an Ottawa actuary who appeared as an expert witness in the lowercourt trial, says the issue is of immense importance to divorcing couples across Canada, since a pension is often a family’s most valuable asset after the matrimonial home. In some cases, the pension is worth far more than the house.

To make matters worse, there are numerous inconsistencies among the pension and family law acts in various provinces as they pertain to pension valuation. Generally speaking, the laws in Ontario and British Columbia are more favorable to non-pensioned spouses—usually women—while the rules in Quebec and Manitoba tend to benefit pension holders.

“It’s a patchwork system, and the issues involved are exceedingly complex,” says Woods, who chairs a special task force of the Canadian Institute of Actuaries that is trying to come up with a common approach to pension valuation. That wouldn’t solve all the problems, but it might prevent some of the prolonged legal battles that can complicate the already difficult process of divorce.