If the benefits are determined by the contributions made to the plan, and net investment returns on those contributions, the plan uses a “defined contribution provision”. (The contributions to the member’s account may be made by the employer or by both the employer and the employee, and the value of the account consists of the contributions plus investment returns, less administrative expenses.)
If the member’s benefits are in a defined contribution account, the benefits are divided by transferring to the credit of the spouse a share of the amount in the defined contribution account accumulated during the relationship. [FLA, s 114; Reg., s 20] The spouse would send to the plan administrator the agreement or court order dividing the benefits, together with a Form P3. [Reg., s 4(1)(c)] The administrator would then request the spouse to direct where the funds are to be transferred (usually to a Locked- In Retirement Account, but the funds could also be used to purchase an annuity or transferred to another pension plan, with the consent of that plan’s administrator). [Reg., s 26] Additional tax forms (see para 2.79) will be required to complete the transfer, and the benefits are subject to “locking-in rules” (which are discussed in Chapter 10. For the meaning of “locked-in” see para 10.4).
Administrator Checklist 3 and Lawyer Checklist 2 (see the appendices) cover the steps for dividing benefits in a defined contribution account.
| 3.3 Why divide DC Account by immediately transferring spouse’s share? | Why is a former spouse entitled to receive a share of a defined contribution account immediately, when benefits determined by a benefit formula provision are divided on a deferred basis? |
| A defined contribution account is like a bank account or an RRSP. Any future changes in its value will be because more contributions are made to it (and from investment returns), so it is relatively straightforward to divide the account balance immediately between the parties. (In contrast, when benefits are determined by a benefit formula provision, their value increases by other factors that usually cannot be fully assessed until a future date. For that reason, benefits determined by a benefit formula provision are divided on a deferred basis, until those factors, or more of them, are known, as described in Chapter 2). | |
| 3.4 Spouse’s share in a DC Account | How is a former spouse’s proportionate share of a defined contribution account determined? |
| The former spouse is entitled to a share of the account balance that accrued during the parties’ relationship. The actual period is determined by dates specified in the agreement or court order for the beginning of the relationship (the “commencement date”) and the end of the relationship (the “entitlement date”) [See para 2.24, and Reg., s 1(1) definition of “commencement date” and “entitlement date” and Reg., s 20] The Division of Pensions Regulation provides for determining the former spouse’s proportionate share of a defined contribution account by the formula: transfer amount = ½ (account balance – pre-relationship contributions) The “account balance” is the value of the account at the former spouse’s entitlement date, plus investment returns up to the date the former spouse’s share is transferred. The entitlement date will usually be the date of separation, but the parties can agree upon, and the court can direct, that a different date be used. |
The “pre-relationship contributions” referred to in the Division of Pensions Regulation are the value of the defined contribution account at the commencement date and also include investment returns from the commencement date to the date the former spouse’s share is transferred from the account. [Reg., s 20] The commencement date is usually the date that the parties’ relationship began (which is the earlier of the date that their marriage-like relationship began, and the date of their marriage: FLA, s 3(3)). The parties can agree upon, and the court can direct, that a different date be used for the commencement date used to divide pension benefits.
In either case, the administrator does not have to guess about what dates to use. These have to be specified in the agreement or court order, or by the parties in subsequent directions.
For an example of how the former spouse’s proportionate share would be determined, suppose that:
- the account balance at the entitlement date is $90,000,
- investment returns up to the date the former spouse’s share will be transferred are $5000,
- the value of the defined contribution account at the commencement date is $40,000, and
- investment returns from the commencement date to the date the former spouse’s share will be transferred are $20,000.
In this case, the former spouse’s proportionate share would be:
½ (account balance – pre-relationship contributions)
= ½ (($90,000 plus $5,000) – ($40,000 plus $20,000))
This works out to ½ ($95,000 – $60,000) = ½ ($35,000) = $17,500.
The example assumes that it will be possible to determine the investment returns at the specified dates. Some administrators will be able to provide that information. In other cases, where information is not available, the best that can be done is to estimate investment returns. See para 3.7.
| 3.5 “Net investment returns” and commission expenses | Does “investment returns” include commission expenses? |
| Yes. The definition of “investment returns” expressly provides that “related investment expenses” are deducted from proceeds realized from investing contributions. Commission expenses are normal investment expenses taken into account when calculating net returns on an investment. [Reg., s 1(1)] | |
| 3.6 Employer contributions | Are employer contributions that have not vested by the entitlement date divided between the spouses? What about employer contributions that were not vested at the start of the relationship? |
| The policy adopted under Part 6 is that employer contributions not vested by the date of division are not divided between the spouses. Reg., s 9 divides “contributions to the plan to the credit of the member”. Until they are vested, contributions to the plan are not credited to the member because, if they do not vest, the member will never become entitled to them. The PBSA introduced immediate vesting effective September 30, 2015. Immediate vesting means that a plan member is entitled to receive any benefit earned from the time the member joined the plan (for all service accrued after January 1, 1993, the date when pension benefits legislation was first enacted in B.C). The FLA rules relating to contributions that are not yet vested, however, would still apply to plans that are not subject to B.C.’s PBSA. Where the unvested contributions are sizeable, a spouse may seek to divide the benefits by a compensation payment from the member. [FLA, s 97] Under the Division of Pensions Regulation, s 27(4), a spouse may choose to either (a) postpone valuation of a compensation payment until it is determined whether unvested entitlement vests, or (b) have the valuation proceed “assuming the entitlement will vest, but adjusting it to take into account the contingency that the member may die or leave employment before vesting”. |
| 3.9 Retaining records | How long must a plan retain records to determine the pre-relationship contributions?[SN1] [GU2] [SN3] |
| To discharge the obligations imposed on plan administrators with respect to pension division means that in some cases records must be retained indefinitely. However, where other legislation specifies record retention periods, then there will be cases where plan administrators will have to estimate benefits based on the information that is available. For example, PBSA, s 34 requires plan administrators to retain plan records, in Canada, in accordance with the superintendent’s requirements, which have been issued as a guideline. See Records Retention Guideline (Pensions) Administrators of BC Registered Pension Plans, issued September 2017. | |
| 3.10 Records for non-B.C. members | Suppose a plan has members in a number of provinces. If a member moves to B.C. and pension division is required, must the plan produce past records to establish the pre-relationship contributions? |
| No. There is no requirement on a plan to retain records for members that earn pension entitlement outside of B.C.[SN4] [GU5] [SN6] The pre-relationship contributions would have to be estimated on a pro-rata basis. [See para 3.7] | |
| 3.11 Locked-in transfers: when made | What unlocking rules apply to the former spouse’s share? |
| The B.C. PBSA provides that all pension benefits earned are “locked-in” (that is, must be used to produce life income at a later date: see para 10.4). [PBSA, s 68] This rule applies equally to a share of the benefits received by a former spouse when a relationship ends. (Immediate locking-in of a member’s benefits represents a change to the former position, which provided that benefits vested after 2 years of continuous plan membership. The new locking-in rule applies to all benefits earned after January 1, 1993, the date that pension benefits standards legislation was first enacted in B.C.) Different locking-in rules apply depending on the legislation governing the plan. Federal rules differ from provincial rules. Make sure you know which rules apply. See further Chapter 10, particularly para 10.5. There are a number of situations in which locked-in benefits can be unlocked, and the B.C. unlocking rules would apply equally to pension benefits in the hands of a former spouse. [PBSA, s 69] One of these situations is that pension benefits that are less than a prescribed amount can be unlocked. |
| For example, suppose that before the benefits are divided, the total amount is above the prescribed amount. The former spouse’s share is transferred to a LIRA in the former spouse’s name. If, after division, the former spouse’s share is beneath the prescribed amount, then those benefits can be unlocked, and can be transferred to the former spouse on a non-locked-in basis. For more information, see Chapter 10. | |
| 3.12 Pre and Post Jan. 1993 Contributions | Part of the member’s benefits consists of pre-1993 contributions that are not locked-in. The spouse would like the transfer to be on a non-locked-in basis. Can the spouse choose to have the spouse’s share paid only from the pre-1993 contributions? |
| In previous editions of this Q&A, the view was adopted that the formula for division could not be manipulated in this way, mainly because the transfer would not protect the retirement income for the spouse. [See para 3.11. For the meaning of “locked-in” see para 10.4] However, with experience under the legislation, it is clear that, where the parties have more than one plan, or a plan consists of more than one component, the parties can choose how to allocate the former spouse’s entitlement. It depends on how the plan is structured. If the plan administrator is able and willing, without undue difficulty, to segregate the former spouse’s share and allocate it against a discrete part [SN7] [GU8] of the member’s benefits, then there is nothing under Part 6 preventing that result. This would be fairly straightforward to do when dealing with benefits in a defined contribution account, an identifiable part of which is not locked-in. Things become more complicated, however, when dealing with benefits that are determined by a defined benefit provision or in a hybrid plan, where the former spouse is entitled to a pro-rata share and division is based on service. In those cases, it is unlikely that the plan administrator would be able to segregate the former spouse’s share and allocate it against a discrete part of the member’s benefits. | |
| 3.13 Plan has 2 separate components | The member has terminated employment and has decided to keep the benefits in the plan and make regular Life Income Type Benefit (“LITB”) withdrawals. The LITB account consists of two different parts, one of which is locked-in and the other not. Can the agreement or court order divide |
| these two parts in different percentages? (In this case, the parties want to divide the locked-in portion 50-50 but give the former spouse a larger share of the non-locked-in portion). | |
| If the plan consists of two or more different components, the parties may use different approaches for quantifying the former spouse’s proportionate share of each component of a plan. See also para 3.12 and 5.22. | |
| 3.14 Transfer options | What transfer options are available to a former spouse? |
| [See Chapter 10] | |
| 3.15 Retaining share in plan | I’m entitled to a share of my former spouse’s defined contribution account. The plan has a good track record for investments. Can I keep my share in the plan? |
| Yes, if the administrator consents. [FLA, s 114(2)(b)] You would have to file a Form P2 to become a limited member of the plan, and your share would be administered “subject to the same terms and conditions that apply to members”. The usual maximum administrative fee for a transfer from a defined contribution account is $200. But if the former spouse becomes a limited member of the plan instead, the maximum fee increases to $1000. | |
| 3.16 Variable benefits | The member has terminated employment and has decided to keep the benefits in the plan and make regular Life Income Type Benefit (“LITB”) withdrawals (sometimes called a “variable pension” or “variable benefits”). Does FLA, s 117 apply, so all the former spouse can receive is a share of the withdrawals? Or can the former spouse still receive the share of the defined contribution account by a transfer from the plan? |
| No, the former spouse would not be entitled to a share of the withdrawals made by the member. The former spouse would still receive the share of the defined contribution account by a transfer from the plan. The rules for dividing defined contribution accounts continue to apply so long as there are funds in the account, even after a member begins making withdrawals from the account. [FLA, s 114(1)(b)] |
| At one time, the only option available to a member who terminated employment was to use the funds in the defined contribution account to purchase a lifetime annuity (the reason these plans are often called “money purchase plans”). However, the ITA was amended to permit other options (such as transferring the funds to a LIF [SN9] from which regular withdrawals can be made subject to prescribed annual minimum and maximum amounts or keeping the funds in the plan and receiving benefits in the same way: see PBSA Reg., s 74). If an annuity was purchased for the member using the funds in the defined contribution account, then the former spouse would receive the share under s 117 (see Chapter 5). | |
| 3.17 Terms for dividing variable benefits | The member has terminated employment and has decided to keep the benefits in the plan and make regular Life Income Type Benefit (“LITB”) withdrawals. What information needs to be in the agreement or court order to divide these benefits? |
| In most cases, the agreement or court order will specify the dates to be used, and the benefits will be divided in accordance with FLA, s 114(2) and Division of Pensions Regulation, s 20. [See para 3.4] If there are sufficient funds in the account to satisfy the former spouse’s share, no problems are caused by the fact that the member has been making LITB withdrawals in the meantime. However, there will be cases where LITB withdrawals will leave a balance in the account that is less than the former spouse’s share. In those cases, the administrator would be required to: (a) advise the former spouse concerning the amount of the former spouse’s share, and (b) transfer as much of that share as is available as directed by the former spouse (to a financial vehicle as permitted under PBSA, s 88, such as a LIRA or LIF). The former spouse would have to look to the member for compensation for the deficiency. If the parties are well advised, the agreement or court order will address this issue in advance. For example, the pension division arrangements could: (a) instead of relying on the formula set out in Division of Pensions Regulation, s 20, specify a percentage of the account balance as of a specified date (this would be the preferred approach from the plan administrator’s perspective). Another option would be to express the former spouse’s share as a dollar amount (although this approach can cause problems, if the markets are volatile and investment values plunge, which are avoided by using a percentage amount); and |
| The plan should leave the current limits (ITA minimum and PBSA maximum) in place until the following year when they would be updated as part of normal process. | |
| 3.21 Flexible benefits plan | How are defined benefit flexi-benefits divided? |
| See para 2.22. | |
| 3.22 Pooled Registered Pension Plans | How are benefits in a pooled registered pension plan divided? |
| The FLA applies to the division of benefits in a pooled registered pension plan account. [FLA, s 110, definition of “local plan”] A PRPP is a type of plan in which benefits are determined under a defined contribution provision, so the benefits would be divisible under FLA, s 114 (and in accordance with the principles discussed in this Chapter). Transfers from the account would be to another pooled registered pension plan, to a pension plan, if that plan administrator permits, to a locked-in savings or income plan, or used to purchase an immediate or deferred life annuity. (For BC members, the transfer would be to a federally regulated locked-in savings or income plans, although these plans are subject to the usual creditor protection rules that apply under provincial pension standards legislation to all provincial locked-in savings and income plans.) For more information regarding the rules for PRPPs refer to the governing legislation. [Pooled Registered Pension Plans Act, SBC 2014, c 17; Pooled Registered Pension Plans Act, SC 2012, c 16] Also, information for B.C. members is available on the website of the federal Office of the Superintendent of Financial Institutions. In 2018, OSFI published a Member Guide for each participating Jurisdiction. BC’s is here https://www.osfi-bsif.gc.ca/en/supervision/pensions/administering-pension-plans/guidance-topic/pooled-registered-pension-plans-guide-british-columbia-members |
[SN1]Cynthia Callahan-Maureen (Min. of Finance) – Did you want to include a reference to the fact that PBSA s. 34 requires plan administrators to retain plan records, in Canada, in accordance with the superintendent’s requirements, which have been issued as a guideline. See Records Retention Guideline (Pensions) Administrators of BC Registered Pension Plans, issued September 2017.
[GU2]Let’s add this into the answer.
[SN3]Confirm new wording
[SN4]Cynthia Callahan-Maureen (Min. of Finance) – I don’t believe this is correct. The plan administrator is required under the Superintendent’s guideline to retain records for all members at least until benefits are paid out. The administrator of a multi-jurisdictional pension plan must apply the applicable pension legislation: of the jurisdiction with the plurality of members for plan matters, which would include records retention, and of the jurisdiction of each member for other matters relating to member benefit entitlement. See the 2020 Agreement Respecting MJPPs and for record retention being a plan matter, see Schedule B section 5.
[GU5]Agree, let’s amend the answer accordingly.
[SN6]Confirm new wording
[SN7]Stephanie Griffith (Benefits Administrator)- I think it would be worth noting here that the member has to agree to this i.e. giving up his share of the unlocked benefits
[GU8]Group to discuss
[SN9]Cynthia Callahan-Maureen (Min. of Finance) – I think the style is to use LIF.