Clients whose marital status is anything other than “married” must use great care when making arrangements for the division of their pensions, according to recent decisions from courts across the country.
Recent judgments from Ontario, British Columbia and Manitoba deal with the division of a pension where spouses have separated or divorced. They highlight the difficulties of ensuring that the wishes of clients with valuable pensions are enforceable. Among other points, the decisions make clear that the wording of spousal agreements, when a pension commences and the role of statutes designed to protect the pension rights of spouses must all be taken into consideration.
According to Kathryn Bush, partner with law firm Blake Cassels & Graydon LLP in Toronto, the changing landscape is good reason for financial advisors to consult with their clients about seeking legal advice to ensure that clients’ wishes are properly documented and in accordance with provincial legislation. Such advice could be obtained from a lawyer who specializes in the pensions field or from appropriate government sources, such as the Financial Services Commission of Ontario.
One thing does seem relatively certain, however: such questions are likely to continue to arise as “till death do us part” becomes less reasonable to more people, and more clients find themselves in complex circumstances following marriage breakdown.
“If everyone stayed married forever it would be neater on the pension front,” notes Bush.
Perhaps the most widely noted decision in the field was released by the Ontario Court of Appeal (OCA) in 2012, with leave to appeal to the Supreme Court of Canada denied the following year. The result in Carrigan v. Carrigan Estate took so many pension experts by surprise – notably, most pension plan administrators – that the Ontario government passed legislation in 2014 designed to reverse the result in the case.
In Carrigan, the contest was between a wife who had separated from a pension plan member (but was not divorced from him) and the plan member’s common-law spouse. The plan member had died prior to retirement and the issue was which “spouse” was entitled to the death benefit – the legally married but separated wife or the subsequent, common-law partner. After an extensive analysis of the meaning of “spouse,” the court ruled that the benefit should go to the plan member’s designated beneficiaries – in this case, his children and wife.
Prior to the Carrigan decision, the legal and pension industry interpreted Ontario’s Pension Benefits Act as intending that a death benefit be given first to a common-law partner, ahead of any designated beneficiaries, even if the pension plan member was still married but separated from another spouse.
“It seemed to everybody that [the OCA judgment] was really hinging on this arbitrary fact of a member not having gotten a divorce from a prior spouse,” says Douglas Rienzo, partner in the pensions and benefits department at law firm Osler Hoskin & Harcourt LLP in Toronto. “Why should a common-law spouse’s entitlement be dependent upon whether or not the [pension] member got a divorce?”
As a result of the OCA’s ruling, the Ontario government received many requests from the pension administration community to amend the province’s legislation. That was done in July 2014, with the changes giving priority to common-law spouses in situations in which the plan member is still married to a former partner when the right to a pre-retirement death benefit arises or the pension begins. The amendment is not retroactive, meaning that pension benefits of an individual who died between the 2012 ruling and the 2014 amendment would be distributed in accordance with Carrigan.
As Rienzo notes, the Carrigan decision and subsequent legislation changes are another reminder to advisors to talk with clients about updating their designated beneficiaries and being very clear about how they want their assets distributed after their death. “It’s just a reminder that those things matter and life circumstances can change,” says Rienzo.
A more recent decision in Tarr Estate v. Tarr from the B.C. Court of Appeal (BCCA) also dealt with a situation in which changing life circumstances and a failure to follow through on administrative requirements following divorce led to a contest over pension entitlements.
Michael and Colleen Tarr, both schoolteachers, separated in July 2002 after a 38-year marriage. The same month, Michael Tarr retired and elected to make Colleen Tarr the beneficiary of his 100% joint life pension; under that plan, the beneficiary would receive 100% of Michael’s pension for life. In 2007, the Tarrs signed a separation agreement, stating that each “shall retain for his or her own use absolutely, free of any claim by the other pension and pension rights.”
Michael Tarr remarried in 2008 and, following his death in 2010, his second wife claimed the survivor pension benefits. The second wife was successful at trial, but the BCCA overturned that decision; it ruled that under B.C. legislation, pension survivor benefits become the property of the person who is the spouse when the pension commences. The separation agreement was not sufficiently clear and unambiguous enough to be an effective waiver of Colleen Tarr’s rights to the survivor benefits.
The BCCA did rule that an ex-spouse may waive his or her rights to a survivor benefit after the pension has commenced, but it must be done in a clear and explicit manner. For example, such a waiver from an ex-spouse might have to state “notwithstanding the election that was made in my favour, I am agreeing that I not be paid any of the pension,” says Bush. The designation can also be changed by court order.
Clarity in pension divisions between spouses is important even before a marital breakdown or a death. Dundas v. Schafer, an October 2014 decision from the Manitoba Court of Appeal (MCA), dealt with a couple who had signed a pre-nuptial agreement in 1997, one day before their wedding, in which Jennifer Dundas relinquished all claim to Arthur Schafer’s university professor pension should they divorce. (Schafer had lost part of his pension in a previous divorce settlement. He was adamant that he would not remarry if his pension was at risk). In 2011, the couple separated and Dundas claimed a portion of Schafer’s pension.
Dundas argued that the pre-nup was not the proper document to opt out of a subsection of Manitoba’s Pensions Benefits Act (MBPBA), which provides that a pension must be divided between a divorcing couple; Dundas argued that a new agreement was required after separation. The court, however, found that because the pre-nup agreement gave up any entitlement to Schafer’s pension, the relevant sections of the MBPBA never came into play. In other words, the pension never formed part of the marital property that was subject to division.
The MCA agreed that the pre-nup had been effective in protecting the pension from the second wife’s claim. The MCA also ruled that a subsequent amendment to the MBPBA prohibiting opting out of its provisions had no effect on agreements made before that legislation was enacted.
In the April issue, we will examine recent government initiatives pertaining to public pensions.
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