Defined Benefit vs Defined Contribution Pensions in an Ontario Divorce

If you or your spouse belongs to a workplace pension plan, it may be one of the most valuable things you own, even though you cannot see a balance the way you can with a bank account. When a marriage ends, that pension has to be accounted for, and how that works depends on what kind of plan it is.

This article explains the difference between defined benefit and defined contribution plans, how each is valued for family law purposes in Ontario, and how the spouse's share is generally paid. It is general information, not advice on your situation.

How pensions fit into property division

In Ontario, equalization compares each spouse's net family property at separation with the net family property at the date of marriage. The spouse with the larger net increase pays half of the difference to the other. Retirement savings are among the property counted in that calculation.

Property owned at separation is valued as of the separation date, and property owned at marriage is valued as of the wedding date. The government advises asking the pension administrator for the pension's value. Debts are subtracted from property values.

Pension plans regulated under Ontario's pension law have their own family law rules on top of this. Those rules limit the former spouse's share to 50% of the Family Law Value, and the administrator prepares a Statement of Family Law Value.

Defined benefit vs defined contribution: the basic difference

A defined benefit plan promises a pension at retirement, usually based on a formula such as years of service and earnings. A defined contribution plan builds up an account from contributions and investment earnings, and the pension depends on what is in the account. The two are valued differently for family law purposes.

The key point for a defined benefit plan is the service ratio. Only the portion of the pension earned during the spousal relationship is counted, which is why years of service before the relationship began reduce the figure.

The valuation date and the 50% cap

The value of the pension is fixed at the family law valuation date. For pensions, the former spouse's share is limited to 50% of the Family Law Value. FSRA's pension settlement rules apply to settlements made after 31 December 2011, and the 50% cap applies to those settlements. For retired members, section 67.4(5) of the Pension Benefits Act imposes the same limit.

An order or agreement that divides a pension must state the valuation date, name the plan, and give the spouse's share as a dollar amount or a percentage not over 50%. Vague wording can cause delay, so the drafting matters.

How the spouse is paid

If the plan member has not retired on the family law valuation date, the administrator can only pay the spouse a lump sum for equalization. That lump sum must go to a locked-in account such as a LIRA or LIF. This means the money is generally not available as cash right away.

The spouse applies on FSRA Form FL-5 with a certified copy of the court order, arbitration award or domestic contract. How payment works once the member has retired depends on the plan and the circumstances, so ask the administrator and confirm with a lawyer.

• Pension value is not the same as what you could withdraw today.
• How you can use a locked-in account depends on the type of account, so it is worth confirming with the administrator or a lawyer.
• Other retirement savings, such as RRSPs, are counted in equalization too.

What to do next

Start by finding out what kind of plan each spouse has, and write down the date of marriage, the date of separation and the plan's name. Then ask the administrator how to get a family law value. The plan member or the spouse starts the process by sending the administrator the Application for Family Law Value, FSRA Form FL-1.

• Identify each plan and whether it is defined benefit or defined contribution.
• Gather recent pension statements and the plan name for each employer.
• Confirm your date of marriage and date of separation.
• Request a family law value using Form FL-1.
• Check the property claim time limit: six years from separation or two years from the day a divorce is final, whichever comes first.
• Have a lawyer review wording of any agreement before it is signed.

Pension valuation can involve large amounts and technical rules. A lawyer or an accountant can confirm how the rules apply to your plan before you agree to a settlement.

Frequently asked questions