When is a Valuation Needed?
Discovery is often asked whether a pension is worth valuing at all. It may be that another form of pension division is possible. Recent legislative changes allow for the division at source of some pensions, making valuations unnecessary. Where this is not an option, the issue then becomes whether it is likely that the discounted present value of future pension payments will significantly exceed the “value of paid-in contributions (including employer contributions) to date” which is normally provided by pension administrators to their members (and which the pension-holder is likely to argue represents the value of the pension).
The true pension value is likely to exceed the refund value under the following circumstances:
- Pensions that are based on final wage levels before retirement. (e.g. the highest five or six years of earnings). This is typical of federal government pensions (including armed forces and R.C.M.P.) and provincial government pensions (including teachers and municipal employees).
- Pensions that are indexed to inflation once the monthly payments begin after retirement, such as government pensions.
- A potential for early retirement increases pension values. Many plans allow retirement before 65, sometimes with a slightly lower pension.
- In the case of Canadian Armed Forces or R.C.M.P. pensions, there is the option of early retirement with an immediate pension. Early retirement options increase pension values.
- Where the period of the marriage is long relative to the years of pensionable service then the share of the pension attributable to the spouse will be higher.
- If the pension holder’s spouse is entitled to a survivor’s pension where the pension holder dies after retirement, and where there is no penalty for this “joint life” pension, then the value of the pension will be significantly higher if there is a chance that the pension-holder will remarry. This is typical of federal pensions.
The value of the pension will not be significantly greater than the value of paid-in contributions:
- When there is a high probability of the individual switching careers, or he/she has already done so.
- When the pension holder has only a few years of pensionable service with a long time to go before retirement.
- When the pension is based entirely on contributions, as for the University of Victoria. In this case the amount of contributions (with interest) at the time of separation is a good estimate of pension value.
Allocation to Period of Marriage
After determining the value of the pension, the final step is to calculate the portion of the pension which was earned during the period of the marriage.
Our calculations provide the present value of before-tax pension income. In some situations, this asset is used to offset another family asset which has been acquired with after-tax dollars. Discovery can provide assistance if an adjustment for income tax is needed.
In order to calculate the present value of future pension entitlements, the following information is needed:
- A valuation date. This is most usefully the date when any payment to compensate for the pension will take place. The valuation date need not be related to the marital separation date.
- An assumption about when the pension holder will retire or when pension payments will begin. This assumption is crucial both in determining the total present value of the pension and the share attributable to the period of marriage. The ratio of the period of marriage to the period over which the pension is earned will increase with earlier retirement, so that normally the sharable pension value will be at a maximum with retirement at the earliest date at which this may be done with no penalty.
- Will the individual keep his job until then? Is promotion or demotion likely?
- In valuing a federal pension where value will be greatly increased by remarriage of the pensioner, it is useful to mention the possibility of remarriage. If no specific information is available, Discovery can use marriage and divorce statistics provided by Statistics Canada to estimate this probability.