Protecting your pensions

Monique Deraps has never worked as a pension administrator, an actuary or a financial adviser. Nevertheless, in pension law circles, when one talks about survivor benefits, her name almost always comes up.

“It certainly was in my view — and the view of a lot of people I have subsequently spoken to in the legal fraternity — a very important decision for the survivor benefits in pension plans,” remembers Douglas Gunn, Deraps’ St. Thomas, Ont.-based lawyer in the 1990s.

Deraps successfully sued her late husband’s pension fund administrators for not fully explaining the implications of the waiver she had signed when he applied for a disability pension. Because the couple elected to receive his full disability pension — and not a reduced one to ensure his wife received a survivor’s pension — she received nothing when he died eight months later. He had already been diagnosed with cancer when they were signing the papers.

The Deraps’ case resonates because it highlights the importance survivor benefits can play in the financial planning mix. Pensions provide an essential income stream — and there’s a lot at stake.

Approximately 5.5 million Canadian workerbelong to private or public sector registered pension plans, most of which have some level of survivor benefit. In 2004, approximately $26 billion in pension benefits were paid to retirees and survivors.

Then there are the public pensions. Under the Canada Pension Plan, the maximum pension for survivors 65 years of age and older is about $497 a month. The maximum CPP survivor pension for those under 65 is about $462. Under the Quebec Pension Plan, the maximum survivor benefit for those 65 and under is about $710. The maximum survivor pension for those over 65 is about $497. The maximum children’s benefit is currently about $195 a month. The maximum pension payable to a C/QPP contributor is about $828 a month. The maximum C/QPP death benefit is a one-time payment of $2,500.

Another public pension that often gets overlooked is the Allowance for the Survivor program under Old Age Security (OAS). This program helps low-income Canadians between the ages of 60 to 64 whose spouses or common-law partners have died. The allowance is based on income and, currently, the maximum survivor benefit is about $927 a month.

But despite the financial stakes, many Canadians are not fully cognizant of the risks they are taking and the benefits they could be missing out on in the multi-billion dollar pension sweepstakes. Before a private or public sector employer pension commences — whether it is a disability benefit as in the case of the Deraps or a standard retirement pension — a plan member and his or her spouse must decide whether to receive a full pension to be paid right away or take a smaller pension payment to ensure a survivor’s benefit. Both spouses must sign the agreement.

“Pensions are very important long-term assets that you really need to be thoughtful about,” says Andrew Harrison, a pensions lawyer at the Toronto offices of Borden Ladner Gervais LLP.

Next page: legislative safeguards not fool-proof

Generally speaking, surviving spouses and children are protected under various pieces of provincial and federal legislation governing private and public sector pensions and public pensions such as C/QPP and OAS. But these legislative safeguards for survivors are not foolproof. Randy Bauslaugh, a pension lawyer with the Toronto office of Blake, Cassels & Graydon LLP, opens new files every month as his registered pension plan clients try to sort out confusion and conflict over survivor benefits.

The missed survivor entitlements are more disconcerting in the public pension arena. In Ottawa, filing cabinets are filled with thousands of cases of missed survivor CPP and OAS allowance benefits. The problem is less acute under the Quebec Pension Plan because of that province’s more comprehensive personal records storage and retrieval system.

Canadians are in a better position to protect a survivor’s benefit if they know the leading causes of missed or disputed benefits. Bauslaugh says that contradictory paperwork held by a plan administrator in a registered pension plan is an ongoing problem. For example, plan members sometimes designate a child for the survivor benefit but also execute another document designating another benefit for a common-law spouse. While plan administrators give the benefit of the doubt to the spouse, other listed beneficiaries have been known to litigate for the survivor benefit.

In most pension plans, survivor benefits are also at risk when there is unsubmitted paperwork. This is particularly apparent when it comes to CPP survivor benefits and the OAS allowance. When Canadians miss out on pension benefits, it’s usually because they did not know they had to make a formal application or were not aware of the benefit.

Richard Shillington of Manotick, Ont.-based Tristat Resources, a company that analyses and monitors social policy, estimates there may be tens of thousands of Canadians who are eligible but are not receiving a survivor benefit.

“Most of the cases that we see about people not getting benefits they are entitled to are around CPP survivor. If there are 50,000 who have not applied for their (CPP) retirement benefit, you could speculate that there are probably more than 100,000 who haven’t applied for their (CPP) survivor benefit,” says Shillington.

The real financial tragedy rests in the fine print of the legislation and governing regulations that shape the CPP survivor benefit and the Allowance for the Survivor.

“The current legislation for OAS, GIS and CPP provides for only 11 months of retroactive benefits. The only exceptions are where an individual was incapacitated or where the government accepts that they made an administrative error … or [provided] false advice,” says Shillington.

“By comparison, note that the Quebec Pension Plan actively looks for those eligible, has a far more generous retroactivity provision and pays interest.”

A case in point is New Glasgow, N.S., resident Jean Fournier. Fournier (not his real name) was involved in an automobile accident in 1978 in which his wife died. It wasn’t until 1992 that Fournier found out he was entitled to survivor benefits. Over that time, Fournier may have missed out on $25,000.

Survivor benefits — both in private and public pension plans – are also put at risk when there is doubt about who was the “eligible spouse” on the date of death. This is a growing problem. Between 1981 and 2001, the proportion of common-law couples of all families rose from six per cent to 14 per cent. When one enters a common-law relationship there is always the possibility that a former spouse will wrestle with the new common-law partner in a fight over the survivor benefits.

“It’s a matter of who gets the survivor benefits in modern families where you have people switching partners,” says Shillington.

Missed maintenance payments to a former spouse can also put a survivor’s benefit at risk. If a plan member is required by a court order to pay maintenance or support to a spouse, former spouse, child or other dependant, the person who is entitled to these payments can trump a new surviving spouse and have the court-ordered support deducted from the survivor pension.

And then there’s that notorious waiver. When the spouse of a plan member signs it, he or she is forgoing any survivor benefit. According to court documents, Deraps was informed that if his wife did not sign the waiver, his monthly disability payment would be $321 and his wife’s survivor’s benefit would be $193. If, on the other hand, she signed the waiver, her husband’s monthly benefit would increase to $425, and she would receive nothing upon his death. She signed the waiver.

Next page: protecting a survivor’s entitlement takes vigilence

Protecting a survivor’s entitlement takes awareness, knowledge, foresight and vigilance. And because almost every working Canadian is eligible for some type of survivor pension — and no one knows for sure who will be the survivor — it is essential for both partners — and surviving children — to know the rules. In fact, Debbie Lyon, chair of the Canadian Association of Pension Supervisory Authorities, points out that all existing pensions standards legislation in Canada protects surviving spouses and common-law partners. Generally speaking, survivors — including children — of private and public sector pension members can receive 60 per cent or more of the pension payable to the deceased.

Registered pension plan contributors and their spouses can start by reading through the annual report that is sent out to each contributor. Andrew Harrison urges all plan members and their spouses to review key information within this document, notably the listed beneficiary and marital status. If a child from a previous marriage or a recently dumped common-law partner is listed as a beneficiary, it’s probably a good idea to take steps to get the situation clarified as soon as possible.

“In general, a spouse or common-law partner is entitled to information concerning their spouse’s or partner’s pension benefits, such as an employee booklet or member booklet. There is also a right to receive a copy of the annual pension statement,” says Lyon. One way to address this situation — without being confrontational — is to sit down with your spouse and do an annual review of all your assets and investments. Make sure your partner’s pension plan annual report is in the review pile.

Another way of protecting a survivor is to select from the options that escalate a survivor benefit. Take the example provided to plan members governed by the Saskatchewan Financial Services Commission Pension Benefits Act. If the waiver is signed by the spouse of a plan member, a single life annuity with no guarantee period will pay, for example, $1,000 a month. There will be no survivor benefit.

However, if one selects a pension plan payment option that includes a 10-year guarantee period, a level of survivor protection kicks in. Under this option, the pension payments drop to $930 a month. However, should a plan member die before 10 years, the surviving spouse will receive $930 for the remainder of the 10-year period.

Also, under Saskatchewan’s pension legislation, the survivor is better protected through a “joint-and-survivor” option. For example, the plan member will receive $850 a month during his or her lifetime; on death, the surviving spouse will receive 60 per cent ($510 a month) for the remainder of his or her lifetime.

Some pension plans allow members to protect a survivor even further. But with each percentage jump in the survivor benefit, the immediate payout to the plan member is reduced.

And keep those receipts! If you are living common law and your partner is a plan member and dies, it may be necessary to prove the length and legitimacy of your relationship. For example, under federal public service pension rules, a survivor applicant may have to submit letters, bills, receipts, rental agreements, leases and government records. Ideally, these documents will prove the relationship was serious and lengthy and that it takes precedence over competing claims on the survivor’s pension.

Thousands are missing out on CPP and OAS survivor benefits. However, at this time, vigilance is the only preventative measure. Read through any government pamphlets or information circulars that come to your residence. And don’t just toss the package the funeral home director handed you after your spouse dies. It should contain information about how to apply for a CPP survivor’s pension and death benefit.

Of course, if a survivor feels they have been unfairly denied a benefit — either by an employer pension plan administrator or the government — there is recourse. When it comes to CPP survivor and death benefits and the OAS allowance, one can request an explanation or a reconsideration of any decision by contacting Social Development Canada (1-800-277-9914). If one is not satisfied with the explanation, ask about the appeals process.

Alternatively, an increasing number of frustrated survivors are turning to the Ottawa-based private company Retirement Planning Institute (RPI), which recovers missed C/QPP survivor benefits on a fee and contingency basis.

“We have had several cases where we have identified a problem and have had to drag the case to several levels of appeal covering a year or more. To date, 97 per cent of the cases we have appealed have been successful,” says RPI principal Michael Moreland.

Survivors of members of registered pension plans — either private or public — who have been denied a claim also have recourse. If they receive an unfavourable decision from a pension administrator, they have 90 days to work out a compromise. If the competing parties don’t settle, they are free to litigate and the pension is placed in trust with the court.

There are no simple solutions to protecting a survivor’s pension. But what one can do is ensure that pensions — whether employer or public — are given the same priority as other assets such as a principal residence, a cottage or savings. More important is to not lose sight of the pension’s place in time.

“It’s very important not to just consider the present effect of the pension but also the future benefit a surviving spouse will receive,” says lawyer Douglas Gunn.

Next page: reduce taxes through pension sharing

Reduce taxes through pension sharing
Conventional wisdom in financial circles has it that as one ages, debt should be lower, employee and public pensions will commence and seniors discounts on many goods and services will kick in. However, employing tax reduction strategies becomes more difficult.

One relatively easy — but often unused — tax reduction strategy is “pension sharing” through the Canada and Quebec pension plans.

Generally speaking, the total tax on family income will be lower when each member earns approximately the same. By transferring C/QPP income that is being taxed at a higher marginal tax rate to a partner in a lower marginal tax rate, tax savings can be realized.

Consider this fictional case: Doug and Arlene are both are 68 years old and have been married for 40 years. Doug worked as a teacher and is now retired. His annual income includes a teacher’s pension of more than $40,000, plus CPP benefits of $10,224. Doug pays tax at a marginal rate of about 40 per cent. Arlene is working still but has minimal income and is in the lowest marginal tax bracket. If Doug transfers some of his CPP income to Arlene, this form of pension sharing would create a combined tax savings of $1,000 to $2,000 a year.

Married or common-law C/QPP recipients who are both at least 60 years of age can transfer pension benefits to each other that were earned while living as a couple. The overall benefits paid do not increase or decrease. CPP pension-sharing applications are available though Human Resources and Skills Development Canada, and QPP applications are available through the Régie des rentes du Québec.

Pension sharing normally ends if you and your spouse separate, divorce or if one of you dies. The pension-sharing arrangement will also end if both of you request that it be cancelled.

Pension-sharing rules governing CPP and QPP are not identical. Read the fine print before completing the forms.

James Pasternak is a Toronto-based writer who specializes in personal finance, seniors’ advocacy, driver safety and human resources. His work has appeared in numerous publications.