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When The Logic Fits Together, But Everything Falls Apart

A recent case decided by the Ontario Court of Appeal called 'Carrigan vs. Carrigan Estate' is likely to cause a seismic shift in the way pension industry professionals view the mandatory spousal death benefit provisions of pension standards legislation in Ontario and, maybe, other jurisdictions as well. Hopefully, government can react swiftly or we will have to wait and hope the Supreme Court will provide an appropriate solution.

The presumption of those in the industry is clearly that a spouse – common-law or married – who is living with a plan member at the date of death, or at the date pension payments start to be paid, has first rights to benefits payable upon the death of the plan member. The understanding is that these rights cannot be displaced by a beneficiary designation without first getting the consent of the current spouse. This case raises issues about who the current spouse is for this purpose. If the current spouse is a common-law spouse and there is no undivorced, married spouse lurking in the background, the benefit will be paid to the common-law spouse. But if there is an undivorced married spouse, who is living separate and apart, the death benefit will be paid to whomever the member has designated as a 'beneficiary,' whether that is the current spouse, the undivorced married spouse, or someone else. This seems radically counter-intuitive.

Serious Issue

The case does not present unique facts. Many plan members in common-law relationships have undivorced married spouses because many people just don't incur the expense of getting divorced. Because this is not uncommon, it is likely to be a serious issue for plan administrators.

The facts of the Carrigan case are these. The Carrigans were married in 1973 and separated in January 2000. They were never divorced. Mr. Carrigan started living with a Ms. Quinn shortly after his separation and up until the time of his death in 2008. In 2002, after leaving Mrs. Carrigan and taking up with Ms. Quinn, Mr. Carrigan designated Mrs. Carrigan and their two daughters as beneficiaries of death benefits payable under the pension plan. When he died, both 'spouses' claimed the death benefit – Ms. Quinn as the common-law spouse who was living with him on the date of his death and Mrs. Carrigan, the undivorced prior 'spouse' who hadn't lived with him for more than seven years, but who had been designated as a beneficiary.

Ms. Quinn claimed the pre-retirement death benefit on the basis that she was the 'spouse' on the date of death. She argued that the effect of section 48(1) of Ontario's Pension Benefits Act (PBA) is to grant the pre-retirement death benefit to the person who is the spouse on the date of death.

Mrs. Carrigan also claimed the death benefit. She argued that either she was a spouse or, in the alternative, she and her daughters were entitled as the designated beneficiaries.

The lower court agreed with Ms. Quinn, the common-law spouse who lived with Mr. Carrigan at the time of his death. However, in a two-to-one decision, the Court of Appeal overturned this and granted the death benefit to the separated, but still married, Mrs. Carrigan and her two daughters as designated beneficiaries.

Date Of Death

In reaching its decision, the majority of the court focused exclusively on the wording of the pre-retirement death benefits provisions of section 48 of the PBA. It found that both Ms. Quinn and Mrs. Carrigan were 'spouses,' as that term is defined in the PBA, on the date of death. It acknowledged that section 48(1) provides for the death benefit to be paid to the person who is the spouse on the date of death in priority to any other claim. It then notes that section 48(3) says that section 48(1) does not apply if the spouse is living separate and apart from the member at the date of death. Since Mrs. Carrigan was technically still a spouse and was living separate and apart, the majority of the court concluded that section 48(1) does not apply – at all! So logically, goes the reasoning of the majority of the court, that takes one to section 48(6) which permits the designated beneficiary to receive the death benefit. Applying this tunnel-vision logic, the Court of Appeal determined that the plan administrator was, therefore, required to give effect to the beneficiary designation and ignore the common-law spouse.

One might question how logical it is to conclude that because one 'spouse' does not qualify for the benefit, neither 'spouse' should qualify, especially when a spouse-by-spouse analysis would have logically resulted in Ms. Quinn receiving the benefit.

One might also wonder why the court wouldn't put its logical analysis into the context of a logical policy assumption. The court did not ignore policy, it simply concluded, "…I see no particular policy rationale for interpreting the PBA to provide unequivocally that in all circumstances where there is a legally married spouse and a common-law spouse, the common-law spouse is entitled to the member's death benefit. Given the diversity of possible relationships, it is more desirable to interpret the statute to allow pension members the freedom to order their affairs in a way that suits their particular circumstances."

It's not clear where that last sentence fits into the overall logic of this decision. Why would a pension standards statute bother at all with spousal entitlements if it was not concerned with constraining the rights of members to provide for persons who are not their spouses at the date of death? And given the unmistakable solicitude the PBA evinces for persons who are spouses of plan members who are not living separate and apart, why would it allow the mere existence of an undivorced former spouse to destroy the self-obvious priority the PBA sets up to safeguard the interests of persons who are spouses at the date of death?

Welfare Of Spouses

The structure and the wording of the death benefit provisions of the PBA ensure that pension members are not free to order their affairs as they see fit without first obtaining waivers from a current spouse. The statute clearly evinces a concern for the welfare of spouses, whether common-law or married, as long as they are not living separate and apart.

This is not only the case for pre-retirement death benefits. It applies to the form of pension that is payable to a member at the point the pension starts to be paid. Section 44 of the PBA is structured in exactly the same way as section 48. If a plan member has a 'spouse' on the date the pension starts to be paid, the benefit must be paid in the form of a joint and 60 per cent survivor pension which means a pension for the life of the member, but with at least 60 per cent continuing to the member's spouse for the life of the spouse, if the member dies first. If the member wants to change this form of payment to any form that would pay the then-current spouse less than this amount following the member's death, the member must obtain a waiver from the spouse. This does not apply if the member and the member's spouse are living separate and apart on the date pension payments start to be paid.

In coming to its decision, the majority of the Court of Appeal also says, "the canons of statutory interpretation require that the statutory provision being interpreted be considered in the context of the statute as a whole." But then the majority went on to focus on the pre-retirement death benefit section. It didn't look at any other sections that protect the interests of spouses and it clearly didn't look at the regulations, including the prescribed spousal forms.

The decision of the trial court judge – to grant the death benefit to the spouse who was living with Mr. Carrigan at the time of his death – was so consistent with expectations and established practice in the industry that it went largely unnoticed in the pension industry. The majority decision of the Court of Appeal will not go unnoticed.

The facts are not unique; so the decision is going to be of significant concern to pension administrators in connection with how they may have paid death benefits in the past where there were potential claims from competing spouses, one of whom might be a separated, but not divorced, married spouse. It also has implications for the payment of pensions to persons with common-law spouses on the date pension payments first start to be made. It may also have implications for advice provided to plan members that they need a current spouse to sign-off before getting any form of payment that would not provide a death benefit to a surviving current spouse.

Public Importance

An appeal of this case to the Supreme Court of Canada is not certain. Leave to appeal will have to be sought on grounds that it is of such public importance that the highest court in the land must hear it ‒ in other words, that it is a really big deal. Hopefully some large plan administrators or an industry group like the Association of Canadian Pension Management might apply for intervenor status at the leave seeking stage, so the Supreme Court might at least get the impression that this is not an isolated family squabble and is, in fact, a REALLY BIG DEAL!

The court process will be a long and time-consuming road if it does go forward. Unfortunately, we don't have a government in Ontario that can deal with the issue any time soon, if, as expected the policy goal is to protect current spouses – common-law or married.

This case will no doubt cause plan administrators to seriously review how they administer pensions at the point of payment and upon post-retirement death as well as for pre-retirement deaths. For starters, they will want to know if the member was ever married and, if so, was a divorce obtained, before automatically setting up a joint and survivor pension for a member in a common-law relationship. On the other hand, it seems plan members can avoid having to get the consent of a common-law spouse with whom they are currently living to release the mandatory joint and survivor form of pension by simply not getting divorced from a former spouse. In other words, a plan member with a prior married spouse can avoid having to take a joint and survivor form of payment in order to get a higher paying single life annuity, by simply not divorcing a married spouse. That's logical, isn't it?

Clearly the policy behind mandatory surviving spouse benefit provisions in a pension standards statute are to ensure that current spouses are not left in the lurch when a plan member dies. It is not clear why the majority of the Court of Appeal simply ignored this obvious contextual policy underpinning in reaching its very robotic interpretation. In the result, plan administrators will be left to clean up and respond to what might be a very considerable mess.

Randy Bauslaugh is a partner and national leader of the pensions, benefits, and executive compensation practice at McCarthy Tétrault.

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