divorce and the division of canada pension plan...

DIVORCE AND THE DIVISION

OF CANADA PENSION PLAN CREDITS

by

Dorothy Easton

B.A., Simon Fraser University 2007

PROJECT SUBMITTED IN PARTIAL FULFILLMENT OF

THE REQUIREMENTS FOR THE DEGREE OF

MASTER OF PUBLIC POLICY

In the

Faculty

of

Arts and Social Sciences

© Dorothy Easton 2009

SIMON FRASER UNIVERSITY

Spring 2009

All rights reserved. This work may not be

reproduced in whole or in part, by photocopy

or other means, without permission of the author.

ii

Approval

Name: Dorothy Easton

Degree: Master of Public Policy

Title of Project: Divorce and the division of Canada Pension Plan credits

Examining Committee:

Chair: Nancy Olewiler

Director, Public Policy Program, SFU

Jonathan R. Kesselman

Senior Supervisor

Public Policy Program, SFU

___________________________________________

Nancy Olewiler

Supervisor

Public Policy Program, SFU

___________________________________________

Roderick Quiney

External Examiner

Visiting Public Service Fellow, Public Policy Program, SFU

___________________________________________

Date Defended/Approved: February 27, 2009

Last revision: Spring 09

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iii

Abstract

This study investigates the low take-up rate of the division of Canada Pension Plan

credits at separation and divorce. The equal division of CPP credits accrued during marriage is

mandatory when CPP authorities receive notification of the dissolution, yet only 15% of couples

apply for credit-splitting. The equalization of CPP credits generally yields a transfer from the

male to female partner, because women are more likely than men are to earn lower wages and

experience family-related interruption in their labour force participation.

Low public awareness, misinformation, provincially legislated waivers, and reluctance to

make retroactive claims are identified as reasons for the low utilization of credit-splitting. Policy

recommendations to improve take-up and outcomes for the low contributing partner include the

inclusion of CPP credit-splitting information on the CPP retirement application, the elimination

of provincial legislation that permits the waiver of claims for CPP credit-splits, and a targeted

communication strategy.

iv

Executive Summary

The Canada Pension Plan (CPP) provides for the equal division of pension credits upon

divorce or separation from marriage or a common-law relationship. The equal division of CPP

credits accrued during marriage is mandatory when the Plan authorities receive notification of the

dissolution and supporting documents, yet only 15% of couples apply to equalize their credits.

The credit-splitting provision was introduced in 1978 to acknowledge the prevalence of

divorce and the importance of future pension income to both partners. The CPP credits accrued

by each partner during marriage are often unequal due to the different earning levels or extended

interruptions in labour force participation due to childrearing or other family responsibilities.

Women are more likely than men are to experience lower earnings, and the equalization of CPP

credits generally yields a transfer from the husband to the wife. The CPP provision recognizes

that pension credits are a shared marital asset that should be divided upon marriage dissolution;

however, the low take-up rate indicates that the objective of credit-splitting policy is not being

achieved.

Canada Pension Plan credit-splitting at the end of marriage is analyzed using three

instruments: Canada Pension Plan administrative data, simulated CPP splitting scenarios, and the

results of a survey of divorced women to identify strengths, limitations, and difficulties with the

current CPP splitting system.

Key Findings from Data Analysis and Interviews

Approximately 95% of applications for credit-splitting are made by women.

Women gain from the equalization of credits in 95% of credit-splitting transactions. The

average gain is 30% points as a proportion of the Yearly Maximum Pensionable

Earnings. This translates to an increase of approximately $136 per month for a 20 year

period of cohabitation.

Knowledge about CPP credit-splitting is low. There is uncertainty about making retro-

active claims for CPP following a finalized separation agreement.

v

The existence of provincial opt-out legislation means that credit-splitting is not

mandatory in all provinces, and the claim against CPP may be waived without

compensation.

Credit-splitting will not result in a significant pension change for couples with similar

earning histories. The interaction of the childrearing drop-out and credit-splitting

provisions mean that in some cases the transfer causes the credit-losing spouse to lose

more than the recipient spouse gains from the transaction.

Formal valuation of CPP is required to compensate a spouse for contracting out of credit-

splitting. Estimating the value of CPP credits is not standard procedure in the division of

marital property, suggesting that waivers to credit-splitting are made without complete

information or fair compensation.

Recommendations

Policy alternatives to improve take-up rates and outcomes for the low-contributing

spouse are analyzed using the following criteria: equity, effectiveness, public costs, private

transaction costs, and implementation complexity. The recommendations are:

Communication Strategy: A targeted communication strategy would increase awareness

about credit-splitting at the time of separation and reduce uncertainty about the role of a

separation agreement if a longer period of time has passed since separation or divorce.

Credit-splitting information distributed through provincial family court services in all

provinces and mailed directly to individuals reporting a change in marital status on their

income tax returns would significantly increase knowledge and take-up.

Include Credit-Splitting on the CPP Retirement Application: The inclusion of a question

about credit-splitting on the retirement application form would be the most effective way

to increase the take-up of this provision. It would provide quasi-universal opportunity to

disseminate information and initiate the credit-splitting application process.

Eliminate Provincial Waiver Legislation: The elimination of contracting out of credit-

splitting will prevent misinformed waivers of claim to a former partner‟s credits. It will

also eliminate inter-provincial inequity that exists because in BC, Alberta, Saskatchewan,

and Quebec the „mandatory‟ credit-splitting provision can be contracted out through a

separation agreement. The removal of this exception will reduce confusion about

eligibility because the option to contract out will no longer exist.

vi

Correct the penalty that results from the childrearing drop-out interaction: This option

will remove the distortion that may occur when credits are transferred to an individual

who will be dropping some of the years as part of the childrearing drop-out to maximize

their lifetime average of annual pensionable earnings. This option will not change the

results for the spouse with lower CPP, but it will reduce inefficient outcomes, improve

horizontal equity, and benefit the integrity of the provision.

vii

Dedication

To Emilie and Juliana – my brilliant, strong, funny, beautiful, heart-warming girls

viii

Acknowledgements

I offer my sincere thanks to Dr. Jon Kesselman for his guidance with this project and to

Rod Quiney for his insight and advice.

I would also like to acknowledge the financial support from the Social Sciences and

Humanities Research Council of Canada Master‟s Scholarship program. Thank you to Dr.

Krishna Pendakur for his generous assistance and encouragement in securing this funding.

A research grant was also received from the Cross Government Research, Policy and

Practice Branch of the government of British Columbia.

I would also like to offer my appreciation and gratitude to friends and family for their

patience, love, and support – thank you to Christopher, my girls, my parents, and Paula-Jane. I

couldn‟t have done it without you!

ix

Table of Contents

Approval ......................................................................................................................................... ii

Abstract .......................................................................................................................................... iii

Executive Summary ...................................................................................................................... iv

Dedication ..................................................................................................................................... vii

Acknowledgements ..................................................................................................................... viii

Table of Contents .......................................................................................................................... ix

List of Figures ................................................................................................................................ xi

List of Tables ................................................................................................................................ xii

1: Introduction and Policy Problem ............................................................................................. 1

2: Background ................................................................................................................................ 3

2.1 Canada Pension Plan Basics ...................................................................................... 4 2.1.1 Childrearing Drop-out Provision ........................................................................... 5 2.1.2 Credit-Splitting ...................................................................................................... 5

2.2 Credit-Splitting Provision: Current Take-up ............................................................. 6 2.3 Provincial Opt-out Legislation................................................................................... 8 2.4 Effect of Credit-Splitting on CPP Expenditure .......................................................... 9

3: Literature Review .................................................................................................................... 10

3.1 Take-Up Rates ......................................................................................................... 10 3.2 Economics of Motherhood ...................................................................................... 11 3.3 Divorce and Divorce Services ................................................................................. 12 3.4 Division of Property ................................................................................................ 13 3.5 Divorce Outcomes for Women ................................................................................ 14 3.6 Pension Valuation .................................................................................................... 15

4: Methodology ............................................................................................................................. 17

5: Canada Pension Plan Administrative Data ........................................................................... 19

5.1 Applicants ................................................................................................................ 20 5.2 Number of Years and Last Year of Cohabitation .................................................... 21 5.3 Pensionable Earnings Subject to Credit-Splitting .................................................... 22

6: Credit-Splitting Simulations ................................................................................................... 25

6.1 Scenario Assumptions ............................................................................................. 26 6.2 Scenario A: 10 Years Cohabitation, 25% YMPE Gap, 2 Years

Childrearing ............................................................................................................. 29 6.3 Scenario B: 20 Years Cohabitation, 50% YMPE Gap, 5 Years

Childrearing ............................................................................................................. 30

x

6.4 Scenario C: 30 Years Cohabitation, 50% YMPE Gap, 10 Years

Childrearing ............................................................................................................. 31 6.5 Scenario D: 20 Years Cohabitation, 0% YMPE Gap, 10 Years Childrearing

(Zero gain with CRDO) ........................................................................................... 32

7: Survey Descriptive Findings ................................................................................................... 33

7.1 Legal Representation ............................................................................................... 35 7.2 Take-up and Knowledge of Credit-Splitting ........................................................... 35 7.3 Separation Agreement CPP Waiver ......................................................................... 36 7.4 Earnings and Labour Force Participation ................................................................ 37 7.5 Financial Literacy .................................................................................................... 38

8: Summary of Key Findings ...................................................................................................... 39

9: Policy Alternatives ................................................................................................................... 41

9.1 Status Quo ................................................................................................................ 41 9.2 Communication Strategy ......................................................................................... 41 9.3 Include Credit-Splitting Provision on CPP Retirement Application Form .............. 42 9.4 Eliminate Provincial Waivers .................................................................................. 43 9.5 Correct Childrearing Drop-out (CRDO) Interaction................................................ 43

10: Evaluation Criteria ................................................................................................................ 44

10.1 Vertical Equity ......................................................................................................... 44 10.2 Horizontal Equity ..................................................................................................... 45 10.3 Effectiveness ............................................................................................................ 45 10.4 Public Cost ............................................................................................................... 46 10.5 Private Cost .............................................................................................................. 46 10.6 Implementation Complexity .................................................................................... 47

11: Evaluation of Policy Alternatives ......................................................................................... 48

11.1 Status Quo ................................................................................................................ 48 11.2 Communication Strategy ......................................................................................... 49 11.3 Including Credit-Splitting Question on the CPP Retirement Application

Form ......................................................................................................................... 50 11.4 Eliminate Provincial Waivers .................................................................................. 51 11.5 Correct CRDO Interaction ....................................................................................... 52 11.6 Relative Importance and Trade-offs among Criteria ............................................... 53

12: Recommendations .................................................................................................................. 57

Bibliography ................................................................................................................................. 59

Appendices .................................................................................................................................... 63

Appendix A: Survey ................................................................................................................. 64 Appendix B: Survey Statistics .................................................................................................. 66 Appendix C: Survey Comments ............................................................................................... 69 Appendix D: Formula for Estimating CPP Change ................................................................... 71

xi

List of Figures

Figure 1: Applicant Proportions by Years of Cohabitation for 2000-2005................................... 21

Figure 2: Percentage of Pensionable Earnings before and after the Credit-Split for Female

Applicants that Gained ................................................................................................ 24

xii

List of Tables

Table 1: Take-up Rate - Annual applications as a proportion of annual marital dissolution ........... 7

Table 2: Divorces by Duration of Marriage, 2005 ......................................................................... 13

Table 3: CPP Applicants by Gender .............................................................................................. 20

Table 4: Impact of Division of CPP Credits by Gender, 2000-2005 ............................................ 21

Table 5: Applications by Last Year of Cohabitation .................................................................... 22

Table 6: Sum of Lifetime CPP Benefits, Maximum and Average, 2009 dollars ........................... 27

Table 7: Pension Monthly Benefit Change from Credit-Splitting, 2009 dollars ........................... 27

Table 8: Lifetime Pension Benefits Change from Credit-Splitting, 21 years of benefits

collected, 2009 dollars ................................................................................................. 28

Table 9: Credit-splitting Scenario A ............................................................................................. 29

Table 10: Credit-Splitting Scenario B ........................................................................................... 30

Table 11: Credit-Splitting Scenario C ............................................................................................ 31

Table 12: Credit-Splitting Scenario D ........................................................................................... 32

Table 13: Characteristics of Survey Respondents .......................................................................... 34

Table 14: Legal Representation in divorce or separation .............................................................. 35

Table 15: Take-up of CPP credit-splitting by survey respondents ................................................ 35

Table 16: Source of information about CPP credit-splitting .......................................................... 36

Table 17: Absence from labour force for childrearing................................................................... 37

Table 18: Income Ratio during marriage ....................................................................................... 37

Table 19: Effect of marriage on current earnings .......................................................................... 38

Table 20: Financial Knowledge at time of separation or divorce .................................................. 38

Table 21: Interest level in attending a free workshop on the finances of divorce .......................... 38

Table 22: Criteria for Policy Alternatives Evaluation ................................................................... 44

Table 23: Evaluation of Policy Alternatives .................................................................................. 55

Table 24: Score and Ranking of Policy Options ............................................................................ 56

Table 25: Example of Estimate of Change in Benefits, 30% point increase, 20 years

cohabitation ................................................................................................................. 71

1

1: Introduction and Policy Problem

Nearly four in ten marriages in Canada end in divorce before reaching the celebration of

a thirtieth wedding anniversary (Statistics Canada, 2004). Divorce marks the formal end of a

joint investment in family, finances and a shared future. The rising divorce rate over recent

decades has led to the increasing relevance of public policy and family law reform dealing with

the dissolution of marriage. Public policy that ventures into the private family matters of divorce,

including the division of marital property, has the potential to reduce uncertainty, promote fair

outcomes, alleviate stress, and minimize the transaction costs of divorce. The Canada Pension

Plan (CPP) provides for the equal division of pension credits upon divorce or separation from a

marriage or common-law relationship, but the utilization of this credit-splitting provision is low.1

The take-up rate for the division of CPP credits is only 15% of annual divorces and separations

from legal marriage (CPP, 2008).

The CPP credits accumulated by spouses during marriage and cohabitation remain in

separate CPP accounts, but much the same as private pension plans, CPP contributions are a

shared marital asset.2 The CPP contributions made in marriage are a joint investment made with

the expectation that both spouses will benefit from the retirement income. The CPP credits and

pension benefits earned by each spouse in marriage are often unequal due to different work

histories or different earning levels. Women are more likely than men are to experience

reductions in their earnings because of part-time employment, non-standard work, and extended

interruptions in labour force participation. Even when fully employed, married women‟s average

earnings are still less than their spouses‟ despite a secular narrowing of this gap.

Legislative amendments made to the Canada Pension Plan Act in 1978 allow for an equal

division of credits upon the dissolution of a marriage. The CPP credit-splitting provision, based

on principles of both entitlement and need, is a mechanism to help ensure that non-earning and

low-earning spouses, generally women, maintain adequate pension coverage after divorce.

Retirement income from CPP supports both spouses in a lasting marriage and a surviving spouse

in the event of death through survivor benefits. Upon divorce, the equalization of CPP credits

1 CPP credit splitting is formally called the Division of Unadjusted Pensionable Earnings (DUPE).

2The same rights to marital property, including pensions applies to both legal and common-law marriages.

2

ensures that both spouses receive an equal share of the future pension benefits (including

disability and survivor benefits) acquired during marriage.

The equal division of Canada Pension Plan credits at divorce is mandatory when the

Canada Pension Plan receives notification and supporting documents from either ex-spouse.

However, the notification rate for the credit-splitting provision is low. Between 1994 and 2004,

the credit-splitting applications represented only 15% of the 670,000 divorces and separations of

married couples over the same period in Canada (CPP, 2008).3 The gains from the division of

pension credits can be an important source of future income for the spouse with the lower

contributions. The financial hardships experienced post-divorce are generally greater for women,

and in most CPP equalization cases the woman gains from the division of CPP credits (CPP,

2007). This project will investigate the low take-up rate of the Canada Pension Plan credit-

splitting provision and evaluate requisite policy reforms.

I begin the study by providing background about the objectives and the legislative history

of the Canada Pension Plan, as well as the rationale for state intervention in the economic

outcomes of divorce settlements. I explain and evaluate provisions that address credit-splitting at

divorce and statutory exceptions to mandatory credit-spitting based on provincial matrimonial

property laws. I then use Canada Pension Plan administrative data, simulated CPP splitting

scenarios, and the results of a survey of divorced women to identify strengths, limitations, and

difficulties with the current CPP splitting system. Finally, I formulate and evaluate options for

improving the delivery and the outcomes of Canada Pension Plan credit-splitting at divorce.

3 The number of divorces, separations and CPP credit splitting applications does not include Quebec. The

Quebec Public Pension (QPP) is administered separately and is not included in the CPP statistics.

3

2: Background

The Canada Pension Plan (CPP), introduced in 1966, is a compulsory, contributory

national income security program that provides basic earnings replacement to retired workers,

disabled workers, and the surviving spouses of deceased contributors. The compulsory

contributions of workers and CPP Investment Fund earnings finance the pension fund (HRSDC,

2007). There have been several reviews and amendments to the Canada Pension Plan and its

ancillary features, but the primary rationale continues to be protection for workers and their

families from income loss due to retirement, disability, or death. Changes made over the past

twenty years attempt to address changing Canadian family patterns such as the increase in labour

force participation of women, the prevalence of non-standard work,4 high divorce rates, and an

increase in common-law relationships (HRSDC, 1997).

The provision for credit-splitting at marital dissolution was introduced in 1978 to address

the increasing divorce rate and to promote gender equity in the outcomes of marital breakdown

(HRSDC, 1997). Following amendments made in 1987, the division of CPP credits is mandatory

in principle; however, notification of divorce or separation is required to trigger the equalization

of credits by the Canada Pension Plan.5 The provision also allows provinces to pass legislation

that permits former spouses to opt out of CPP credit equalization. Legislation in Alberta, British

Columbia, Saskatchewan and Quebec permits a waiver of rights to CPP credits through written

separation agreements. This creates an exception to the mandatory credit-splitting provisions

designed to equalize CPP retirement benefits accumulated during marriage. In these jurisdictions,

the right to CPP credits is eligible for bargaining between the spouses in the same manner as

other property and marital assets. The inconsistency in the treatment of CPP credits across

provinces and the low take-up rates suggest the private and social gains of CPP credit-splitting

are not understood or not given much weight at the time of divorce. Unless an explicit

provincially permitted waiver has been included in a separation agreement, a spouse can make a

4 Non-standard work includes part-time, temporary, contract, and self employment. Non-standard workers

are less likely to receive employer private pension benefits and make fewer CPP contributions compared

to workers with standard and non-interrupted work histories. 5 The term “mandatory” is somewhat misleading, given that notification by a spouse is required for the split

to occur. The equalization of pensionable earnings is mandatory only in the sense that an exactly equal

split is required (different proportions are not permitted) and that in most cases spousal consent is not

required (Alberta Law Reform Institute, 1990).

4

claim for credit-splitting at any time following one year of separation until retirement.6 Not all

couples will require credit-splitting to maximize their pension benefits, but it is unlikely that the

15% take up rate accounts for the proportion of divorced women with reduced CPP credits that

resulted from family-life work interruptions and decreased earnings.

2.1 Canada Pension Plan Basics

The Canada Pension Plan is a compulsory program obligating employers and workers

over the age of 18 to contribute through employment deductions on annual earnings that fall

between the Year‟s Basic Exemption (YBE) of $3,500 and the Year‟s Maximum Pensionable

Earnings (YMPE), which rises annually based on average wages (HRSDC, 2008).7 Employers

and employees fund the program on a cost-sharing basis with equal contributions. Since 2003 the

contribution rate for each party has been 4.95% of pensionable earnings. The lifetime

contributions and corresponding pension benefits will be larger for individuals with longer

contribution periods and higher earnings. In addition to retirement benefits, the Canada Pension

Plan objectives include the provision of survivor and disability benefits.

Upon retirement and after the age of 60, any Canadian who has contributed to CPP makes

application to the Canada Pension Plan to begin their benefits. Canada Pension Plan benefits

initiated at age 65 are equivalent to approximately 25% of a worker‟s lifetime average

pensionable earnings (adjusted for the increase in average earnings over time); the benefit is

lower if initiated before age 65 and higher if initiated after that age (Service Canada, 2006). Once

initiated, an individual‟s pension benefits are indexed for inflation with annual adjustments based

on the Consumer Price Index. The average monthly retirement benefit for 2008 was $490 with

the maximum rate of $884 (Service Canada, 2006; HRSDC, 2008).

The general drop-out provisions in CPP allows for the exclusion of the 15% of lowest

earning years for all contributors. Pension benefits are calculated based on pensionable earnings

from age 18 to retirement at a minimum age of 60. This general drop-out provision removes the

lowest 7 years (for someone working until age 65) from the benefit calculation, reducing the

impact of low contributory years that may result from factors such as education and

6 There is no time limit on making a claim for the division of CPP credits for spouses that were married.

The time limit for common-law spouses is four years following separation. A claim must be made

within 36 months of the death of a separated partner (married but not formally divorced). There is no

time limit if parties were divorced. 7 The Year‟s Basic Exemption (YBE) is frozen at $3,500. The Year‟s Maximum Pensionable Earnings

(YMPE) is adjusted annually – it was $44,900 in 2008, and $46,300 in 2009. Only the earnings between

the YBE and YMPE are considered in CPP deductions and pensionable earnings calculations.

5

unemployment. Additionally, the childrearing drop-out provision allows a parent to disregard

their low or non-earning years that coincided with caring for children under the age of seven.

Both of these drop-out provisions effectively increase the pension benefits by removing the lower

contributory years that if retained would lower the yearly average earnings of the contributor

(HRSDC, 1997).

2.1.1 Childrearing Drop-out Provision

The childrearing drop-out provision is an optional provision that must be requested at the

time of retirement. Implemented in 1983, the childrearing drop-out provision (CRDO) avoids

penalizing parents for their earnings interruptions associated with the care of young children

(HRSDC, 1997). The years when pensionable earnings are less than the individual‟s average

earnings are excluded for the period the contributor was caring for children under the age of

seven. The CRDO is used to maximize the lifetime average by allowing the caregiver parent to

drop from the calculation any years with zero or below-average earnings that occurred during the

eligible period. For example, a woman who was out of the workforce for 10 years with one child

would use the CRDO to drop out 7 of her zero-earning years. Only 3 of the 10 zero-earning years

would be used in the final calculation of her pensionable earnings average (although those years

could be selected for exclusion with the general 15% lowest-earning years drop-out provision).

The childrearing drop-out provision reduces the impact of childrearing on pension calculations of

the caregiver, but it is not the same as a homemaker pension or childrearing credit, which would

give the equivalent of an earnings credit for those childrearing years.

2.1.2 Credit-Splitting

Credits for pensionable earnings accrued during marriage or cohabitation are eligible for

equal division upon divorce or permanent separation. The CPP maintains an individual record of

annual pensionable earnings for each contributor. The credit-splitting mechanism sums the

pension credits of both spouses for each year of cohabitation and assigns an equal share of each

year‟s credits to both individuals. The records of earnings are adjusted following notification

rather than at the time of retirement. The equalization of the credits transfers pension credits from

the spouse with the higher pension credits to the spouse with fewer credits for each year. The

redistribution of pension credits may create entitlement to CPP benefits for a spouse that did not

have any entitlement at all due to very low or zero pensionable earnings. Yet because of the

operation of the childrearing drop-out and the 15% lowest-earning years exclusion, a spouse

6

gaining credits through the splitting provision will not always gain higher CPP benefits in

retirement. This outcome will hinge in part on her future earnings path following the divorce and

thus often will not be known at the time of divorce unless that occurs relatively late in life.

The credit-splitting provision for married couples divorced after 1987 is not time-limited;

however, in the case of a divorce that occurred prior to 1987 the consent of both former spouses

is required. In the case of an opposite-sex, common-law relationship there is a four-year time

limit, waived only with the consent of both former partners. The common-law provisions apply to

same-sex partners who separated after 2000. In addition to the time restrictions, credit-splitting

may be prevented if the rights to CPP are explicitly waived in a written separation agreement in

Alberta, British Columbia, Saskatchewan or Quebec. After an application or notification is made

for credit-splitting, the application can be withdrawn within a 3 month period.

2.2 Credit-Splitting Provision: Current Take-up

According to Canada Pension Plan statistics the current take-up of the credit-splitting

provision is 15%. The calculation for the take-up rate is the annual number of credit-splitting

applications divided by the annual number of divorces and estimated permanent marriage

separations.8 The numerator in the formula included both married and common-law DUPE

applications, but the denominator does not include separations from common-law relationships.

Given the increasing proportion of couples choosing to cohabitate in a common-law relationship,

this omission suggests that the 15% take-up figure overstates the actual rate. Statistics Canada

estimates from the 2006 General Social Survey indicate that there are an equal number of

marriage and common-law relationship dissolutions annually. This means that in recent years,

the effective take-up rate of this provision is about half of the CPP estimate of 15%.

8 The separations included in the CPP data are estimated from the Office of the Chief Actuary. Not all

permanent marriage separations are finalized with a formal divorce decree.

7

Table 1: Take-up Rate - Annual applications as a proportion of annual marital dissolution

Year of Application

Take-up Rate as % of Marital Dissolution Only

1

Take up Rate as % of Marital and Common law Dissolution

2

1994 13% -

1995 14% -

1996 17% -

1997 18% -

1998 16% -

1999 15% -

2000 14% -

2001 15% 8%

2002 15% 7%

2003 15% 8%

2004 15% 8%

Source: 1Canada Pension Plan Office (2008),

2 Estimates derived from General Social Survey Findings

(Beaupre and Cloutier, 2006)

The majority of applicants for the division of CPP credits are women. Prior to 2000,

virtually all applicants were female and between 2000 and 2005, 96% of the applicants were

female (CPP Office, 2008). Between 2000 and 2005, approximately 2,000 of the 53,000

applicants were male, but only about half of them personally gained in the credit-splitting

outcome. During the same period, 95% of the 51,000 women who made application were better

off after the division of credits (CPP Office, 2008).

Steps have been taken to increase awareness and the take-up of credit-splitting in recent

years. Credit-splitting information is currently disseminated to the general public through the

Service Canada website, links from provincial family legal services websites, and through

newsletters mailed to CPP clients with their T-4 tax information slips. CPP equalization is briefly

mentioned in Self-Counsel Press publications, and in some provincial courts credit-splitting

information is issued when a divorce order is received. Notice of credit-splitting at the time of

divorce will not benefit those who have opted out due to misinformation or poor advice. A three

year pilot project was implemented in Manitoba in October 2005 to provide information and

simplified application forms to all those seeking assistance with custody or property issues and

included outreach sessions for service providers. Results of the pilot project were not available,

8

but it was expected to increase take-up of credit-splitting in the jurisdiction (Department of

Justice, 2006). Additional resources include a “Guide for the Legal Profession,” which is

available online at the HRSDC website.

2.3 Provincial Opt-out Legislation

Both federal and provincial governments are involved in the process of divorce and

separation. Administered by the federal government, the Divorce Act sets the conditions for

divorce, and the Supreme Court of Canada grants the divorce order. Matrimonial property law

falls under provincial jurisdiction. The CPP credit-splitting provision is a federal initiative that is

complicated by the interaction with provincial matrimonial property law. The entitlement to an

equal share of CPP upon marital breakdown is automatic, but federal legislation outlines how

provinces can enact opt-out legislation that permits waiving the division of credits.

The opt-out clause was introduced in the 1987 amendments to Section 55 of the Canada

Pension Act to alleviate conflict between the federal credit-splitting rules and provincial

matrimonial property laws (Alberta Law Reform, 1990). Rights to CPP credits may be waived in

a separation agreement only if the required statutory conditions prescribed in Section 55 are met.

The option to waive rights to CPP credits is recognized only if a valid written agreement or court

order specifically refers to the waiving of CPP pension credits, and if it is made in a province that

has enacted opt-out legislation in their matrimonial property law. Four provinces have amended

their provincial matrimonial property laws to accommodate the contracting out of CPP credits.

Saskatchewan amended the Matrimonial Property Act to allow for the waiver in 1987. Quebec

amended the Family Patrimony section of the Civil Code of Quebec in 1989 to support the waiver

of both Canada Pension Plan and Quebec Pension Plan credits. British Columbia amended the

BC Family Relations Act in 1995, and most recently Alberta amended the Alberta Family Law

Act in 2005 (HRSDC, 2008).

The argument supporting the ability to waive the division of Canada Pension Plan credits

is based on the premise that spouses should have the right to privately negotiate their financial

outcomes and that Canada Pension Plan credits should not be treated differently than private

pension plans and other matrimonial property (Law Reform Institute of Alberta, 1990; Law

Reform Commission of British Columbia, 1992). The assertion for treating CPP like other

property is that CPP should be considered a government sponsored savings vehicle rather than a

social program, and that compensation with other assets should be permitted as an alternative to

credit-splitting (Law Reform Institute of Alberta, 1990).

9

Opposition to provincial opt-out legislation is based on the assertion that CPP is a social

program and a unique asset, and consequently it should not be eligible to be traded for immediate

financial benefits or waived (Law Reform Institute of Alberta, 1990). Additionally, this social

program premise is supported by the suggestion that the low or non-contributing spouse is likely

to have greater need for the public pension benefits at retirement (Law Reform Institute of

Alberta, 1990). There is concern that low or non-contributing spouses may forfeit pension rights

without adequate compensation because of a weaker position in the negotiation of family

property settlements and because of the unknown capitalized value of the CPP contributions (Law

Reform Institute of Alberta, 1990; Law Reform Commission of British Columbia, 1992). The

existence of an option to waive has contributed to low take-up rates (Alberta Law Reform, 1990).

In 1992, the Law Reform Institute of Alberta recommended against including opt-out legislation

in the Matrimonial Property Act, while the Law Reform Commission of British Columbia

recommended in favour opt-out legislation in its report addressing the division of pensions on

marriage breakdown.

2.4 Effect of Credit-Splitting on CPP Expenditure

The aggregate effect on CPP expenditures is a reduction of CPP benefit expenditure with

credit-splitting compared to no splitting of credits. The reduction in CPP payments is an

unintended consequence that results from the interaction of credit-splitting and the childrearing

drop-out provision. The mechanics of credit-splitting involve an equalization of the annual credits

through a transfer from one record of earnings to the other. The sum of annual credits is not

altered, as it is a simple shift to equalize the annual credits between partners. However, the

potential interaction of the credit-splitting and the childrearing drop-out provision means that

some divided years may not be used by the childrearing spouse in the final calculation for pension

benefits. The credits are equalized for the entire period of cohabitation, but the partner using the

childrearing drop-out provision (usually the mother), effectively does not gain from the credits

received for the drop-out years. The individual effect of this interaction varies depending on each

couple‟s scenario and level of attachment to the work force, but in many cases the higher earning

spouse will lose more pensionable earnings than the recipient spouse will effectively gain.

Credit-splitting reduces long term CPP expenditure on benefits. Actuarial simulations estimate

that the elimination of the credit-splitting provision would increase annual benefit expenditures

by 0.40% to 0.57% annually (HRSDC, 1997).

10

3: Literature Review

3.1 Take-Up Rates

Take-up rates are a measure to describe the extent that a social benefit is received by the

eligible recipients. Low take-up rates for social benefits are generally explained by stigma,

transaction costs, benefit levels, and information problems (Currie, 2004; Dahan and Nisan, 2006;

Remler and Glied, 2003). If the value of the benefits exceeds the sum of the inconvenience and

stigma costs of participation, the rational choice is to participate. An individual‟s decision about

making an application will be based on their cost relative to the potential benefit. Therefore take-

up rates are expected to improve with a decrease in transaction costs or an increase in benefit

levels. The importance of each take-up rate factor will depend on the affected population group

and the specific program being examined.

A review of welfare benefits in OECD countries found that take-up rates for means-tested

programs range between 40% and 80% for social assistance and housing subsidies, and between

60% and 80% for unemployment insurance benefits (Hernanz et al, 2004).9 In Canada, the take-

up rate for income assistance for senior citizens was 86% for the Guaranteed Income Supplement

(GIS) for the 1999-2001 period and almost 100% for the Old-Age Security Pension (Poon, 2005;

Office of the Superintendent of Financial Institutions, 2006). The take-up rate for Medical

Services Plan premium assistance in British Columbia was 74% in 1999, suggesting that 26% of

eligible families have not applied for this benefit in part due to lack of information, stigma, or the

transaction costs (Warburton, 2005).

Stigma may offer an explanation for low take-up of some income-tested social benefits

such as welfare, income supplements, and housing subsidies, but it is not clear that stigma

explains the low take-up on the division of pensionable earnings at divorce. Furthermore a

comparison between means-tested and non-means-tested programs in the U.S. shows variation

that suggests stigma may not be the most significant factor in the take-up of social welfare

benefits (Currie, 2004). Divorce and the equal division of assets is a societal norm that is

generally not viewed as an embarrassment. However, the CPP pension-splitting process may still

9 Estimates for take-up rates are based on available data from a variety of social assistance, housing

benefits, and unemployment benefits available in different countries including Canada, France,

Germany, Netherlands, United Kingdom, and United States.

11

involve issues of pride with respect to self-sufficiency, or the self-questioning of entitlement,

particularly years after divorce if the CPP split was not completed soon after the end of marriage.

The transaction costs for social benefits include the travel, time and inconvenience costs

associated with gathering information and making application for the benefit. The elimination of

inconvenience through automatic enrolment has the potential to drastically increase program

participation rates. In Ontario, where medical premium assistance is linked to tax information for

automatic enrolment, the coverage rate is close to 100%, compared to 74% with voluntary

enrolment in British Columbia (Warburton, 2005).

The availability of information about the existence of programs and eligibility

requirements are related to take-up rates. An experimental study on food stamp benefits in the

United States found that 46% of participants eligible for food stamps enrolled, or intended to

enrol for the benefit after being provided with the information about their eligibility. The role of

information on its own may not make a significant difference for all programs. A study on

Medicaid in the United States found that 88% of low income families without Medicaid or State

Children‟s Health Insurance had knowledge about the programs, but had not opted to enrol.

Confusion about eligibility also matters, as almost one-fifth of those low income families did not

think their children would be eligible (Remler and Glied, 2003).

Studies suggest that take-up rates for social benefits can be increased through the

reduction of application and administrative barriers, and by utilizing existing social programs to

improve the interaction between benefit programs (Hernanz et al., 2004). The use of a single

administrator for multiple programs reduces the transaction costs for the applicant and enhances

program promotion through a natural interaction if the institution is already serving the applicant

for other programs or benefits. Income-tested programs such as the British Columbia Carbon Tax

Refund and the Ontario medical premium assistance, both linked to Revenue Canada, are

examples of inter-agency co-operation. In jurisdictions where Medicaid and food stamp

enrolment was linked to welfare receipt, the enrolment increased (Remler and Glied, 2003).

3.2 Economics of Motherhood

In recent decades, it has become the norm for mothers to combine parenting and

employment; however, it is still typical for the mothers to reduce their attachment to the

workforce in order to balance work and family responsibilities. Traditional economic models of

the family explain the division of labour and the existence of gender-based roles within families

on comparative advantage and the efficiency of specialization within the family unit (Jacobsen,

12

2007). The well-being of a household will be maximized when the higher earning spouse

specializes in the labour market and the lower wage spouse specializes in parenting. Modern-day

families do not specialize to the extent that families of past decades did, but there are still

childcare and household management decisions and trade-offs to be made in the modern two-

parent family. The increase of real wages in the United States has resulted in an increase in

labour force participation by women in recent decades, but women with children are less likely

than men with children to be employed. Motherhood is associated with negative effects on hours

of work and annual wages; and the specialization in household production may disadvantage

mothers‟ current and future earnings because of their reduced investment in labour specific

human capital (Lundberg and Rose, 1999). Using the Canadian National Longitudinal Survey of

Youth (NLSY), Erosa et al. (2005) found substantial gender differences in employment and hours

of work during the first 20 years of labour market participation, with the largest difference

explained by the presence of children.

One quarter of Canadian parents who took leave from employment to care for children

during 2001-2006 did not return to the workforce, with one quarter of those not returning due to

high childcare costs and half of them not returning because of a preference to raise their child

without day care (Beaupre and Cloutier, 2006). Estimates on the cost of motherhood in the United

Kingdom suggest that in terms of pension loss, mothers with lower earning capacity forfeit a

larger proportion of their pensions than higher earning mothers (Davies et al., 2000). Lower

earning mothers will subsequently be more dependent on their husbands‟ retirement income,

more vulnerable in the event of divorce, and less able to afford legal representation to secure a

portion of their husbands‟ pensions.

3.3 Divorce and Divorce Services

Approximately 70,000 married couples experience divorce annually in Canada, and

results from the Statistics Canada General Social Survey (GSS) indicate a similar number of

separations from common-law relationships (Statistics Canada, 2006b; Beaupre and Cloutier,

2007). Estimates from the GSS suggest that approximately 1.0 million couples were divorced or

separated between 2001 and 2006 with about one-half of the relationship breakdowns

representing the end of a marital union and one-half representing the end of a common-law union

(Beaupre and Cloutier, 2007). Accordingly, approximately 167,000 couples are divorced or

separated from marital or common-law relationships each year. Approximately 60% of divorces

13

are for marriages of 10 years or more duration, 42% for 15 years or more, and 27% for 20 years

or more, as shown in Table 2 (Statistics Canada, 2005b).

Table 2: Divorces by Duration of Marriage, 2005

Duration of Marriage % of Total Divorces

Less than 10 years 41%

10 to 14 years 17%

15 to 19 years 15%

20 to 29 years 18%

30 or more years 9%

Statistics Canada (2005b), Cansim Table 101-6519

The characteristics and experiences of persons leaving marriages and common-law

relationships vary. Of persons going through a divorce between 2001 and 2006, 38% were over

the age of 45, while only 12% of those ending a common-law union were over age 45 years.

Couples ending a marital union are more likely to have dependent children. Approximately half

of the couples divorced in the survey period had dependent children, while less than one third of

couples experiencing common-law separation had dependent children (Beaupre and Cloutier,

2007).

Less than half of the separating and divorcing individuals seek independent legal

assistance while navigating the end of their marriage or common-law union. According to the

2006 GSS, only 48% of persons leaving relationships used the services of a lawyer, legal aid,

mediator, duty counsellor, or a family law information centre during this family transition.

Approximately one-third used social support services such as counselling and community

resource centres, and about 5% made use of a financial advisor relevant to their divorce or

separation (Beaupre and Cloutier, 2007).

3.4 Division of Property

Legislation pertaining to the division of marital assets falls under provincial jurisdiction.

The characteristics of property judgments in different provinces are fairly standard in terms of

both child custody arrangements and the division of assets. Since the introduction of no-fault

divorce in 1968, negotiated agreements have become increasingly common as it has become

easier to obtain a divorce (Brinig, 1999). The increase in the proportion of common-law

relationships and dissolutions in recent decades also suggests that more couples bargain privately

14

at the end of a relationship. Private bargaining may not result in fair financial settlements due to

lack of information or unequal bargaining power. Brinig and Alekseev found (as cited in Brinig,

1993) that women were more likely to trade away financial assets in return for a greater

proportion of child custody, and that women are financially better off from settlements derived

through court than through private bargaining. Weitzman (as cited in Alberta Law Reform

Institute, 1990) found that even with legal representation, women frequently accept inequitable

terms to avoid the high economic and emotional transaction costs of conflict and litigation.

3.5 Divorce Outcomes for Women

Divorce laws in Canada treat spouses as equals, and in most cases there is no assumption

of need for lifelong support for women. Most spousal support awards are for a fixed term to

assist in the transition to financial independence. The gender neutrality of current divorce law

does not expect homemakers to require indefinite support from men and is based on the

expectation of self-sufficiency (Eastman, 1992). Despite the gender neutrality of Canadian

divorce law, the resulting financial outcomes have not reflected the same neutrality. There is

consistent evidence that the economic hardships experienced after divorce and separation are

greater for women than for men (Brinig, 1999). Women may be more vulnerable following

marital breakdown due to a variety of factors, including lower wages, greater childcare

responsibilities, and less investment in career development because of family responsibilities

during and after marriage (Smyth and Weston, 2000). Using Canadian tax records, Finnie (1993)

found the decrease in income to be substantially larger for mothers than for fathers in the years

following divorce, and more recent research by Smyth and Weston (2000) concluded that the

gender disparity in economic hardship continues to hold true following divorce in Australia. The

forgone income associated with workplace absences for childcare, altered career paths, and part-

time work choices mean that mothers bear the majority of the negative consequences on current

earnings, future earnings, and retirement income (Davies et al., 2000). The impact of the high

investment in family skills relative to labour skills reduces a mother‟s economic independence

and increases the risk of financial hardship in the event of marital dissolution.

The long-term consequences are reflected in statistics indicating that separated and

divorced older women are the poorest of older unattached women due to lower lifetime earnings

and less pension coverage that are partly due to the burden of carrying the majority of

childrearing responsibilities (McDonald and Robb, 2004). Never-married women generally have

higher lifetime earnings and have accumulated greater retirement savings than divorced and

15

separated women, who relied on a shared household income during the period of cohabitation.

The stronger economic security for married women is a result of higher household income, rather

than higher personal income (McDonald and Robb, 2004). The retirement income of older

married and widowed women is supplemented by the greater wealth accumulations during

marriage and by their husbands‟ pension incomes.

The economic repercussions of marital breakdown and lone-parenting are not limited to

the transition period, and challenges will be long term if financial struggles and family

responsibilities have prevented adequate earnings ability and retirement savings. Census data

indicates that 25% of families with children at home are headed by a lone parent, and 80% of lone

parents are women (Statistics Canada, 2006a). The increasing proportion of lone mother families,

which is partly the result of high marital breakdown, suggests that many women will face

retirement income barriers when they reach old age. Vartanian and McNamara (2002) found that

many older women in poverty were experiencing the long-term effects of lifetime low earnings

and midlife marital breakdown. The advancement that women have made in society and the

workplace has not eliminated the gender disparity, particularly with the presence of children. The

effects of unpaid childcare responsibilities and gender gaps in the labour market put women at

increased risk of poverty in old age following marital dissolution.

3.6 Pension Valuation

Accurate pension valuation is critical for the equal division of pension assets and for the

bargaining and trading of claims to pension rights following marital dissolution. Pension assets

are considered family property that is subject to division at marital dissolution. Registered

Retirement Savings Plans and defined contribution pension plans are generally straightforward to

divide because the value at the end of marriage is simply the sum of the contributions and their

accumulated investment returns to that point in time.10

In contrast, the division of defined benefit

plans is more complicated and requires valuation of the pension by the pension administrator or a

privately contracted actuary.11

The future pension income received from a defined benefit plan is

not directly related to the contributions and accumulated interest, and consequently a contribution

10

In a defined contribution plan, all contributions are allocated to an individual account for each employee,

and the individual‟s retirement income will be withdrawn from their own account. The value of the plan

is the sum of the contributions and the return on the investments. 11

A defined benefit pension plan is based on a formula for the benefit, rather than the value of

contributions. Large employers such as governments, hospitals and educational institutions commonly

use defined benefit plans. Typically, pension benefits are calculated based on years of service and the

salary in the years preceding retirement.

16

based valuation of defined benefit pensions will likely underestimate the value for the purpose of

division or buyout (LCO, 2008). The complexity in evaluating private pensions applies similarly

to Canada Pension Plan contributions. If a waiver to CPP credit-splitting is made on the basis

that other assets of equal value were taken in lieu of directly splitting the marital credits, then

some kind of value would need to be assigned to the CPP contributions. Valuation of CPP in the

process of property division is infrequent, and it is difficult to assign value to the social insurance

components of disability and survivor‟s benefits (Alberta Law Reform, 1990).

17

4: Methodology

The low take-up rate of Canada Pension Plan credit-splitting at the end of marriage is

analyzed using CPP administrative data, basic credit-splitting simulations, and the results of a

survey of divorced and separated women that was conducted for this project. This multipronged

approached is intended to help describe the current situation, demonstrate the range of impacts of

credit-splitting, and explore reasons that more women do not apply for this provision. To date,

published research on the division of CPP credits is limited to Human Resources and Social

Development Canada reports and provincial law commission reports reviewing matrimonial

property law reform.

The first part of the analysis uses secondary data obtained from the Canada Pension Plan

Office to show the average effects of credit-splitting. Annual take-up rates and other statistics on

the division of unadjusted pensionable earnings describe the trends in applications and the impact

of the division on applicants and their partners. The CPP aggregate data include annual statistics

about average pensionable earnings before and after division, average number of years eligible

for division, and average number of zero-earning years categorized by gender of applicant, age at

time of separation, and last year of cohabitation. The CPP data is useful to illustrate the average

effect that the division of pension credits has on those that have made application for CPP credit-

splitting. The data identifies the characteristics of applicants and the proportion of applications

made according to age and years of cohabitation.

The second method of analysis is the simulation of different credit-splitting scenarios to

show the range and magnitude of effects that can result for the division of CPP credits. Data on

the effect of credit-splitting is generated from simulations of credit-splitting that differ in terms of

length of marriage, age at divorce, child drop-out years, and earnings histories of both spouses.

The simulations will show the varied effects on retirement earnings for the individual parties and

identify the circumstances under which mandatory credit-splitting results in a negative net benefit

because of interactions among credit-splitting, childrearing drop-out, and general drop-out

provisions.

The third component of the analysis is a survey instrument used to help understand the

credit-splitting experience and general knowledge of the provision. An online survey of women

18

who have been divorced or separated was conducted as part of this research. Multiple choice

answers and written comments were obtained from 44 survey respondents. Clearly, a non-

randomized, small-scale survey poses limitations in the conclusions that can be drawn, but this

approach has the potential to help identify the experiences of divorced women and potential

barriers that may affect take-up rates of CPP credit-splitting.

19

5: Canada Pension Plan Administrative Data

Aggregate administrative data describing credit-splitting applications for the period 1978-

2005 were obtained from the Canada Pension Plan Office at Human Resources and Social

Development Canada in Ottawa. The Canada Pension Plan Summary Tables on the Division of

Unadjusted Pensionable Earnings (DUPE) include annual application numbers by gender of

applicant, take-up rates, and statistics about the average number of years eligible for division and

changes in pensionable earnings for the years that were divided. Application is made for the

division of CPP credits by one spouse, and the data tables obtained are categorized by applicant

gender with corresponding tables for the partners of the applicant. The statistics for the number

of years eligible for division, number of zero years, and average percentage of yearly maximum

pensionable earnings (YMPE) before and after the division of credits are separated by several

characteristics of the applications. The tables are categorized and summarize results by gender of

applicant, partner of applicant, and higher or lower pensionable earnings after the split. Most

applicants are female, and consequently the following analysis concentrates on this section of the

data.

Limitations of this data include selection bias of applicants, the reduced explanatory

value of mean averages, and the fact that the changes in pensionable earnings are only for the

period of cohabitation, and they do not account for drop-out provisions. The first limitation,

selection bias of applicants, affects the interpretation of the results because the statistics are

derived only from those who have made application, and those with more to gain from credit-

splitting are more likely to use this CPP provision. Accordingly, the average result for those who

have not made application is likely to be lower than the results in the CPP statistics. Secondly,

the CPP data are also limited because they are aggregate and thus show average effects. It does

not provide information about median effects or the range of effects within categories. This

inherent limitation of summary data is somewhat mitigated by the inclusion of intervals for last

year of cohabitation and age at last year of cohabitation, which divides the data into subsets for

the calculation of averages. The third limitation is the fact that the changes in pensionable

earnings are only for the period of cohabitation and therefore do not show the total impact that the

division will have on the final pensionable earnings at retirement. The final pension benefits and

the benefit derived for the period of the credit-split are not known until childrearing and general

20

drop-out provisions are applied. These calculations are not made until the time of retirement

because contributions over the entire period from age 18 to retirement are required to determine

how the drop-out provision should be applied to maximize pension benefits.

5.1 Applicants

The overwhelming majority of applicants for credit-splitting are female, and in the

majority of credit-splits females ended up with an increase in pensionable earnings for the period

of cohabitation following the division of CPP credits. In the 1980‟s and 1990‟s credit-splitting

applicants were 100% female, but there has been a small increase in male applicants in recent

years. Between the years 2000 and 2005, approximately 96% of applications were submitted by

women, and the remaining 4% were made by men. During this period, women benefited from the

division in 95% of the applications made on their own behalf and from 53% of the applications

made by males. Female applicants seem to be making applications primarily on their own behalf

since they gained in an overwhelming majority of cases. Male applicants gained in only half of

the cases, suggesting that they are submitting notification to CPP even though they will not be the

ones to gain. Take-up by province was not available, but the recent increase in male applicants

corresponds with the credit-splitting pilot project in Manitoba. The notification and simplified

application process in Manitoba may have increased take-up by males because it was not clear

that the form was voluntary. This warrants further investigation when data on the Manitoba pilot

project become available.

Table 3: CPP Applicants by Gender

Year of Application

Female Applicants

Male Applicants

Total Applicants

Proportion of Female Applicants

1978-99 105,539 14 105,553 100%

2000 8,486 149 8,635 98%

2001 8,693 318 9,011 96%

2002 8,300 369 8,669 96%

2003 8,680 370 9,050 96%

2004 8,659 426 9,085 95%

2005 8,381 398 8,779 95%

Total 156,738 2,044 158,782 99%

Canada Pension Plan Office DUPE Statistics (2008)

21

Table 4: Impact of Division of CPP Credits by Gender, 2000-2005

Applicant Gender Higher CPP Credits after Division for

Applicant

Lower CPP Credits after Division for

Applicant

Female 95% 5%

Male 47% 53%

Canada Pension Plan Office, DUPE Statistics (2008)

5.2 Number of Years and Last Year of Cohabitation

The credit-splitting provision is used in a greater proportion by women who have been in

long-term marriages. The average length of cohabitation was 19 years for applications that were

made between 2000 and 2005. Approximately two-thirds of the applications made in this period

were for cohabitation periods of 16 years or more (see Figure 1). The average duration of

cohabitation ranges from 20 to 25 years for applicants in the age groups above age 40 years.

Figure 1: Applicant Proportions by Years of Cohabitation for 2000-2005

43%

21%17%

13%

6%

21 and more 16 to 20 11 to 15 6 to 10 0 to 5

Years of Cohabitation


Most applications are made within a few years of separation. Applications made in any

particular year are for marital dissolutions that have occurred as recently as one year prior or

from as long as decades ago, but the majority of divisions are are for marriages that ended three

22

to ten years prior to the year of application. From applications made in the three most recent

years of data, it is apparent that the most applications are made within ten years of separation.

Fifty percent of applications made between 2003 and 2005 were for a last year of cohabitation

that occurred in 2000 or more recently. Table 5 shows the last year of cohabitation by year of

application.

Table 5: Applications by Last Year of Cohabitation

Last Year of Cohabitation

Year of Application

2000-2005

1990-1999 1980-1989 1979 & prior

2000 - 2005 34% 52% 14% 1%

1990 - 1999 - 80% 18% 2%


5.3 Pensionable Earnings Subject to Credit-Splitting

The data for this section is for credit-splitting where female applicants gained from the

division of credits. The CPP data are tabulated separately by gender and higher/lower

pensionable earnings following the division of credits. The scenario of a female applicant

receiving higher earnings after the division represents the outcome in 94% of the cases. The

average pensionable earnings measure is the proportion of the yearly maximum amount of

pensionable earnings averaged over the period of cohabitation. The sum of the annual proportions

of the maximum is divided by the years in the relevant time period. The entire period of

cohabitation is used for credit-splitting purposes, and the earnings from age 18 to 65 (less any

drop-out years) are used for the purpose of calculating average pensionable earnings when CPP is

applied for at retirement.

For example, a 15 year period of cohabitation with an individual earning 10 years at 50%

of the yearly maximum pensionable earnings (YMPE) and 5 years at 100% of the YMPE yields a

15 year average of 83% points before division:

23

50% x 5years 100% x 10years

15years =

15

105.2 = 83.3% of YMPE average

The average pensionable earnings before credit-splitting refers to the average earnings

and contributions that were personally accumulated by the applicant during the period of

cohabitation. The average pensionable earnings after credit-splitting refers to the 50% share of

the combined pensionable earnings of both partners. The annual pensionable earnings of both

partners are combined and divided equally for each year of cohabitation. In a three year period of

cohabitation where one spouse earned 80% of the YMPE each year and the other spouse earned

50% of the YMPE in two years and 0% in the third year, the credit-split would result in average

earnings of 57% for each party:12

Year 1:

2

%50%80 , Year 2:

2

%50%80 , Year 3:

2

%0%80 = 3 year average of 57%

The trend in average pensionable earnings before credit-splitting for women who gained

from the division has been fairly consistent. Applicants for credit-splitting that were separated

between 1990 and 2005 had average pensionable earnings of 22% of the YMPE before the credit-

split which is a slight increase from earlier periods. The average of pensionable earnings after the

credit-split has remained constant at approximately 52% of the YMPE for all years of separation

from 1979 to 2005. The increase in women‟s earnings has not increased the average earnings

after division, due to a decrease in the average earnings of their partners prior to credit-splitting.

Average pensionable earnings for the male partners accumulated over the period of cohabitation

decreased from 91% to 82% of the YMPE between 1979 and 2005.

12

CPP uses monthly pensionable earnings in the calculation of credit-splitting and other provisions. Annual

averages are used in this project to simplify the examples.

24

Figure 2: Percentage of Pensionable Earnings before and after the Credit-Split for Female Applicants that Gained

14%17%

22% 22%

52% 52% 53% 52%

1979 & prior 1980-89 1990-99 2000-05


before

after


25

6: Credit-Splitting Simulations

This section demonstrates the range of credit-splitting effects based on different earnings,

work history, and length of marriage. The credit-split immediately affects the pension credits for

the period of cohabitation, and in the long term it will affect the average pensionable earnings that

are used to calculate the monthly benefit paid at retirement. The simulations show the effect

directly on the average pension credits as a percentage of the maximum pensionable amount for

the period of cohabitation. At the time of credit division, the final effect of the credit-split is

uncertain unless both parties are at or near retirement. This uncertainty exists because the

pensionable earnings in future years will determine which split years to drop with the general and

childrearing drop-out (CRDO) provisions in order to maximize the average lifetime pensionable

earnings. The lowest 15% of pensionable years are dropped for all pension recipients, and

additionally a caregiver can apply to drop the low or zero-earnings years that occurred while

raising children under the age of seven. The 15% general drop-out provision is applied to the

remaining pensionable years following the CRDO provision.

The childrearing drop-out provision is applied to boost average pensionable earnings of

the caregiver regardless of marital status or credit-splitting status. It would not be beneficial to

apply the CRDO if the pensionable earnings (acquired through employment or credit splitting) for

the childrearing years are among the caregiver‟s highest insured years. The interaction between

the childrearing drop-out provision and credit-splitting means that some split years will be

dropped by the primary caregiver if this will increase the average of yearly pensionable earnings.

The drop-out of split years will maximize earnings if any of the split years have pensionable

earnings that are below the average of all pensionable years. For example, if a woman has 5 zero-

earning years for childrearing, her total credits for each of those years will be equivalent to half of

her husband‟s pension credits for those years. If her portion of credits in those years is lower than

her average, it will be optimal for her to use the childrearing drop-out provision in order to

maximize her lifetime average. Her husband has lost half the credits for those years even though

they will not be used in the calculation of his spouse‟s pension. He will have the option of

dropping some of the split years using the 15% general drop-out provision if these are his lowest

earning years as well, but that would only be the case if he did not have zero or very low earnings

26

years at some stage of his pensionable years between the ages of 18 and 65 years due to

unemployment, education or other workforce absence.

As intended, the splitting of the credits ensures that each party receives an equivalent

share of the credits that were accumulated during the relationship. The credit-splitting anomalies

associated with the childrearing drop-out mean that the credit transfer is not a zero-sum

transaction. The transfer of credits often translates to a monetary loss to one partner that is greater

than the gain to the other partner. In the scenario calculations, the difference in the gain/loss is

illustrated in by the difference between the male and female net change as calculated at the

bottom of each table in sections 6.2 through 6.5.

6.1 Scenario Assumptions

The childrearing drop-out provision (CRDO) is used to maximize the average pension

credits accumulated during the period of cohabitation in the following scenarios. This assumes

that the recipient spouse had full attachment to the workforce outside the period of cohabitation

that earned pension credits greater than those in the years eligible for the CRDO. In the final

pension calculation at retirement, the childrearing drop-out will sometimes not be used because of

very low income years outside of the period of cohabitation, or because the recipient does not

apply for the CRDO at the time of retirement.

Estimates for pension benefits are calculated using 2009 pension benefits. The yearly

maximum pensionable earning amount for 2009 is $46,300, and the corresponding monthly

pension benefit is $908.75. The average benefit in 2008 was $490, which is 55% of the maximum

pensionable amount. It is assumed that that CPP is collected starting at age 65 years. Without

discounting, a simple sum of the benefits in 2009 dollars demonstrates the maximum and average

pension benefits that will be received during the period of retirement, based on average life

expectancies at age 65 (see Table 6).

27

Table 6: Sum of Lifetime CPP Benefits, Maximum and Average, 2009 dollars

Sum of CPP Lifetime Benefits

Monthly Annually 18 Year Sum

1

(Male) 21 Year Sum

2

(Female)

Maximum Benefit

$908.75 $10,905 $196,290 $229,005

Average (55% YMPE)

$500 $6,000 $108,000 $126,000

1 Remaining life expectancy for 65 year old male is 18 years (Statistics Canada, 2005a)

2 Remaining life expectancy for 65 year old female is 21 years (Statistics Canada, 2005a)

Benefit receipt initiated at age 65 is averaged over a period of 40 years if there is no

CRDO applied.13

The impact of the credit-split on final benefits depends on the length of

marriage, drop-out years, and earnings outside of the cohabitation period. However, it is possible

to estimate the direct effect on pension benefits that will result from a change in the percentage of

the Yearly Maximum Pensionable Earnings (YMPE). For example, a change of 30% points in the

average YMPE for a 20 year marriage yields a change of $136 per month in terms of 2009

pension benefits. The same percentage point change over a 40 year marriage would yield

approximately twice the benefit (see Table 7).

Table 7: Pension Monthly Benefit Change from Credit-Splitting, 2009 dollars


10% Change in YMPE

30% Change in YMPE

50% Change in YMPE

10 Years $23 $68 $114

20 Years $45 $136 $227

30 Years $68 $204 $341

40 Years $91 $273 $454

The impact on lifetime CPP benefits depends on the period of time between retirement

and death. For a woman aged 65, the remaining life expectancy is 21 years. A simple sum of the

benefits over the 21 year period illustrates the change in future pension receipt that results

13

The general drop-out provision applies to the 15% lowest years. There are 47 contributory years (ages

18-64 inclusive) and the 15% drop-out means that 7 years are dropped from the calculation for a

standard formula based on a 40 year average. If CRDO provision is applied, the Total Years for

Averaging = (47 – drop-out years) x 0.85.

28

directly from different credit-splitting scenarios. The lifetime change in benefits is based on 2009

CPP pension payments without discounting (see Table 8).

Table 8: Lifetime Pension Benefits Change from Credit-Splitting, 21 years of benefits collected, 2009 dollars


10% Change in YMPE

30% Change in YMPE

50% Change in YMPE

10 Years $5,796 $17,136 $28,728

20 Years $11,340 $34,272 $57,204

30 Years $17,136 $51,408 $85,932

40 Years $22,932 $68,796 $114,408

1 Remaining life expectancy for 65 year old female is 21 years (Statistics Canada, 2005a)

29

6.2 Scenario A: 10 Years Cohabitation, 25% YMPE Gap,

2 Years Childrearing

This scenario is for a cohabitation period of 10 years with the female spouse having 2

years with zero-earnings for childrearing. The husband earns 100% of the maximum pensionable

amount, and the wife earns 75% of the YMPE in the years she was employed. If CRDO is

claimed, the wife gains 12.5% points of the maximum pensionable amount compared to the not-

splitting scenario, and the husband loses 20% points. The impact is relatively small given the 10

year marriage represents less than one quarter of the pensionable years for both partners. The

change in 2009 pension income is a gain of approximately $24 monthly for the wife and a

reduction of $45 for the husband. (See Table 9.)

Table 9: Credit-splitting Scenario A

Cohabitation: 10 years Male: 100% YMPE annually. Female: 75% YMPE with 2 years zero-earnings for childrearing

% YMPE in Years 1 - 2

% YMPE in Years 2-10

10 Year Average YMPE

BEFORE SPLIT

Male 100 100 100

Female 0 75 60

Sum 100 175 160

AFTER SPLIT

50% share = 50 87.5 80

BEFORE SPLIT w/ 10 YR CRDO

Male 100 100 100

Female Drop-out 75 75

Sum 175

AFTER SPLIT w/ 10 YR CRDO

Male 50 87.5 80

Female Drop-out 87.5 87.5

Sum 167.5

NET CHANGE FOR 10 YEAR PERIOD

Male = 80% – 100% – 20%

Female without claiming CRDO

= 80% – 60% +20%

Female w/CRDO = 87.5% – 75% +12.5 (8 year average)

30

6.3 Scenario B: 20 Years Cohabitation, 50% YMPE Gap,




amount, and the wife earns 50% of the maximum in the years she was employed. If CRDO is

claimed the wife gains 25% points of the maximum pensionable amount compared to the not-

splitting scenario, and the husband loses 31% points. The marriage is for half of the pensionable

years, so the impact on final pension benefits is more significant than in a marriage of shorter

duration. The wife will drop the five zero-earnings years, and her pension will be calculated over

an average of 36 years and the husband over the standard 40 years. The change in 2009 pension

income is a gain of approximately $95 monthly for the wife and a reduction of $142 monthly for

the husband. (See Table 10.)

Table 10: Credit-Splitting Scenario B

Cohabitation: 20 years Male: 100% YMPE annually. Female: 50% YMPE with 5 years zero earnings for childrearing




BEFORE SPLIT

Male 100 100 100 Female 0 50 37.5

Sum 100 150 137.5

AFTER SPLIT

50% share = 50 75 68.75


Male 100 100 100

Female Drop- out 50 50

Sum 150 150

AFTER SPLIT w/10 YR CRDO

Male 50 75 68.75


Sum 143.75


Male = 68.75% – 100% –31.25%


= 68.75% – 100% +31.25%

Female w/CRDO = 75%–50%

+25% (15 year average)

31

6.4 Scenario C: 30 Years Cohabitation, 50% YMPE Gap,




amount, and the wife earns 50% of the maximum in the years she was employed. If CRDO is

claimed the wife gains 25% points of the maximum pensionable amount compared to the not-

splitting scenario, and the husband loses 33% points. The period of cohabitation is 30 years,

which increases the impact on the final pensionable amount. The wife will drop the 10 zero-

earnings years, and her pension will be calculated over an average of 32 years and the husband

over the standard 40 years. The change in 2009 pension income is a gain of approximately $142

monthly for the wife and a reduction of $227 per month for the husband. (See Table 11.)

Table 11: Credit-Splitting Scenario C

Cohabitation: 30 years Male: 100% YMPE annually. Female: 50% YMPE with 10 years zero earnings for childrearing




BEFORE SPLIT

Male 100 100 100

Female 0 50 33.3

Sum 100 150 133.3

AFTER SPLIT

50% share = 50 75 66.6


Male 100 100 100


Sum 150


Male 50 75 66.7


Sum 141.7


Male = 66.7% – 100% – 33.3%


= 66.7% – 33.3% + 33.3%

Female w/CRDO = 75% – 50% +25% (20 year average)

32

6.5 Scenario D: 20 Years Cohabitation, 0% YMPE Gap,

10 Years Childrearing (Zero gain with CRDO)

This is the worst-case scenario example. This results when the wife is fully attached to

the workforce with equal earnings, except for the childrearing drop-out years. The wife does not

gain from the credit-split because she can drop the zero earnings years, but the husband loses

credits for that period. The final result with the CRDO provision is no gain for the wife and a

reduction of approximately $227 monthly to the husband. The wife would use the transferred

credits from her zero-earnings years only if she had low or zero earnings in the other 20 years in

her work history. If that were the case the wife would gain from the splitting compared to the

not-splitting scenario. (See Table 12.)

Table 12: Credit-Splitting Scenario D

Cohabitation: 20 years Both 100% YMPE annually. Female 10 years zero earnings for childrearing




BEFORE SPLIT

Male 100 100 100

Female 0 100 50

Sum 100 200 150

AFTER SPLIT

50% share = 50 100 75


Male 100 100 100


Sum 200 200


Male 50 100 75


Sum 175


Male = 75% – 100% – 25%


= 75% – 50% + 25%

Female w/CRDO = 100% – 100% 0 % (10 year average)

33

7: Survey Descriptive Findings

An online survey of women who were divorced or separated in Canada was conducted

for this study to investigate knowledge and take-up of the Canada Pension Plan credit-splitting

provision. The survey was limited to female participants because 95% of credit-splitting

applicants are women, and generally women have a greater incentive to apply because they gain

from the division in most cases (CPP Office, 2008). The survey participants were recruited

through advertisements on internet forums that target a Canadian female audience. The

respondents were asked about knowledge of CPP credit-splitting, legal representation, financial

knowledge, earnings history and relevant demographic information. Responses were collected

from 44 participants during December 2008 and January 2009. The majority of the responses

came from relationships that ended in British Columbia and Ontario. Only two respondents had

been separated from a common law relationship rather than a formal marriage. The sample over-

represents women with high educational attainment, which may bias knowledge about and

utilization of the credit-splitting provision.

34

Table 13: Characteristics of Survey Respondents

N %

Gender

Female 44 100%

Education

Less than high school 1 9%

High school 4 2%

Some-post secondary 21 48%

University Degree 18 41%

Province

British Columbia 22 50%

Ontario 12 27%

Alberta 3 7%

Quebec 3 7%

Manitoba 2 5%

New Brunswick 1 2%

Yukon/Territories 1 2%

Employment Income

Less than $15,000 6 14%

$15,001 - $25,000 8 19%

$25,001 - $35,000 7 16%

$35,001 - $50,000 8 19%

$50,001 - $75,000 9 21%

$75,000 + 5 12%

Age Groups

19 - 29 3 7%

30 - 39 11 25%

40 - 49 20 45%

50 - 59 6 14%

60 + 4 9%

Number of Children

none 8 18%

one 5 11%

two 19 43%

three 9 20%

four or more 3 7%

Years Cohabitated

mean 13

Relationship Type

Legal Marriage 44 95%

Common law 2 5%

Relationship Dissolution Status

Separated 13 30%

Divorced 31 70%

35

7.1 Legal Representation

Respondents were asked about legal representation to assess whether knowledge and

utilization of credit-splitting is more likely with the presence of legal advice. The sample is over-

represented by those who received legal advice in the process of their marital dissolution, as 80%

of respondents had access to legal services. Statistics Canada data indicates that only 48% of

people accessed legal services in the form of a private lawyer, mediator, or legal aid in the

process of separation and divorce (Beaupre and Cloutier, 2006). The high presence of legal

advice did not ensure take-up or knowledge of CPP credit-splitting for the surveyed women.

Only 12 of the 35 women who received legal advice learned about CPP credit-splitting from their

lawyer.

Table 14: Legal Representation in divorce or separation

Legal Representation

N %

Lawyer or Mediator 35 80%

No Lawyer 9 20%

7.2 Take-up and Knowledge of Credit-Splitting

The credit-splitting take-up rate from the sample surveyed was slightly higher than the

take-up rate from the Canada Pension Plan Office administrative data. Twenty percent of the

respondents had applied for credit-splitting, compared to the 15% take-up rate reported by the

Canada Pension Plan office. 14

Table 15: Take-up of CPP credit-splitting by survey respondents

Application Made for Credit-Splitting

N %

Have split credits 9 20%

Have not split credits 35 80%

14

The 15% take-up rate is credit-splitting applications as a proportion of dissolved marriages only, not

included common-law. The survey sample was overwhelmingly formerly married women.

36

The survey findings indicate that knowledge of CPP credit-splitting is low; 43% of the

sample had no knowledge of this CPP provision prior to their participation in the survey.

Seventy-three percent of respondents with no prior knowledge of credit-splitting had a lawyer or

mediator involved at some point in their separation or divorce. This suggests that the presence of

a lawyer in negotiating a settlement does not mean that CPP will be directly addressed or that it is

a reliable source of information for those who stand to benefit from division of the credits

accumulated during marriage.

Table 16: Source of information about CPP credit-splitting

Source of Information

N %

Did not know about it before this survey 19 43%

Lawyer 12 27%

Own Research 7 16%

Family/Friends 4 9%

Other Government Sources 3 7%

Ex-Partner 1 2%

Court Notice 1 2%

7.3 Separation Agreement CPP Waiver

A separation agreement including a clause in which spouses agree not to make further

claim against each other‟s property may be mistaken as a waiver of entitlement to CPP (Alberta

Law Reform, 1990). The survey responses suggest confusion about the entitlement to CPP credit

division with respect to an existing separation agreement. The terms of a separation agreement

were reported as the reason for not intending to apply for credit-splitting by 25% of the

respondents. However, half of those respondents were divorced in provinces that do not permit a

waiver of CPP division. Many people erroneously assume that a general clause about the finality

of the terms of agreement or the omission of any mention of Canada Pension Plan precludes

future claims for CPP division. The default position is entitlement to the division of credits. The

prevailing assumption is the opposite, given that respondents divorced in non-waiving provinces

thought they were not entitled to claim CPP credits. Survey comments included, “I worry it is too

37

late with the separation agreement in place already,” and “I cannot go back to claim anything

retroactively as agreed in the separation agreement.”

7.4 Earnings and Labour Force Participation

For half of the surveyed women, the economic impact of motherhood has resulted in

lower earnings because of an altered career path for childrearing responsibilities. One quarter of

the women did not participate in the labour force during early childrearing years, and three

quarters of the women had total workforce absences in excess of two years for maternity and

childrearing leaves. During the period of marriage and cohabitation, the male partner earned the

majority of family income in 44% of the all cases and in 50% of the cases with one or more child

present. Many families with children still experience a traditional division of labour reflected in

lower earnings for the primary caregiver.

Table 17: Absence from labour force for childrearing

Total Years out of Workforce for Childrearing

N %

Less than 2 9 25%

2 to 4 10 28%

5 to 7 6 17%

8 to 10 6 17%

11 to 15 4 11%

More than 15 1 3%

Table 18: Income Ratio during marriage

Income Ratio during Marriage All Respondents

N %

Husband/Wife fairly equal 19 43%

Husband main earner 19 43%

Wife main earner 6 14%

Respondents with one or more child

Husband/Wife fairly equal 15 42%



38

Table 19: Effect of marriage on current earnings

Lower Current Salary from altered career path? All Respondents

N %

Yes 20 47%

No 23 53%

Respondents with one or more child

Yes 18 51%

No 17 49%

7.5 Financial Literacy

The survey respondents were asked to indicate their level of financial knowledge at the

time of their separation and what their interest in participating in a free workshop on the finances

of divorce would have been at that same time. If knowledge about retirement funds and financial

planning is low, it is difficult for an individual to make a fully informed decision about waiving

the rights to private or public pensions. The difficulty in assigning some kind of tangible value to

CPP is compounded by general lack of understanding financial issues, and it may negatively

impact negotiated outcomes for those with low levels of financial literacy. The interest in a

financial workshop was very high, with 86% of respondents reporting that they would have been

interested in attending an educational session on the subject of the finances of divorce at the time

of marital dissolution.

Table 20: Financial Knowledge at time of separation or divorce

Financial Knowledge

N %

Not knowledgeable 19 43%

Somewhat knowledgeable 17 39%

Very knowledgeable 8 18%

Table 21: Interest level in attending a free workshop on the finances of divorce

Workshop Interest

N %

Not interested 6 14%

Somewhat interested 20 45%

Very interested 18 41%

39

8: Summary of Key Findings

The key findings related to the low take-up rate are the lack of knowledge and the

misconceptions about credit-splitting entitlement after a divorce has been finalized. The CPP data

suggest that most women who make an application for credit-splitting do so within a few years of

separation, rather than many years later. Thus information at the time of divorce may be more

valuable and more likely to invoke an application than information received in the period leading

up to retirement due to stigma or reluctance to make a claim long after the rest of the property

division and divorce issues have been settled.15

It is possible that the feeling of entitlement to

claim a portion of credits diminishes over time. The reluctance to claim retroactively is likely a

combination of stigma and incomplete information, both of which are expected to negatively

affect take-up rates of social programs.

The findings from the CPP data and scenario simulations illustrate the range and average

effects from the division of credits accumulated during cohabitation. The average length of

marriage for recent credit-splitting applicants is 19 years, and the average change in the

percentage of maximum credits over the period of cohabitation is 30 percentage points. In a 20

year marriage that would translate to a change of approximately $136 per month in 2009 dollars

and pension levels. However, the range of effects is wide, and for some couples it is very small.

In short marriages and marriages where both partners had similar work histories, the change in

benefits will be small or non-existent, suggesting that a provision to ensure closer to 100% take-

up of CPP credit-splitting may not be required to deliver the policy objective.

The childrearing drop-out provision creates inefficiency in the division of credits between

former spouses when the caregiver uses the CRDO to maximize lifetime average pensionable

earnings. The sum of spousal credits used from the period of cohabitation is lower for those who

split credits, compared to those who do not when the CRDO is applied because some of the

equalized years are subsequently dropped by the childrearing spouse. In some cases the credit

forfeiting spouse will lose substantially more than the recipient spouse will gain. This suggests

the theoretical existence of a more efficient private solution to the division, but there is not

15

An ex-husband who has started collecting CPP retirement benefits prior to his ex-wife making

application for credit splitting will have subsequent payments reduced to reflect his decreased benefits

entitlement and the overpayment of benefits already received (HRSDC, 2008a).

40

adequate information for fair negotiations. The capitalized value of CPP is not readily available

without a costly private assessment, and it is difficult to monetize the social insurance aspect of

CPP given the associated eligibility for disability and survivor‟s benefits. An interview with a

family lawyer, Scott Taylor, confirmed that the monetary value of the CPP asset is usually

unknown by legal clients and their lawyers. In his extensive experience representing men and

women in their divorce proceedings, Taylor states that he has never seen CPP used as a

bargaining tool or traded for other assets. The Alberta Law Reform‟s survey of legal practitioners

reports that in many cases where CPP is not equalized, nothing has been received in exchange by

the spouse who would have benefited from the credit-split (Alberta Law Reform, 1990).

Interestingly, advocates of the right to waive CPP division argue that couples should be able to

treat CPP credits like a private pension or other property, but it is not practical because of

valuation and information problems.

41

9: Policy Alternatives

The policy alternatives described in this section are aimed at increasing awareness of

credit-splitting and promoting equity and efficiency in the division of pension credits following

divorce or separation. The following alternatives are outlined and evaluated in this section:

Status Quo

Communication Strategy

Include Credit-Splitting Question on CPP Retirement Application Form

Eliminate Provincial Waivers

Correct CRDO Interaction

9.1 Status Quo

The current policy recognizes the inequity and economic disadvantage that may result

from separation and divorce. The current strategy is best described as a mandatory division upon

notification by one of the parties, in the absence of a separation agreement waiver. The main

dissemination strategies include: a reference guide for legal professionals, outreach to legal aid

societies, notice of CPP division entitlement upon issuance of a divorce order in some

jurisdictions, and targeted newsletters to existing CPP clients. Additionally HRSDC has

participated in seminars for family lawyers such as those sponsored by the Continuing Legal

Education Society of British Columbia.

9.2 Communication Strategy

The communication strategy would include extending the targeted notification system

that has been used in the Manitoba/HRSDC pilot project to other jurisdictions and contracting

Revenue Canada to distribute a blind mailing to tax filers reporting a change of marital status on

their income tax returns.

The information dissemination strategy that has been used in Manitoba since 2003 is a

joint initiative of HRSDC and the Manitoba Department of Justice. It provides credit-splitting

information and a simplified application form to individuals seeking assistance with custody

42

issues, property issues and separation agreements (CPP Office, 2008). Notification prior to the

completion of divorce proceedings is particularly important in jurisdictions that permit opting out

of credit-splitting to ensure that full information is received before a claim for CPP is formally

waived.

Revenue Canada is notified of a change in marital status via income tax returns. Income

tax deductions for spousal support payments and increased eligibility or benefit levels for tax-

credits provide effective incentives for people to voluntarily notify Revenue Canada of a divorce

or separation. A credit-splitting pamphlet or application form could be mailed to the applicable

individuals annually by Revenue Canada on behalf of HRSDC.

9.3 Include Credit-Splitting Provision on CPP Retirement

Application Form

In order to initiate Canada Pension Plan benefits upon retirement, the contributor must

complete a five-page application form. The form is also used to collect information about the

optional childrearing drop-out provision and permits the applicant to request or waive the CRDO

provision. The inclusion of a similar question about separation or divorce would give every CPP

applicant a final opportunity to claim the division of the credits accumulated during a period of

cohabitation. The large amount of information required to complete a credit-split may necessitate

an additional form, but a short section on the form could allow for the applicant to give basic

information to start the credit-splitting notification, or the form could direct the applicant to more

information. There is a question about the presence of a disability on the existing application

form with a format that could be similarly used for inquiring about credit-splitting eligibility. The

current CPP retirement application form inquires about disability with the question:

Did you stop working because of a disability? (Yes/No). If you answered ‘yes’ you may be eligible for a disability benefit. See the information sheet.

A similar question could be used to ask whether the applicant has been divorced or

separated, with instructions on where to find information about credit-splitting eligibility or with

supplementary questions to initiate the evaluation of credit-splitting. Including the basic

information gathering on the retirement application will nudge CPP applicants toward applying

for credit-splitting compared to using a separate form. The default will be applying for credit-

splitting with the choice presented in this format:

43

At any time have you been divorced or separated from a marriage or common law relationship? (Yes/No). If you answered ‘yes’ you may be eligible for an equalization of pension credits that were acquired during cohabitation. This could increase your pension if you were the lower earning spouse. See the information sheet at the end of the form for more information and provide the following information to begin your claim.

9.4 Eliminate Provincial Waivers

CPP allows for the waiver of mandatory credit-splitting only in the case of separation

agreements in the provinces with opt-out legislation that specifically deals with CPP credit-

splitting. British Columbia, Alberta, Saskatchewan and Quebec have such legislation. In all

other provinces entitlement to CPP credit-split cannot be waived, and the right to claim it in the

future cannot be waived. In provinces with waiver legislation, the absence of complete

information or poor advice may result in an unintentional or misinformed waiver. The ability to

waive CPP claims creates uncertainty and confusion for couples that have not specifically dealt

with CPP issues in their separation agreement. This option would require federal legislation to

amend the current provision for opting out, or the voluntary removal of the legislation by the

participating provincial governments. CPP amendments could over-ride provincial legislation

and resolve the constitutional conflict if CPP entitlements are interpreted as a claim against CPP,

rather than private property (Alberta Law Reform Institute, 1990).

9.5 Correct Childrearing Drop-out (CRDO) Interaction

Correcting for the interaction of credit-splitting and the CRDO provisions would allow

credit-splitting to equalize the pension credits without unnecessarily penalizing the partner that is

not claiming the CRDO. This option would require the transferred credits to be marked on the

CPP record of earnings, so that they could be credited back to the earner if they are dropped out

by the partner claiming the childrearing drop-out provision at the time of retirement. This

alternative would eliminate inefficient credit-splitting scenarios that currently exist when

transferred credits within the CRDO years are relinquished by the paying partner and are not used

by the gaining partner. In cases with no net gain for the lower-earning spouse because of the

CRDO, credit-splitting should not be executed. The implementation of this option will require

the evaluation of CRDO and credit-splitting at the time of retirement because the optimal

allocation will not be known ex ante.

44

10: Evaluation Criteria

The credit-splitting policy alternatives and recommendations are evaluated based on the

criteria of equity, effectiveness, public cost, private cost, and implementation complexity. The

assessment and comparison of alternatives are based on measures assigned to each criterion. The

criteria are outlined in Table 22 and described in more detail in the following sections.

Table 22: Criteria for Policy Alternatives Evaluation

Criterion Definition

Vertical Equity The extent that the policy provides fair redistribution of CPP wealth between former partners

Horizontal Equity Equity between couples – is the spousal sum of pension benefits from period of cohabitation the same for couples that split, or is there a “splitting penalty”

Effectiveness The extent to which the policy option addresses the low take-up of CPP credit-splitting after divorce or separation

Public Cost Change in administrative costs and CPP expenditure compared to status quo

Private Cost Transaction costs in terms of stigma, pride, time and information costs

Implementation Complexity

The extent of provincial/federal co-operation required and the need for legislative amendments to implement

10.1 Vertical Equity

The primary objective of the CPP credit-splitting feature is equity between former

spouses. The division of pension credits at divorce is a transfer of wealth between spouses,

usually from the husband to the wife. Women making an investment in family-specific skills are

at a disadvantage in their human capital acquisition and accumulation of CPP credits in their own

45

name. The lower-earning spouse is likely to be financially disadvantaged at the time of marital

dissolution and is more likely to have financial constraints affecting access to independent legal

representation in the process of divorce. The imbalance in bargaining power, financial resources

and access to complete information at the time of divorce may influence the settlement terms and

prevent credit equalization that is in the best interest of the spouse with the history of lower

pensionable earnings. The policy alternatives are evaluated for vertical equity based on a scale of

low, medium or high.

10.2 Horizontal Equity

Two components of horizontal equity need to be considered. The first is equitable

treatment of the pension credits accumulated during cohabitation for both married and separated

couples. The second component of horizontal equity is the different treatment based on the

province of divorce or separation. The policy alternatives are evaluated for horizontal equity

based on a scale of low, medium or high.

Equity between Divorced and Married Couples: The interaction of the childrearing drop-

out provision and credit-splitting yields a loss of credits when they are transferred to a spouse

who will drop those years to maximize earnings with the CRDO provision. Under the status quo,

the spousal sum of benefits accumulated during an equivalent period of cohabitation is greater for

those remaining married when the childrearing drop-out is utilized. Changes to CPP ancillary

provisions such as the childcare drop-out and credit-splitting will influence the accumulation of

credits for some groups of contributors or non-contributors more than for other groups.

Inter-provincial equity: The existence of provincial opt-out legislation in BC, Alberta,

Saskatchewan and Quebec means that CPP credits are treated differently depending on the

province of divorce or separation. In the provinces without legislation permitting CPP waivers,

the low or non-contributing spouse will have access to future pension benefits regardless of

current information sources, financial resources or negotiating issues at the time of divorce. The

implication is that those who stand to gain from credit-splitting are better off in provinces where a

waiver is not permitted because access to credit-splitting is ensured.

10.3 Effectiveness

Effectiveness is a measure of success in achieving the policy goal, which is equalization

of public pension benefits between former partners. The take-up rate by couples with

46

disproportionate shares of CPP credits is the ideal measure of effectiveness. However, the

general take-up rate as a percentage of all marital dissolutions from legal marriage is the available

measure. The objective of CPP credit-splitting policy is the fair division of pension credits jointly

accumulated during cohabitation. Effective policy options will improve the outcome by

increasing the take-up rate compared to the status quo. The optimal take-up will not be 100%,

given that there is no gain or very little gain from credit-splitting for couples with very similar

work histories or short periods of cohabitation. The current take-up rate is 15% and the

alternatives are evaluated for the expected increase from the current rate based on a scale of low,

medium or high.

10.4 Public Cost

The administrative costs associated with each option are estimated to be similar, with the

exception of the costs associated with options that require amendments to legislation. Policy

alternatives will affect the immediate administrative burden and related costs associated with CPP

credit-splitting, and in the long term affect aggregate CPP expenditure that is paid out in pension

benefits. Incremental changes to the expenditure for CPP administration are relevant if changes

to the credit-splitting system complicate the handling of individual cases or substantially increase

the volume of applications. The effect on CPP expenditure is not easily quantified. It is known

that the interaction of the CRDO and credit-splitting provisions reduces CPP expenditure;

therefore an increase in credit-splitting rates without correcting the CRDO distortion would

further decrease CPP benefits expenditure. Any amendments to drop-out provisions and credit-

splitting protocol or take-up rates will affect aggregate CPP benefits paid out as future pension

income. The public cost criteria are evaluated separately for administrative cost and CPP

expenditure. The public cost criterion is measured by a scale of low, medium and high.

10.5 Private Cost

Relevant private costs are transaction costs including stigma, time, and information costs

associated with the application process. Policy alternatives that increase the availability of

complete information and simplify the application process will reduce private costs and increase

the net private benefits of exercising the CPP credit-splitting provision. The uncertainty that

results from confusion about the implication of waivers and separation agreements increases the

private costs because of misinformation, inter-provincial differences, stigma, and the high costs

47

of private legal advice. The policy alternatives are evaluated for private transaction costs based

on a scale of low, medium or high costs.

10.6 Implementation Complexity

Implementation complexity is related to the administrative and political feasibility of the

options. The complexity resulting from the interaction between federal responsibility for the

Canada Pension Plan and provincial responsibility over matrimonial property law is an important

consideration in evaluating the policy alternatives. Options that require inter-jurisdictional

cooperation or require legislative amendment will have higher implementation complexity than

other alternatives and are less feasible in both the short term and long term. The policy

alternatives are evaluated for implementation complexity based on a scale of low, medium or

high complexity.

48

11: Evaluation of Policy Alternatives

The alternatives are evaluated in the following sub-sections with the relevant criteria

addressed for each option and a corresponding score of low, medium, or high. A table

summarizing the evaluation of the options against each criterion follows (see Table 23).

11.1 Status Quo

The existence of the Canada Pension Plan credit-splitting provision in its current format

is a reasonable solution to the economic inequities of divorce that may affect the fair distribution

of the social insurance and retirement wealth associated with CPP. However, the low take-up rate

of 15% indicates that improvement is needed to deliver the policy objective of protecting low and

non-contributing spouses by equalizing pension credits accumulated during cohabitation. Current

policy is not optimal given the inter-provincial inequity, the low utilization, and the low level of

public knowledge about the provision.

Vertical Equity: The existing credit-splitting provision promotes vertical equity because it

recognizes that CPP is a joint marital asset that should be divided upon separation or divorce.

However, the low level of awareness, provincial waivers, and confusion that exist under the status

quo hinder vertical equity. Vertical equity is assigned a score of low for the status quo because it

is based on the principle of promoting equity but falls short in reaching the objective widely.

Horizontal Equity: The status quo creates horizontal inequity between couples who split

credits and those who do not split credits when the childrearing drop-out (CRDO) provision is

used. The CRDO penalty means the sum of credits from the period of cohabitation may be

reduced for those splitting CPP credits. Additionally, inter-provincial inequity exists because the

right to claim CPP is ensured in provinces that have not legislated the opting out of CPP in

separation agreements. Horizontal equity is assigned a score of low because of the CRDO penalty

for credit-splitting spouses and the inter-provincial inequity.

Effectiveness: The current take-up rate is 15% which indicates that the status quo is not

highly effective. The duration of marriage is greater than 15 years in 42% of divorces and greater

than 20 years in 27% of divorces (Statistics Canada, 2005b). Given the large proportion of long

marriages, the 15% take-up rate falls short of delivering CPP credit-splitting to those with the

49

most potential to gain from the division of credits. Human Resources and Social Development

Canada recognizes that the rate is low and has taken steps towards improving awareness and take-

up in recent years. Effectiveness is assigned a score of low.

Public Cost: The status quo involves minimal administrative resources that are in line

with the delivery of other CPP provisions and federal social programs. Additionally, the status

quo reduces CPP benefit expenditure because of the unintentional interaction with the CRDO.

Public cost associated with the status quo is low.

Private Cost: The private transaction costs of the status quo involve stigma, time,

information, and legal costs. Under the status quo a considerable onus is placed on individuals to

research the provision, and the application process is time-consuming. Stigma costs may be high

given reluctance to make retroactive claims and the involvement of legal advice in provinces that

permit waivers will increase private costs. Private costs under the status quo are high.

11.2 Communication Strategy

Vertical Equity: Increased awareness will promote equity between former spouses by

providing information about the CPP credit-splitting and the application process. However, an

improved communication strategy will not affect vertical equity significantly. The vertical equity

under this option is moderately higher than the status quo and is therefore assigned a score of

low-medium.

Effectiveness: Increasing public awareness about credit-splitting will increase the take-up

of the provision by individuals who otherwise would not have learned about CPP equalization.

An expansion of the targeted approach of the Manitoba pilot project to other jurisdictions and the

use of Revenue Canada for targeted mail-outs will increase knowledge and acceptance of the

credit-splitting provision. An improved communication strategy will increase take-up, but on its

own it will not produce optimal take-up. Accordingly, the communication strategy is assigned a

score of medium for effectiveness.

Public Cost: An expansion of information dissemination is a low cost option for

improving take-up if inadequate awareness is a primary factor in the low utilization of the CPP

credit-splitting provision. This alternative could be implemented with a redirection of current

communication expenditure or with an incremental increase. The improved communication

strategy will reduce CPP benefit expenditure if the CRDO interaction is not corrected because an

50

increase in applications will increase the CRDO interaction savings. The public cost associated

with an expanded and diversified communication strategy is low.

Private Cost: Increased awareness will reduce the private costs of information seeking

and stigma. An expansion of the Manitoba pilot project would include a wider use of the

simplified information and application form, thereby reducing the private time costs associated

with searching for information and making an application. The private costs with this option are

reduced compared to the status quo, but costs will still be moderate or high for some individuals.

The private cost associated with this option is medium.

Implementation Complexity: The implementation of an expanded communication

strategy is not expected to face significant barriers. It will require coordination between

jurisdictions and government departments to facilitate the distribution of information. The

implementation complexity of this option is low.

11.3 Including Credit-Splitting Question on the CPP Retirement

Application Form

The inclusion of a question about eligibility for credit-splitting on the CPP Retirement

Application Form would ensure that all contributors have a final opportunity to be informed about

credit-splitting and to notify the CPP office of their potential eligibility for credit-splitting. For

those making a CPP application, it is a straight-forward, non-stigmatizing question that is

expected to be effective at increasing the take-up of credit-splitting. When added to the status

quo, there will be two critical points in time for information dissemination and application. The

first is at the time of dissolution when family court services are being used, and the second is at

the time of retirement.

Vertical Equity: All CPP applicants will be made aware of potential eligibility for credit-

splitting upon retirement. This option will increase equity between the low and high contributing

spouses through increased awareness and take-up of the provision. Taking into consideration that

this option does not prevent loss of eligibility because of applicable time-limits or pre-existing

legal waivers, this option is assigned a score of medium-high for horizontal equity.

Effectiveness: This option will be very effective as it adds an almost universal component

to the delivery of information. The only individuals who miss out on this later opportunity to

apply are those not making an application for a CPP retirement pension because they have not

contributed to the Plan through standard employment or self-employment. This inclusion of a

51

credit-splitting question on the CPP application is given a score of high for effectiveness because

of the universal characteristics.

Public Cost: The cost of amending the application form is minimal. Additionally, any

increase in take-up will reduce CPP benefit expenditure if the CRDO interaction is not corrected.

Accordingly this option is categorized as low cost.

Private Cost: The quasi-universal aspect of the CPP retirement application form will

decrease information costs. Additionally, stigma and reluctance to make a retroactive claim will

be reduced due to the increased credibility that will be derived from the delivery of the credit-

splitting information in this official format. Transaction costs with this option are significantly

reduced compared to the status quo; therefore the private cost for this option is low.

Implementation Complexity: Changes to the application form are required and the

complexity of assessing CPP applications may increase with this option. Therefore, the change to

the CPP application form has low/medium implementation complexity.

11.4 Eliminate Provincial Waivers

Vertical Equity: The elimination of opting-out legislation will increase equity between

former spouses because the right to claim CPP equalization could not be permanently waived,

and retroactive claim could be made without uncertainty about the implications of a separation

agreement. This option significantly improves vertical equity relative to the status quo, but it

doesn‟t address the lack of knowledge about the provision that is a key factor promoting equity.

This option is accordingly assigned a score of medium-high for vertical equity.

Horizontal Equity: The elimination of provincial waivers would make credit-splitting

mandatory in all provinces, thereby increasing inter-provincial equity. Accordingly, this option

scores high for horizontal equity.

Effectiveness: This option will increase take-up rates because the uncertainty about the

role of separation agreements will be reduced, and people who otherwise may have waived their

rights to claim CPP division will be able to apply for credit-splitting. Universal eligibility will

increase the utilization of credit-splitting. Eliminating provincial waivers will increase

effectiveness in comparison to the status quo, but it is not as effective as revisions to the

retirement application form. Accordingly this option is assigned a score of medium for

effectiveness.

52

Public Cost: The costs that apply to this option are associated with the legislative

amendments required to eliminate the option to privately negotiate CPP waivers. Any increase in

take-up of credit-splitting will reduce CPP benefit expenditure if the CRDO interaction is not

corrected. Taking this into consideration, the public cost of this option is medium.

Private Cost: Private costs will be reduced with the elimination of the provincial waiver.

Universal entitlement will reduce the stigma and the transaction costs, particularly those

associated with trying to evaluate eligibility such as searching for legal documents. The private

cost is medium.

Implementation Complexity: The elimination of provincial waivers would require an

amendment to Section 55 of the Canada Pension Plan Act, which currently recognizes inter-

spousal contracts in provinces with provincial matrimonial laws governing CPP credits. The

conflicting relationship between provincial matrimonial property law and credit-splitting is based

on provincial jurisdiction of property-division legislation and federal jurisdiction of the Canada

Pension Plan. The conflict is resolved if the entitlement to CPP is viewed as a claim against CPP

in the form of a state benefit, rather than private property (Alberta Law Reform Institute, 1990).

Alternatively, this issue could be resolved if provincial governments amend their matrimonial

property laws that permit the private contracting of CPP rights. Changes to eliminate the

contracting out of credit-splitting have high implementation complexity.

11.5 Correct CRDO Interaction

Vertical Equity: Correcting the CRDO interaction would increase vertical equity by

eliminating the distortion that arises if most or all of the split years are later dropped from the

caregiver‟s period of contribution. Under the status quo, transferred credits may not be used in

the final pension calculation of the gaining spouse. Most occurrences of this interaction entail the

husband losing more than the wife gains from the transfer of CPP credits, and correcting the

CRDO penalty would improve the situation for the non-caregiver spouse. The primary objective

of the CRDO and credit-splitting provisions is to improve pension outcomes for caregivers.

Taking this into consideration, the score for vertical equity is medium.

Horizontal Equity: Correction of the childrearing drop-out provision interaction would

eliminate inefficient outcomes and increase horizontal equity in the net outcome of splitting

relative to not splitting credits. This option is rated as high for horizontal equity because it would

eliminate the CRDO penalty that currently exists only for couples who split credits.

53

Effectiveness: Removing the inefficient outcomes from the CRDO interaction is expected

to increase applications for credit-splitting. This option scores medium for effectiveness.

Public Cost: The public cost of this option is likely higher than the others because it

necessitates a re-design of the credit-splitting system and would require the re-evaluation of

credit-splitting cases when the retirement application and CRDO application are made to the

Canada Pension Plan at the initiation of benefits. Additionally, the CRDO and credit-splitting

interaction yields savings for the CPP Pension fund, so that its elimination would increase CPP

benefit costs. The incremental costs have been estimated at approximately 0.40-0.57% of current

total retirement benefit expenditure (HRSDC, 1997). Accordingly the public cost is high.

Private Cost: The correction of the CRDO will reduce private costs compared to the

status quo because former spouses and their legal counsel will not have to be concerned about

inefficient outcomes. The private cost is medium for this option.

Implementation Complexity: The implementation complexity of this option is due to the

reconfiguration of the benefit calculations and the necessity to evaluate credit-splitting for each

case at retirement when the CRDO is used. However, the solution to this problem can be

automated by software, so the actual cost of the complexity would be minimal. Additionally,

credit-splitting cases would be evaluated upon retirement so there will not be an initial

administrative load beyond reconfiguring the credit splitting formula. Implementation

complexity is low/medium.

11.6 Relative Importance and Trade-offs among Criteria

Equity and effectiveness are particularly important in the assessment of the policy

alternatives, given that the main objective of the CPP credit-splitting provision is to make sure

that women receive an equal share of the public pension benefits accrued during the period of

cohabitation. A significant trade-off arises between the effectiveness and feasibility criteria,

because the alternatives most likely to have a significant positive effect on the effectiveness of

credit-splitting will require considerable political support, administrative support, and

administrative change. A trade-off exists between cost and efficiency because removing the

current inefficiencies and distortions from the formula will increase the cost of administering

credit-splitting applications and increase pension benefit expenditure for the CPP fund. Under the

status quo, the inefficient outcomes from the interaction of drop-out provisions and credit-

splitting reduce the pension expenditure compared to not splitting credits. However, given that

the savings to CPP expenditure resulting from the CRDO is an unintended consequence, it is not

54

clear that a change in this cost should be given much weight in a policy assessment. For the

purpose of ranking the options, the criteria are assigned equal weights.

55

Table 23: Evaluation of Policy Alternatives

CRITERIA

Status Quo Option 1:

Communication Strategy Option 2:

Include on CPP Application Option 3:

Eliminate Provincial Waiver Option 4:

Correct CRDO interaction

Vertical Equity

LOW Equalization will not result with waiver or if not aware of eligibility.

MEDIUM Increased information will increase equity between spouses.

MEDIUM-HIGH All applicants will be made aware of eligibility upon retirement. Waivers and time-limits still prevent eligibility.

MEDIUM-HIGH Increases equity between spouses as the option cannot be waived, and can be claimed at a later time if necessary.

MEDIUM Better outcome for spouse not using CRDO.

Horizontal Equity

LOW Interaction with CRDO means separated couples lose credits compared to not splitting. Inter-provincial inequity.

No change No change

HIGH Increases inter-provincial equity.

HIGH Sum of credits the same for separated and married couples. Eliminates credit-splitting/CRDO interaction penalty.

Effectiveness

LOW 15% Take-up

MEDIUM Increased knowledge of provision expected to increase applications.

HIGH Adds second point of information and second opportunity to apply.

MEDIUIM Everyone is eligible if the option cannot be waived.

MEDIUM Removing inefficient outcomes will increase applications.

Public Cost

LOW COST LOW COST Redirect current educational and outreach resources. Increased take-up without CRDO correction will decrease CPP expenditure.

LOW COST Implementation cost and may increase ongoing administrative workload. Increased take-up without CRDO correction will decrease CPP expenditure.

MEDIUM COST Cost associated with legislative amendments. Increased take-up without CRDO correction will decrease CPP expenditure.

HIGH COST Immediate: redesign of credit-splitting system Ongoing: CPP credits would need to be reviewed again at retirement. Increases CPP benefit expenditure.

Private Cost

HIGH COST MEDIUM COST Stigma and information costs reduced with complete information.

LOW COST Stigma and information costs decreased through universal information.

MEDIUM COST Universal eligibility will reduce stigma and misinformation.

MEDIUM COST Eliminates concern about inefficient outcomes from dropped years.


LOW COMPLEXITY

LOW COMPLEXITY Will require some co-operation of jurisdictions or departments in distributing information.

LOW/MEDIUM COMPLEXITY Requires change in application forms and may increase complexity of the assessment process for CPP.

HIGH COMPLEXITY Requires province to voluntary remove waiver legislation or amendments to CPP legislation.

LOW/MEDIUM COMPLEXITY Redesign of splitting/CRDO. Review of both partners records at divorce and retirement.

56

Table 24: Score and Ranking of Policy Options

CRITERION Measure

and Score

Status Quo

Option 1: Communication

Strategy

Option 2: CPP

Application

Option 3: Eliminate Provincial

Waiver

Option 4: Correct CRDO

interaction

Vertical Equity

Low = 1 Medium = 2

High = 3

1

2

2.5

2.5 2

Horizontal Equity

Low = 1 Medium = 2

High = 3 1 1 1 3 3

Effectiveness Low = 1

Medium = 2 High = 3

1 2 3 2 2

Public Cost Low = 3

Medium = 2 High = 1

3 3 3 2 1

Private Cost

Low = 3 Medium = 2

High = 1 1 2 3 2 2


Low = 3 Medium = 2

High = 1 3 3 2.5 1 2.5

Score Maximum Score = 18

10 13 15 12.5 12.5

Ranking 4th

2nd

1st

3rd

3rd

57

12: Recommendations

The policy options presented in this study are complementary changes that should be

implemented jointly to improve the take-up rate and outcomes of the existing CPP credit-splitting

provision. These policy changes will further promote the objective of protecting low-contributing

partners through a fair division of Canada Pension Plan credits. The status quo policy is

„mandatory‟ in principle because the division of credits is automatic upon notification to CPP, in

the absence of a valid waiver. However, the mandatory nature of this CPP provision is weak, and

it has not translated into high take-up of credit-splitting. The proposed policy alternatives are

intended to address the findings of my research, which indicate the need to increase knowledge,

reduce reluctance for individuals to make retroactive claims, eliminate the CRDO penalty, and

thus increase take-up.

The alternatives most likely to be implemented without facing significant barriers are the

targeted communication strategy and the inclusion of credit-splitting on the CPP retirement

application. When implemented together, these alternatives introduce two critical points for

providing information and opportunities to apply for credit-splitting. The communication

strategy will target clients at the time of divorce and separation. The inclusion of credit-splitting

on the retirement application form provides a final opportunity for CPP contributors to be

informed about entitlement to credit-splitting. The early target is ideal because it is more likely to

inform potential applicants during the period when they are dealing with other relevant issues of

separation, and it has the potential to prevent misinformed waivers in the applicable provinces.

The inclusion of credit-splitting information on the retirement application should not be the only

means of communicating the provision, because the delivery of this as new information is likely

to be too late for those facing the time limits imposed on credit-splitting following the dissolution

of a common-law relationship or the death of a former spouse. The inclusion of credit-splitting

on the application form should not replace the communication strategies but will enhance efforts

to distribute information universally and shift the default in the delivery of policy to opting for

credit-splitting.

Correcting the CRDO interaction should proceed to make sure that the non-childrearing

spouse is not unfairly penalized when the CRDO is used by the childrearing spouse. This will be

increasingly important if knowledge and voluntary applications for credit-splitting increases or if

58

automatic notification of divorce is contemplated as a solution. The CRDO interaction causes

unnecessary inefficient outcomes in credit-splitting. It is feasible for the transferred credits for

years dropped with the CRDO to be returned to the record of earnings of the other spouse and for

the division of credits to be executed only if the lower-earning spouse will gain from the

equalization of credits. The CRDO interaction was an unintentional consequence of the credit-

splitting provision which should be directly addressed to eliminate inefficient outcomes and to

improve the integrity of the provision.

The implementation complexity of eliminating opt-out legislation will pose a greater

challenge but should be further considered. Eliminating provincial waivers will require federal

legislative amendments to Section 55 of the Canada Pension Plan Act or provincial co-operation

to amend matrimonial property law to make private contracting of CPP credits legally invalid.

This alternative is important in obtaining inter-provincial equity and removing misinformation

and uncertainty about entitlement to the CPP spousal credits. Universal entitlement will make it

clear that the right to divide CPP exists in all cases immediately following separation and

indefinitely following divorce.

59

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62

Interviews

Taylor, Scott (January, 2009)

63

Appendices

64

Appendix A: Survey

---------------------------------------------------------------------------------------------------------------------------

(1) Are you a female who has experienced a

divorce or permanent separation from marriage

or a common-law relationship?

Yes

No (If no, this survey does not apply to you.)

(2) What is your age?

19-29 years 50-59

30 to 39 60 or over

40-49

(3) How many times have you been divorced?

Once Twice Three or more

If you have been divorced more than once,

please refer to your most recent divorce for the

rest of the survey.

(4) Was your marriage-like relationship a legal

marriage or common-law?

Legal Marriage Common-law

(5) (a) How many years did you live with your

former spouse? ______________________

(b) What year did you last live with your

former spouse? _______________

(6) Are you divorced or permanently separated

from this former relationship?

Divorced Separated

(7) Number of children from your relationship:

No children Three

One Four or more

Two

(8) Age of your youngest child from this

relationship?

No children 9-12 years

3 years or less 13-18 years

4-8 years 19 or over

(9) Please select all the answers that apply to

your use of lawyers for you divorce.

Neither husband nor wife had legal advice

Both parties had legal advice

Wife only had legal advice

Husband only had legal advice

Terms settled by a court judge

Used mediation

Used Do-it yourself divorce kit

(10) What kind of lawyer represented you in the

divorce and negotiations? Check all that apply.

None, I did not use a lawyer

I hired a private lawyer

Subsidized or free legal aid lawyer

Assistance from Family Court worker

Questions about Canada Pension Plan (CPP)

do not refer to private employer pensions or

RRSPs.

(11) Canada Pension Plan (CPP) credits are

automatically deducted from the wages of all

workers. At divorce or separation, you can apply

to the government to have CPP credits divided so

that both parties have equal CPP credits from the

period that they lived together. How did you

find out about this CPP rule?

I did not know about it before this survey

From my lawyer

From my own divorce research

From a friend or family

From my ex-spouse

Notice received from family court

Other government source

(12) How did you deal with the splitting of CPP

credits at divorce?

I have not applied to CPP, but plan to apply

I have not applied to, and do not intend to

I have already applied to CPP for credit-split

I haven‟t given this any consideration yet

SIMON FRASER UNIVERSITY

AT HARBOUR CENTRE

Graduate Public Policy Program

65

(13) If you do not intend to split credits, why

not? Check all that apply.

Too much paperwork or too complicated

Agreed not to in separation agreement

Accumulated enough CPP on my own

Not enough years of marriage to bother

Did not/do not understand it

Was advised by lawyer that it was not

worthwhile

Other

(14) Do you have any other comments on your

experience with splitting CPP credits?

(15) Did you or your former spouse have a

private employer pension?

No, neither of us did

Wife only

Husband only

Both

(16) Did you agree to split the private employer

pension?

Yes

No

(17) How long in total were you out of the work

force due to your children?

Maternity leave of less than 2 years total

Out of workforce for 2-4 years total




Out of workforce more than 15 years

No children

(18) What best describes your employment

history during most of your marriage?

Did not work outside the home

Less than 12 hours weekly

13-24 hours weekly

24-32 hours weekly

More than 32 hours weekly

(19) Which best describes your income ratio

when you were married?

Husband and wife had fairly equal salaries

Husband was main income earner

Wife was main income earner

(20) Is your current salary lower than it would

otherwise have been for you, because you were

out of the workforce or out of your career path

during marriage?

Yes

No

(21) Any other details to clarify how

marriage/children affected your work and

earnings?

(22) At the time your marriage ended, how

knowledgeable were you about financial matters

such as pensions and investments?

Not very knowledgeable

Somewhat knowledgeable

Very knowledgeable

(23) Would you have been interested in attending

a free educational workshop on financial matters

of divorce at the time of your separation or

divorce?

Not interested

Somewhat interested

Very interested

(24)What Province were you divorced in?

__________________________

(25)What is your current marital status?

Single

Married

Common-law

(26) What is your highest level of education?

Less than high school completion

High school graduate

Some College or University

University Degree

(27) What is your current annual salary from

employment?

Less than $15,000

$15,000 – 25,000 $50,000 – 70,000

$25,000 – 35,000 $70,000 – 100,000

$35,000 – 50,000 over $100,0

66

Appendix B: Survey Statistics

N %

Gender

Female 44 100%

Age Groups

19 - 29 3 7%

30 - 39 11 25%

40 - 49 20 45%

50 - 59 6 14%

60 + 4 9%

Number of Divorces

One 38 86%

Two 5 11%

Three or more 1 2%

Relationship Type

Legal Marriage 44 95%

Common law 2 5%

Number of Years Cohabitated

Less than 10 years 14 32%

10 – 19 years 24 55%

20 or more years 6 14%

Mean 13 years


1987 and prior 5 12%

1988 - 1997 10 24%

1998 - 2007 27 64%

Relationship Dissolution Status

Separated 13 30%

Divorced 31 70%

Number of Children

none 8 18%

one 5 11%

two 19 43%

three 9 20%

four or more 3 7%

Age of Youngest Child

3 years or younger 1 3%

4 – 8 years 5 14%

9 – 12 years 8 22%

13 – 18 years 10 28%

19 years or older 12 33%

Use of Lawyers

Neither had lawyer 8 19%

Both had lawyer 28 65%

Wife only 6 14%

Husband only 1 2%

Do it yourself separation /divorce kit 8 18%

Terms Settled by Court Judge 7 16%

67

N %

Type of Legal Services Used

No lawyer 11 25%

Private Lawyer 24 55%

Legal-aid 9 20%

Mediator 10 23%

Source of knowledge of credit-splitting

This survey 19 43%

Lawyer 12 27%

Own divorce research 7 16%

Family or friend 4 9%

Ex-husband 1 2%

Notice from Court 1 2%

Other government source 3 7%

Status of Respondents Credits

Have already applied 9 20%

Intend to apply 9 20%

Do not intend to apply 16 36%

Have not considered/ Don’t know 10 23%

Will not be applying, reason given

Too much paperwork/complicated 5 11%

Separation Agreement Terms 11 25%

Accumulated enough CPP on my own 6 14%

Not enough value to bother 9 20%

Do not understand 8 18%

Other 6 14%

Private Employer Pension

Both partners 11 26%

Husband only 8 45%

Wife only 3 7%

Neither 20 45%

Did you agree to split the private pension?

Yes 5 15%

No 30 85%

Period out of the workforce for childrearing

Maternity leave of less than 2 years 9 20%

2 – 4 years 10 22%

5 – 7 years 6 14%

8 – 10 years 6 14%

10 – 15 years 4 9%

More than 15years 1 2%

Employment during most of marriage

Did not work outside the home 9 20%

Less than 12 hours weekly 2 5%

13- 24 hours weekly 10 23%

25- 32 hours weekly 4 9%

More than 32 hours weekly 19 43%

68

N %

Income Ratio during marriage

Husband and wife had equal salaries 19 43%



Current Salary lower due to marriage?

Yes 20 47%

No 23 53%

Knowledge of Financial Matters

Not very knowledgeable 19 43%

Somewhat knowledgeable 17 39%

Very knowledgeable 8 18%

Interest in free workshop on financial matters of divorce

Not interested 6 14%

Somewhat interested 20 45%

Very interested 18 41%

Province of Divorce

British Columbia 22 50%

Ontario 12 27%

Alberta 3 7%

Quebec 3 7%

Manitoba 2 5%

New Brunswick 1 2%

Yukon/Territories 1 2%

Education

Less than high school 1 9%

High school 4 2%

Some-post secondary 21 48%

University Degree 18 41%

Employment Income

Less than $15,000 6 14%

$15,001 - $25,000 8 19%

$25,001 - $35,000 7 16%

$35,001 - $50,000 8 19%

$50,001 - $75,000 9 21%

$75,000 + 5 12%

69

Appendix C: Survey Comments

Survey Question: Do you have any other comments on your experience with CPP credit-

splitting?

It should be made clear. This information was hard to find.

This was not even mentioned by my lawyer.

I had no idea that I was even entitled to this.

I think it is not a fair system. While one party has been out working and paying CPP and the

other is at home, why should it be split during divorce? If the couple remain married and

retire. The pension belongs to the person who has worked and becomes the spouses upon

their death. I do not believe this should be part of a divorce settlement.

I do not yet understand but plan to read more and find information.

We both had an equal proportion.

I was surprised that my measly yrs of work have to be included in the CPP splitting. Before

kids I lived in Ontario, but worked in Quebec & that is causing a big headache with 2

provinces involved. So I feel it should be clear that CPP division is between 2, & not make it

sound that one will get half of pension when finances are being negotiated. My advice to

anyone who needs to apply, do it ASAP, it's taken a year just to get a letter saying what the

delay is. And also I wish it were made clear when to expect it.

In hindsight, I may not have had the CPP credit-split, because the years I 'took' from my ex-

husband, are actually 'dropped out' from my calculations due to the childrearing drop-out

application. The years would have been not counted at all, so zero equals max in the calc. On

the other hand, I am happy to have something to my credit from a bad situation!!! I worked

at CPP/OAS and that's where I learned about this.

I took 4 years more RRSP and pension contributions of my husband than what I shared with

him

I was totally unaware of this process and intend to look into this now although I worry that it

is too late with the separation agreement in place already.

I had absolutely no idea there was such a thing until I found this survey. We're just about to

file the final paperwork, but looking up CPP stuff seems like probably a lot of hassle for very

little point...

I am not sure if there is a time limit which I suspect and is it too late to apply since he

remarried this summer? And can I apply on the web?

I didn't know about it at the time (if I had, I would have split it or at least discussed

possibility) and can not go back to claim anything retroactively as agreed in separation

agreement. Would likely not be worth the hassle at this point.

My ex-husband looked out for himself and I was not fully aware of my rights.

I had advised friends regarding the splitting of CPP credits, as they were not aware of it.

70

Survey Question: Are there any other details to clarify how marriage/children affected

your work and earnings?

I receive CPP disability, a small long term insurance, spousal support, child support even so, I

live hand to mouth.

Had a well-paying, full time career until having children and deciding to stay home full time

after the birth of the second. My income was actually higher than my husbands until having

kids.

It was only after my separation that I returned to school and obtained a marketable degree

(MBA).

I think it would be a good idea if the govt was to continue paying the CPP for woman who

wish to stay home with their children, especially during maternity leave period.

Having been married or having a child did not affect my professional situation.

It didn't. I had more education, a better career and almost double his income.

Had two 3 month off periods due to miscarriages.

Returned to university as mature student at 35 achieved BScN. Ex-spouse and I decided I

would work p/t as his employment often had him working out of town/country...this way our

3 boys had one constant parent at home half of the time at least. Due to this decision, my

earnings were cut in half; I was not eligible for health benefits, disability benefits.

I did not return to school to upgrade my education and give me higher earning employment.

I am top Real Estate Agent.

I started on a new career and was only working part-time at the end of our marriage, but it

had nothing to do with him.

I was self employed (home day care in marital home) in preparation for our own children (did

not have any). I changed my career path in anticipation of children and had a period of

unemployment during separation because we sold the marital home (my place of business).

I dedicated my time to my children and made a choice to be mom rather than climb the

corporate ladder. I had the chance but failed. I was a single mom trying to raise two kids on

my own and my body gave out. After that I had to put my aspirations on hold and work in

low end administrative jobs that paid very little. Now that my kids are grown I am working

on my degree and although I have 18 years of temping experience no one will hire me on a

full time basis. I am 42 now and this is really hard for me trying to get out of poverty for

myself. It‟s Jan 2009 and for the first time since my youngest turned 18 I might find myself

back on the welfare line through no fault of my own. I am well over qualified and feel

discriminated for whatever reason. It‟s really disheartening.

Ex-husband had Victorian views of women staying home to raise children. last 6 years of

marriage, ex had own (failing) business, so I was the stable earner.

I was out of the work force and because of this, I was unable to obtain experience and have a

gap in my employment history. It also made me less qualified for employment.

71

Appendix D: Formula for Estimating CPP Change

Table 25: Example of Estimate of Change in Benefits, 30% point increase, 20 years cohabitation

Maximum Monthly CPP Benefit in 2009 $908.75

Standard Contributory Period 47 years (age 18 – 65)

Less 15% Drop-out for lowest years 40 years

30 point change for 20 years of cohabitation= ($908.75 x 30%) x (20 years/40 years) = $136.31

divorce and the division of canada pension plan...

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