What method is used to value retirement benefits?
The method prescribed by the Welfare Reform and Pensions Act 1999 (WRPA 99) to determine the value of a members retirement benefits is the cash equivalent transfer value (CETV).

The CETV method was chosen because it has already been established to calculate the value of a members pension rights from an occupational pension scheme or personal pension, where members leaving early wish to transfer accrued benefits to another pension arrangement. It is therefore a calculation that can be easily obtained from the provider.

However, on divorce the member of a defined benefit scheme will usually not be an leaving service and the CETV will therefore not give a fair value of the retirement benefits.


Will the court accept expert evidence other than the CETV?
The court will accept expert evidence to establish a fair value for the members pension rights during ancillary relief proceedings as the step-by-step guide shows. The court has regard to rule 2.51B of the Family Proceedings Rules 1991 that states the overriding objective of the court must be to ensure the parties are on an equal footing and deal with the case in ways which are proportionate to the amount of money involved, to the complexity of the issues and to the financial position of each party.

Therefore the court will have to be satisfied that the pension arrangement is sufficiently complex and the value significant relative to other matrimonial assets to justify the cost of engaging a pensions expert.


What methods can be used other than the CETV?
The CETV will be used as a basis for valuation but is then adjusted to reflect the specific needs of the parties. Expert evidence provided by a pension audit would further consider both the past service reserve and fund value approach. The past service reserve takes account of the fact that a defined benefit scheme, such as a final salary pension, will maintain reserves in anticipation of increases in pensionable earnings due to career progression or inflation.

The fund value approach is an actuarial calculation of benefits to the scheme members if the scheme was wound up. A surplus would mean a greater fund than the CETV whereas an underfunded scheme could result in a lower value. In addition, other benefits such as death in service benefits or discretionary benefits would add value to the members pension rights although each case must be assessed on its own merits as every scheme will have different rules.

The CETV from the provider will always be used as a basis for valuation and these other factors of the case will result in a suitably adjusted CETV reflecting the circumstances and specific needs of the parties on divorce.


Who can provide expert evidence?
Where the court is satisfied that expert evidence is reasonably required and justified, in the majority of cases the court would consider projections from the provider or an independent financial adviser (IFA) as being satisfactory, although occasionally an actuary may be involved but this would increase the costs.

In all cases the projections should be undertaken by a pension expert, regulated by the Financial Services Authority (FSA) and this could be someone with a qualification of G60 Pensions or equivalent. The parties should also have sufficient confidence that the pensions expert is knowledgeable and experienced in the area of pensions on divorce.

If the parties cannot agree on a single pensions expert, under part 35 of the Civil Procedure Rules 1998 the court can use its powers to instruct that evidence be provided by a single pensions expert.


What will a valuation report show?
The valuation report will determine the adjusted CETV producing the fair value of the retirement benefits and this incorporates the cash equivalent transfer value from the provider used as the basis for each pension arrangement. Apart from the fair value the report will reflect the specific needs of the parties such as the desired split of the percentage or the desired income for each party.

The report will then show the amount the former spouse will receive as a percentage or pension transfer lump sum and the projected pension income and tax free lump sum, whether this is to be applied as an earmarking order or pension sharing order. Where there is a defined benefit final salary pension the valuation report will consider both the past service reserve and fund value position of the scheme.

Other considerations will be for death in service benefits and discretionary benefits that will add value to the members pension rights as well as the tax implications. The impact of any percentage against the members pension rights due to an earmarking order or pension sharing order will be reflected by a calculation of the members reduced benefits, so the final position of both parties can be clearly seen.


How are the members benefits reduced?
The members benefits will be reduced by a pension debit as a result of a pension sharing order and implemented immediately after the decree absolute. For an earmarking order the implementation will not take effect until the scheme member chooses to retire.

For a money purchase scheme the members benefits will be reduced simply by a percentage of the fund being transferred to the former spouse. The member will have a reduced fund with no further consequences. For a final salary pension it is more complex and the provider must record the scheme members pension debit as a negative deferred pension that will reduce the benefits to the member at retirement age. If this is not done the provider would make an annual windfall profit from the members pension income and this would not be permitted.


How is a negative deferred pension applied?
A negative deferred pension applies only to a defined benefit final salary pension, applies only when the scheme member actually retires and takes retirement benefits and only when there is a pension sharing order in force. When a pension sharing order is implemented as shown in the step-by-step guide, the scheme provider will pay to the spouse the percentage stated and transferred as the pension credit. This will be applied as an internal transfer if dual membership is allowed or as an external transfer to a different pension arrangement.

For the scheme member the pension debit must be recorded as a negative deferred pension to be applied at retirement age. This process will take the percentage specified in the original pension sharing order, multiplied by the deferred pension income at the time of the divorce and then adjusted for inflation up to the retirement age. The total pension income at retirement age (not adjusted by the pension sharing order at the time of divorce) less the negative deferred pension will give the members actual pension income at retirement.

If instead the provider used the percentage specified in the pension sharing order, multiplied by the years of service accrued at the time of divorce, then this figure will be distorted and increased. This is because by the time the member retired the members final salary pension will have increased with earnings growth that is higher than inflation and the deduction at retirement age would likewise be higher. This would mean less pension income for the member and a windfall profit for the provider, a situation that is not allowed.


What benefits will the former spouse receive?
The former spouse could receive benefits from an earmarking order or a pension sharing order. For an earmarking order this will be a percentage of future member pension rights, being a tax free lump sum, pension income or lump sum death benefit or combination of all these benefits.

For a pension sharing order this will be a percentage of the fair value of retirement benefits that can be transferred to the former spouse as a lump sum and payable at retirement age as shown by the step-by-step guide.

For an internal transfer to a defined benefit scheme the former spouse will be entitled to all the benefits the member would receive. For example, the revaluation of deferred pension rights or if the former spouse retires early an actuarial adjustment for early retirement will be made in accordance with the scheme rules.