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1) 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.
2) 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
guideshows.
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.
3) 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.
4) 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.
5) 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.
6) 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.
7) 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.
8) 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.
Disclaimer:
Information found on this site does not amount to financial advice or
legal advice. Every time you access the website you agree to be bound
by the Terms and Conditions.
If you do not agree to be bound by them, you should not use the sharingpensions.co.uk
website. Before taking any action regarding pensions, pension on divorce
or any other financial or legal matter you should seek professional
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