Introduction
A pension audit undertaken by a pensions consultant that is qualified as a pensions on divorce expert, can potentially add a substantial amount to the cash equivalent value of retirement benefits. It will be necessary where the retirement benefits are significant to other matrimonial assets, complex in nature as with a defined benefit scheme and where the providers issued CETV Method does not produce a fair value for the parties.

There are certain individuals that would benefit greatly from a pension audit. These are people that are divorcing after one year and their spouse has greater pension provision in a final salary pension or especially a public service scheme such as civil service, NHS, teachers, police, fire services or armed forces and have also been in public service all their working life. In addition if this individual is 4 or more years younger than their spouse who is now aged 45 or over, then it is very likely that the cash equivalent value from the scheme administrator will not reflect the true value of the spouse's pension rights.

It may be the case that the spouse of a final salary pension or public service scheme has retired and is already receiving a pension income, therefore a different approach to that shown in the step-by-step guide requiring the CETV Method, may have to be applied resulting in a suitably adjusted CETV. Valuing pension rights is not a regulated activity as specified by the Financial Services and Markets Act 2000 (FSMA) although advice given for an external transfer is regulated activity, and can only be provided by an authorised person.

Pensions expert
During ancillary relief the court may require further expert evidence to determine the fair value of a complex pension arrangement such as a defined benefit scheme where such retirement benefits are expected to represent a significant proportion of the matrimonial assets and be a high value in absolute terms. Nevertheless the cost of such expert evidence must be justified and the court will consider all aspects of the case, usually at the first appointment.

In most cases the court would consider projections from the provider or a pensions consultant as being satisfactory although occasionally an actuary may be involved but this would increase the costs. In all cases projections should be undertaken by a pensions expert. As no product is involved, this person will be a fee based adviser with a qualification of G60 Pensions or equivalent. It is likely that a qualified expert would be a member of the Society of Pension Consultants (SPC).

Furthermore the permitted activity 13 rule of the Financial Services Authority Handbook of Rules and Guidance requires an pensions consultant with the G60 Pensions qualification and applies to pension transfer advice for funds of a defined benefits occupational pension scheme where an external transfer is required as a result of a pension sharing order.

During ancillary relief proceedings the parties may agree to have expert evidence to determine the fair value of the retirement benefits. If so a single pensions expert may be recommended through their solicitors or the parties could select one independently and instruct the expert to work with the solicitors when conducting the pension audit. Such action would be presented at the first appointment as shown in the step-by-step guide. In all cases the parties should have sufficient confidence that the pensions expert is knowledgeable on the area of pensions on divorce.


audit procedure
A pensions consultant will be responsible for the whole pension audit process of valuing the pension benefits. This is important as it will ensure that the work done by the family lawyer as an exempt professional firm is distinguished from the regulated work performed by an pensions consultant. If a pension sharing order is granted and dual membership by the scheme is not permitted, the former spouse must make an external transfer. Advice given for the pension transfer is regulated activity.

In many cases the spouse is nearing retirement and requires a pension income from either the internal or external transfer. Where this is a money purchase scheme, the spouse can use the pension fund to buy an annuity and has the option to use an open market option to search for the highest pension annuity. Once you have purchased an annuity it cannot be changed, so learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised pension annuities quote offering guaranteed rates.

Apart from the regulatory aspects of the audit where there is an external transfer, the advantage to the solicitor is that they can delegate the time consuming process of collecting pension data to the pensions consultant.

To keep the costs down for the parties the pensions consultant should charge a fixed fee for the pension audit rather than an initial fee plus basis. There will usually be further requirements asked of the pensions expert after the valuation report is produced and having an open ended agreement could increase costs for the parties. What should the initial stage include within the fixed fee, is as follows:

The initial audit procedure is to collect pension data and although this sounds straightforward it is often the case that the wrong information is given by the public service scheme or occupational pension scheme.This is because the administrators working for these schemes do not need to know the actuarial basis of how the scheme works or what effect a divorce has on the members pension rights.

The resulting information from a request must be carefully interrogated and any errors corrected before proceeding to the valuation stage. If this is not done, incorrect data used in the data collection stage will be used in the valuation process and will distort the value of the retirement benefits. This would influence the decisions made between the parties, any decision made by a court in a final hearing and potentially result in a negative material impact on the former spouse.


Valuation approach
The valuation approach will be influenced by the specific requirements of the parties rather than simply producing a single value for the retirement benefits. For example, the parties may request an equal pension income from the pension arrangements and this will mean calculations based on the life expectancy of the member and former spouse. Statistically women live longer than men and therefore require a larger fund to provide the same pension income. This means that the percentage stated as part of the pension sharing order will not be an equal split, but will be higher for the wife.

The valuation report produced as a result of the pension audit would explain what would be a fair value of the retirement benefits, specifically with regard to the spouses lost rights as a result of divorce or nullity of marriage or judicial separation. These rights are different from the members pension rights as reflected in the scheme administrators cash equivalent transfer value (CETV).

The calculation is based on the CETV method that assumes the member leaving service on the day of valuation and may not satisfactorily determine a fair value of the retirement benefits, as would be the case with a final salary pension. The report will show the valuation options applicable to the pension arrangement where an adjusted CETV is required reflecting the circumstances and specific needs of both parties. This may consider such methods as past service reserve or fund value and show the valuation result, if applied to offsetting, earmarking or pension sharing.

This may include any death in service benefits, widows pension, any future increases in benefits to the member and the likely increase in earnings of the member up to retirement. The report will consider the tax implications of pensions as opposed to a cash settlement on divorce and a consideration of any distortion of the members pension rights due to the current funding of the scheme. In summary, some of the factors to consider will be:

The impact of any percentage against the members pension rights due to an earmarking order or pension sharing order will be reflected in the report by a calculation of the members reduced benefits or negative deferred pension at the normal pension age, so the final position of both parties can be clearly seen.

Pension audit examples
The following table summarises the findings from recent cases of UK divorce and the value added by the the pension audit.

It is often the case that once the parties realise the fair value of the retirement benefits rather than just the CETV from the scheme administrator, more negotiation will be required through their solicitors to reach a settlement. The solicitor for the former spouse can make an offer to the other party as the step-by-step guide shows and include the adjusted value.

Any negotiations may require further pension calculations from the pensions consultant to help with the process or if sufficient time has elapsed, up to date calculations will need to be done again. This is why it is worthwhile for the parties to pay a fixed fee rather than an initial fee plus for expert evidence.

If nearing retirement and requiring an income the spouse may need further advice where there is an internal or external transfer for a money purchase scheme to buy an annuity. Here there is an option to use an open market option to search for the highest pension annuity, adding all the features necessary such as escalation, frequency of payment or a new survivors income. Once you have purchased an annuity it cannot be changed, so learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised annuity quote quote offering guaranteed rates.