Who can benefit from a pension audit?
In particular, in cases of divorce
after one year where your spouse has greater pension provisions
than you in a final salary pension or a public
service scheme such as civil service, NHS, teachers,
police, fire services or armed forces.
This is especially the case if they have been in public
service all their working life, and in particular are
now aged 45 or over. Also, if
you are 4 or more years younger than your spouse, you
are likely to be a particular beneficiary of a pension
If you are not sure, use the analysis
rating table. This will show you if your spouse's
pension arrangements are an A (significant) rating or
B (moderating) where you would benefit from a pension
audit report. On the other hand, if you have a rating
of C (negligible) or D (no benefit) then the cash equivalent
transfer value (CETV)
from the provider should be used.
When is a pension audit necessary?
For pension sharing the prescribed method of valuing the
retirement benefits is the cash
equivalent transfer value (CETV). However, in cases
where the pension arrangements are complex and the value
of the benefits significant relative to other matrimonial
assets and in absolute terms, such as a member in a defined
benefit scheme, the CETV
Method used by the scheme provider is unlikely to
reflect a fair value of the members pension rights.
On many occasions a member of an occupational pension
such as a public service scheme may already be receiving
a pension income and an adjusted
CETV reflecting the circumstances and specific needs
of the parties will have to be used. In these cases expert
evidence from an pensions consultant, that is qualified
as a pensions expert, can conduct a pension audit to determine
a fair value of the retirement benefits.
Does the court accept expert evidence?
There are certain conditions where expert
evidence is accepted. Under the Matrimonial Causes
Act 1973 (MCA 73) the court will work with the couple
on divorce to achieve a clean
break. If agreement is reached between the couple
through their solicitors to use a single pensions expert
to determine a fair value of the members pension rights,
then the court will accept this expert evidence and the
If no such agreement has been reached by the parties,
then at the first
appointment during ancillary relief proceedings the
court will consider the pension arrangements as the step-by-step
guide shows, having regard to rule 2.51B
of the Family Proceedings Rules 1991. Only if the court
considered the retirement benefits to be complex and significant
relative to other matrimonial assets would it require
expert evidence in the form of a pension audit. The court
would also have to be satisfied that the extra cost incurred
by the pension
audit was justified.
Who can carry out a pension audit?
The Financial Services and Markets Act 2000 (FSMA) came
into force from midnight on the 30 November 2001 and this
now means that only a person authorised directly by the
Financial Services Authority (FSA) can give advice in
investments and pensions. The majority of family law firms
have opted to be designated as exempt
professional firms and this means that the work they
do will not be regulated activity. The valuation of pension
rights is not regulated activity but advising on a pension
transfer is regulated. An IFA regulated by the FSA can give advice on the pensions and
investment aspect of a divorce.
Where a pension audit is required the pensions consultant
should be qualified as a pensions
expert and have the G60 Pensions or equivalent. G60
is also recognised under permitted activity 13 of the
FSA Handbook of Rules and Guidance as being essential
when advising on complex pension arrangements in occupational
pension schemes where an external
transfer could occur as a result of a pension sharing
order, even if this is by default because the existing
scheme does not offer dual membership and in effect no
advice appears to be given.
When during divorce procedures would a pension audit
Assuming there are complex and significant pension arrangements
in a defined benefit scheme that justify the use of a
pensions expert, a pension audit should start as early
as possible when the parties are involved in ancillary
relief proceedings. As the step-by-step
guide shows, this starts will an application
being made to the court.
This could be after the divorce procedure is final but
certainly sometime after the court has granted the decree
nisi. The parties should come to an agreement through
their solicitors to appoint a single pensions expert after
the petitioner has applied for a financial order to divide
the matrimonial assets but before the first appointment.
This should be done before agreement is reached about
the other matrimonial assets as the fair value of the
members retirement benefits as a fully valued CETV may
be much higher than the CETV
Method used by the scheme administrator and therefore
have an important impact on the division of all assets.
At the first appointment if the parties have not come
to an agreement over expert evidence the court will determine
if further information is required and if necessary, the powers
of the court can instruct that a single pensions expert
Can both parties appoint their own pensions expert?
Both parties could appoint their own pensions expert during
ancillary relief proceedings, however, by the final
hearing the court will expect any expert evidence
to be provided by a single pensions expert. In the early
stages two pensions experts mean that the parties will
have an extra cost in valuing the retirement benefits.
If the parties could come to an agreement through their
solicitors to use one pensions expert to calculate a fair
value, this would keep the costs down.
If the parties use their own experts and different values
are reached for the retirement benefits, this will create
animosity between the parties, prolong the legal process
and increase costs further. Ultimately if the parties
cannot agree on a single pensions expert either at the
first appointment or at financial dispute resolution (FDR)
the court will apply its power under part 35 of the Civil
Procedure Rules 1998 to instruct that expert evidence
be given by a single pensions expert as the step-by-step
guide shows, thereby negating the action
to have two pension experts in the first place.
How do you choose a single pensions expert?
Firstly there must be agreement between the parties through
their solicitors to use a single pensions expert. The
pensions expert will usually be a pensions consultant
with the qualification of G60 Pensions or equivalent.
The parties should also have sufficient confidence that
the pensions expert is knowledgeable in the area of pensions
The pensions expert could be one that is recommended through
the solicitors of the parties or selected by the parties
independently and instructed to work with solicitors when
conducting the pension audit. To keep the costs down,
the parties should find a pensions expert that will undertake
the pension audit on a fixed fee basis as often there
will be additional work to be performed after the valuation
report is completed.
How is a pensions expert remunerated?
For work done on a pension audit during divorce to determine
a fair value of the retirement
benefits, the pensions expert will be remunerated
by way of a fee. To keep the costs down both the parties
should select a single pensions expert that will usually
be a pensions consultant or actuary that will work on
a fixed fee basis.
This means that if after the valuation
report is completed and further work is required from
the pensions consultant (because the parties may now have
to re-negotiate the share of matrimonial assets) at least
there will be no further costs from the pensions consultant.
Where the parties agree to appoint a single pensions expert
the cost of the pension audit is split between both parties,
unless agreed otherwise, and the fee can be paid directly
to the pensions consultant or via the solicitors when
work is completed.
How much will it cost?
If after using the analysis
rating table it show your spouse's pension arrangements
are an A (significant) rating or B (moderating), you would
benefit from a pension
audit report, and you should expect a report to
cost approximately £1,000 plus vat.
What information will a valuation report provide?
The valuation report will reflect the requirement of the
parties as well as to determine a fair value of the retirement
benefits.The report will show the fair value for all the
pension arrangements of the parties as a suitably adjusted
CETV, this being based on the cash equivalent transfer
value obtained from the provider. For a defined benefit
final salary pension the details of all benefits including
the funding position of the occupational pension scheme
will be reflected in the fair value.
The benefits will be shown in terms of applying to earmarking and also to pension
sharing. Whatever the requirements of the parties
for a percentage of retirement benefits, for each scenario
required the members
reduced benefits will also be shown. For pension sharing
the report will also indicate whether the former spouse
is allowed dual membership or if only an external transfer
In many cases the spouse is nearing retirement and requires a pension income from either an 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 annuity quote offering guaranteed rates.