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  Valuing cash equivalents   Variation of orders
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Valuing cash equivalents
The lump sum value in today's terms of the rights accrued within a members pension scheme assuming the member left service transferring the pension fund to an alternative pension arrangement, is known as the cash equivalent transfer value (CETV).

The CETV Method does not make any allowance for death in service benefit, discretionary benefits, widows pension, or any future increases in benefits of the member and the associated pensionable service expectations. The CETV is a well established method and applies to the valuation of pension rights for members leaving early from a personal pension or an occupational pension scheme where the scheme member wishes to transfer accrued rights to another pension arrangement.

The calculation for the CETV in the context of early leavers is applied under section 97 of the Pension Schemes Act 1993 (PSA 93) and on divorce, the calculation of the CETV of retirement benefits during ancillary relief proceedings essentially reflects these principles.The CETV will be subject to the minimum funding requirement (MFR) and if the fund value is in deficit, the pension transfer may reflect this as a percentage reduction.

In the case of divorce, the pension credit as the result of a pension sharing order may be reduced by the percentage by which the scheme is underfunded at the date of valuation. If the payment of the CETV is delayed beyond the implementation period allowable by the pension sharing order, then the CETV must be recalculated. The higher of the recalculated amount and the original CETV will be paid with interest in line with regulations.


Other valuation options
As a result of the landmark case White vs White (2000) there is a strong emphasis that on divorce, deciding on the division of matrimonial property and financial matters should begin with and assume an equal share between the parties with the final determination being expressed as a percentage of the retirement benefits valuation.

For a couple on divorce and during ancillary relief proceedings that involve pension arrangements, a pension audit of the members pension rights is important to establish a fair valuation of the retirement benefits from which the court will be able to apply a percentage between the parties if the case progressed to a final hearing. When viewed with other matrimonial property and appreciating that pensions are not necessarily realisable assets, it will be possible to decide the division of assets between the parties by using offsetting, earmarking or pension sharing.

Although the cash equivalent transfer value is the prescribed method in legislation, other valuation options resulting in an adjusted CETV are possible if permitted by the court or agreed by the parties. The CETV Method is an appropriate valuation method for a money purchase scheme issued after 6 April 2001 such as stakeholder pensions or a personal pension where a single charge is made to the pension fund value and no penalties if a pension transfer is applied. However for more complex arrangements within an occupational pension scheme such as a final salary pension, the basic CETV from the provider will not include death in service benefits, spouses pension rights, discretionary benefits issued by the scheme trustees and future expectations of the scheme member.

The valuation method will be based on the CETV from the provider but will also consider the spouses lost rights rather than only the members pension rights as reflected in the cash equivalent transfer value. To determine the spouses lost rights for a final salary pension within an employers pension scheme, a pension audit would have to consider valuation methods such as the past service reserve. This takes into account the fact that a final salary pension will maintain reserves in anticipation of increases in pensionable earnings due to career progression or inflation linked to the retail price index (RPI).

The fund value approach is an actuarial calculation of benefits to the member if the scheme were wound up. A surplus may mean a pension fund value for the scheme member greater than the CETV whereas an underfunded scheme could result in a lower value. The valuation method used may need to be adjusted to reflect the approach in dividing the assets, such as offsetting, earmarking or pension sharing.

For example, offsetting retirement benefits would exchange usable assets for unrealisable retirement benefits and pension sharing will result in a clean break financially today whereas earmarking will require a projection of benefits to a retirement age. A pensions consultant with the requisite qualification such as G60 Pensions or equivalent should undertake a pension audit for the valuation options.


Pension sharing procedures
The procedures for pension sharing are specified by subordinate legislation through regulations and are similar to those of earmarking. When the court makes a pension sharing order it must attach to this an annex to be sent to each person responsible for the pension arrangement, this usually being the scheme administrator. The administrator then has 4 months to implement the pension sharing order and the step-by-step guide details this procedure.

The provider must furnish within 21 days to the court or scheme member information on the pension arrangement and if they fail to provide the information they could be fined by the occupational pensions advisory board (OPRA) for the breach of the requirements. The provider will have six weeks to make the valuation of the members pension rights or accrued retirement benefits. The valuation requested will be the cash equivalent transfer value and in England and Wales this will also include retirement benefits accrued prior to the marriage.

Once the court has determined the percentage allocation to a pension credit to the former spouse the provider of the pension arrangement will have four months to action either an internal transfer, which for example is the only option for an unfunded public service scheme, or if this option is not permitted to make an external transfer.

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 offering guaranteed rates.


Variation of orders
On divorce of a couple and the granting of a court order in settlement against the matrimonial property and financial matters during ancillary relief proceedings, the court has the power to make a variation of settlement order by way of reduction, suspension, discharge or extinguishments or to make an order subject to any restriction or exclusion of any parties interest under that settlement as specified in that order.

Although an existing earmarking order can be varied in the future, there are limits on the variation of pension sharing orders. A pension sharing order cannot be made until after the granting of the decree nisi and will not take effect until after the court has finally granted the decree absolute. Under section 31 of the Matrimonial Causes Act 1973 (MCA 73) it is possible to apply for a variation of a pension sharing order at this time, at which point the variation will prevent the order from taking effect.

However, where a pension sharing order has taken effect the appeal will therefore be out of time due to provisions of the Divorce etc (Pensions) Regulations 2000, as well as new provisions in the MCA 1973 inserted by the Welfare Reform and Pensions Act 1999 (WRPA 1999) protecting the pension scheme and scheme trustees from variation.


Limitations summary
The introduction of pension sharing from 1 December 2000 has been seen as a significant improvement on the extent of earmarking limitations involving pension arrangements, as the parties can achieve a clean break of the financial matters. However, there are some limitations of its use in that a pension sharing order can only be made on divorce or nullity of marriage. This means that for judicial separation any ancillary relief proceedings will have access only to offsetting and earmarking to resolve the retirement benefits.

A pension sharing order will not be made where there is an existing earmarking order applied to a particular pension arrangement as specified in section 24B of the MCA 73. This will apply to an order from a previous marriage as well as to the marriage in question. It is possible therefore for a scheme member with several pensions to avoid a pension sharing order to the detriment of the current partner, by making a pension transfer to the earmarked pension arrangement.

A variation of settlement order against pension sharing order will not be allowed once the decree nisi has been made absolute. This is due in part to new provisions in the MCA 73 that protect the pension scheme against further variation. However, other pension arrangements of the scheme member not subject to any orders could be so at a later date. The scheme member could then minimise future liabilities by directing contributions to the pension arrangement subject to the pension sharing order.

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  70 £7,660  
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