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   Valuation legislation    Valuation options    Variation of settlement order
   Valuation method    Valuation report    Value protection annuity

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Valuation legislation
Although the court have been directed to have regard to the retirement benefits of a couple on divorce as set out in the Matrimonial Causes Act 1973 (MCA 73) and where offsetting pensions against other matrimonial assets has been preferred, there has been little specific guidance on the valuation of the many different pension arrangements from occupational pension schemes such as final salary pensions or personal pensions.

Within legislation introduced from 1 December 2000 by the Welfare Reform and Pensions Act 1999 (WRPA 99), there are provisions that require the use of the cash equivalent transfer value (CETV) as the prescribed method of valuation. This is outlined in subordinate legislation such as the Pensions on Divorce etc (Provision of Information) Regulations 2000, the Divorce etc (Pensions) Regulations 2000 or the Pension Sharing (Valuation) Regulations 2000.

The CETV assumes a scheme member will be leaving service on the valuation date and will not include other spouses pension rights. In circumstances where the CETV does not value the retirement benefits fairly the Divorce etc (Pensions) Regulations 1996, although now repealed and replaced by the Divorce etc (Pensions) Regulations 2000, offer some useful guidance in paragraphs 14 to 16.

In summary these paragraphs state that the regulations for the CETV can be disputed if not correctly applied, the courts are also not prevented from considering other information if the CETV Method is not sufficient. As the cash equivalent transfer value does not consider discretionary benefits or overseas pensions, so other valuation methods should be considered. By using methods such as past service reserve and the fund value approach plus other benefits not included in the CETV, it is possible to produce an adjusted CETV that reflects the circumstances and specific needs of the parties on divorce.


Valuation method
The Welfare Reform and Pensions Act 1999 (WRPA 99) introduced pension sharing but the detailed functioning is specified in subordinate legislation where the valuation method is shown as the cash equivalent transfer value (CETV). On receiving the order from the court the member of the pension arrangement must request the valuation from the provider within 7 days.

The pension provider has six weeks to return the valuation of the members pension rights. The CETV produced by the provider represents the pension fund value of the scheme members retirement benefits at the time of the valuation, assuming the member is leaving pensionable service at that time. The CETV is an appropriate valuation method for a money purchase scheme issued after 6 April 2001 and this could be a stakeholder pensions or a personal pension. For these plans 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 CETV Method 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 should therefore consider the spouses lost rights rather than the members pension rights as reflected in the cash equivalent transfer value.

This can be achieved by using the CETV as the basis of the calculation and by using methods such as past service reserve and the fund value approach it is possible to produce a suitably adjusted CETV that reflects the circumstances and specific needs of the parties on divorce.


Valuation options
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 value of the retirement benefits. When viewed with other matrimonial assets 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 (CETV) is the prescribed method in legislation, other valuation options are possible if permitted by the court or agreed by the parties. In particular for the spouses lost rights of a final salary pension within an employers pension scheme, a pension audit would use the CETV from the provider as the basis in order to arrive at a suitably adjusted CETV that reflects the circumstances and specific needs of the parties on divorce.

The adjusted CETV will 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). Also considered will be the fund value approach that is an actuarial calculation of the 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 Method whereas an underfunded scheme could result in a lower value. The valuation method used may need to be further 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 where pension income is taxable 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.


Valuation report
For a couple on divorce where pension arrangements form part of the matrimonial assets it will be necessary to conduct a pension audit of the members pension rights. In particular where the cash equivalent transfer value (CETV) from the provider does not satisfactorily determine a fair value of the retirement benefits, as would be the case with a final salary pension.

The pension audit will use the CETV from the provider as the basis to producing a suitably adjusted CETV that reflects the circumstances and specific needs of the parties. This 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 CETV Method.

In arriving at the adjusted CETV, the report will show the valuation options applicable to the pension arrangement such as past service reserve or fund value and the valuation if applied to offsetting, earmarking or pension sharing. A pensions consultant or actuary that is a pension expert with a recognised qualification such as G60 Pensions or equivalent should undertake the pension audit.

It is likely that a qualified expert would be a member of the Society of Pension Consultants (SPC).


Value protection annuity
Based on the pension simplification rules from April 2006, an additional feature of the pension annuity is the value protected annuity. This represents a return of original capital less annuity payments received in the event of the annuitant's death before the age of 75. The proceeds are payable less 35% tax.

At retirement an individual can buy an annuity and has the option to use an open market option to search for the highest pension annuity including a value protection 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.

If the annuitant selects the value protection annuity it will not be possible to add a guaranteed period. As the value protection annuity is only available up to the age of 75, the longer the annuity purchase is deferred the shorter the period of protection and this must be balanced with the benefits of a 10 year guaranteed period.


Variation of settlement order
As a result of the divorce of a couple and the granting of a court order in settlement against the matrimonial assets and financial matters during ancillary relief proceedings, the parties can vary a court order in the case of child maintenance and spouse maintenance.

Where there is a change in the financial needs such as income and expenditure of an individual the payment of maintenance can change simply by agreement between the parties. However, this should be ratified by the court by means of a variation of settlement order to ensure the new amount of maintenance can be enforced in the future.

Where maintenance is paid to a spouse it will be possible to capitalise future payments and agree a once and for all lump sum. Where there are other final orders on divorce that are not for maintenance then these cannot be varied. In exceptional circumstances where an error has been made by the court there can be a short time limit where the individual can appeal. In such cases professional advice should be sought from a solicitor as to whether there are grounds for such an appeal.

In terms of pensions, an earmarking order against the scheme members pension rights at retirement age and where the scheme allows a commutation to a tax free lump sum, under the Matrimonial Causes Act 1973 (MCA 1973) the former spouse can exercise the right to commutation to any extent. This variation may be applied if the former spouse requires a higher level of pension income rather than a tax free lump sum.

In terms of a pension sharing order a variation will remain possible after the decree nisi has been granted but where a decree absolute has not as yet been made, thereby preventing the pension sharing 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.

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