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
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
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
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
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
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
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
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
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
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
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.