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1) What method is used to value
retirement benefits?
The method prescribed by the Welfare Reform and Pensions
Act 1999 (WRPA 99) to determine the value of a members
retirement benefits is the cash equivalent transfer value
(CETV).
The CETV
method was chosen because it has already been established
to calculate the value of a members pension rights from
an occupational pension scheme or personal pension, where
members
leaving early wish to transfer accrued benefits to
another pension arrangement. It is therefore a calculation
that can be easily obtained from the provider.
However, on divorce the member of a defined
benefit scheme will usually not be an early leaver
and the CETV will therefore not give a fair value of the
retirement benefits, although this will be used as a basis
for any other options applied to determine a fully valued
CETV.
2) Will the court accept expert evidence other than
the CETV?
The court will accept expert
evidence to establish a fair value for the members
pension rights during ancillary relief proceedings as
the step-by-step
guide shows.
The court has regard to rule 2.51B of the Family Proceedings
Rules 1991 that states the overriding objective of the
court must be to ensure the parties are on an equal footing
and deal with the case in ways which are proportionate
to the amount of money involved, to the complexity of
the issues and to the financial position of each party.
Therefore the court will have to be satisfied that the
pension arrangement is sufficiently complex and the value
significant relative to other matrimonial
assets to justify the cost of engaging a pensions
expert.
3) What methods can be used other than the CETV?
The CETV will be used as a basis for valuation but is
then adjusted to reflect the specific needs of the parties.
Expert evidence provided by a pension audit would further
consider both the past
service reserve and fund value approach. The past
service reserve takes account of the fact that a defined
benefit scheme, such as a final salary pension, will maintain
reserves in anticipation of increases in pensionable earnings
due to career progression or inflation.
The fund
value approach is an actuarial calculation of benefits
to the scheme members if the scheme was wound up. A surplus
would mean a greater fund than the CETV whereas an underfunded
scheme could result in a lower value. In addition, other
benefits such as discretionary
benefits or death in service benefits would add value
to the members pension rights although each case must
be assessed on its own merits as every scheme will have
different rules.
The CETV from the provider will always be used as a basis
for valuation and these other factors of the case will
result in a suitably adjusted
CETV reflecting the circumstances and specific needs
of the parties.
4) Who can provide expert evidence?
Where the court is satisfied that expert evidence is reasonably
required and justified, in the majority of cases the court
would consider projections from the provider or apensions
consultant as being satisfactory, although occasionally
an actuary may be involved but this would increase the
costs.
In all cases the projections should be undertaken by a
pensions expert that with a qualification of G60 Pensions
or equivalent. Also the parties should have sufficient
confidence that the pensions
expert is knowledgeable in the area of pensions on
divorce. It is likely that a qualified expert would be
a member of the Society
of Pension Consultants (SPC).
If the parties cannot agree on a single pensions expert,
under part 35 of the Civil Procedure Rules 1998 the court
can use its powers to instruct that evidence be provided
by a single pensions expert.
5) What will a valuation report show?
The valuation report will determine the adjusted CETV
producing the fair value of the retirement benefits and
this incorporates the cash
equivalent transfer value from the provider used as
the basis for each pension arrangement. Apart from the
fair value the report will reflect the specific needs
of the parties such as the desired split of the percentage
or the desired income for each party.
The report will then show the amount the former spouse
will receive as a percentage or pension
transfer lump sum and the projected pension income
and tax free lump sum, whether this is to be applied as
an earmarking order or pension sharing order. Where individual
is a member of a defined benefit final salary pension
the valuation
report will consider both the past service reserve
and fund value position of the scheme.
Other considerations will be for death in service benefits
and discretionary benefits that will add value to the
members pension rights as well as the tax implications.
The impact of any percentage against the members pension
rights due to an earmarking order or pension sharing order
will be reflected by a calculation of the members
reduced benefits, so the final position of both parties
can be clearly seen.
6) How are the members benefits reduced?
The members benefits will be reduced by a pension
debit as a result of a pension sharing order and implemented
immediately after the decree
absolute. For an earmarking order the implementation
will not take effect until the scheme member chooses to
retire.
For a money purchase scheme the members benefits will
be reduced simply by a percentage of the fund being transferred
to the former spouse. The member will have a reduced fund
with no further consequences. For a final
salary pension it is more complex and the provider
must record the scheme members pension debit as a negative
deferred pension that will reduce the benefits to
the member at retirement age. If this is not done the
provider would make an annual windfall profit from the
members pension income and this would not be permitted.
7) How is a negative deferred pension applied?
A negative deferred pension applies only to a defined
benefit final salary pension, applies only when the scheme
member actually retires and takes retirement benefits
and only when there is a pension sharing order in force.
When a pension sharing order is implemented as shown in
the step-by-step
guide, the scheme
provider will pay to the spouse the percentage stated
and transferred as the pension
credit. This will be applied as an internal transfer
if dual membership is allowed or if not, as an external
transfer to a different pension arrangement.
For the scheme
member the pension debit must be recorded as a negative
deferred pension to be applied at retirement age. This
process will take the percentage specified by the court
in the original pension
sharing order, multiplied by the deferred pension
income at the time of the divorce and then adjusted
for inflation up to the retirement age. The total pension
income at retirement age (not adjusted by the pension
sharing order at the time of divorce) less the negative
deferred pension will give the members actual pension
income at retirement.
If instead the
provider used the percentage specified in the pension
sharing order, multiplied by the years of service accrued
at the time of divorce,
then this figure will be distorted and increased. This
is because by the time the member retired the members
final salary will have increased with earnings growth
that is higher than inflation and the deduction at retirement
age would likewise be higher. This would mean less pension
income for the member and a windfall profit for the
provider, a situation that is not allowed.
8) What benefits will the former spouse receive?
The former spouse could receive benefits from an earmarking
order or a pension sharing order. For an earmarking
order this will be a percentage of future member
pension rights, being a tax free lump sum, pension income
or lump sum death benefit or combination of all these
benefits.
For a pension sharing order this will be a percentage
of the fair value of retirement
benefits that can be transferred to the former spouse
as a lump sum and payable at retirement age as shown
by the step-by-step
guide.
For an internal transfer to a defined benefit final
salary pension the former spouse will be entitled to
all the benefits the member would receive. For example,
the revaluation of deferred pension rights or if the
former spouse retires early an actuarial adjustment
must be made for the spouses early
retirement in accordance with the scheme rules.
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