Introduction
A
pension audit undertaken by a pensions consultant
that is qualified as a pensions on divorce expert,
can potentially add a substantial amount to the
cash equivalent value of retirement benefits. It will be necessary where the retirement benefits
are significant to other matrimonial assets, complex
in nature as with a defined benefit scheme and where
the providers issued CETV
Method does not produce a fair value for the
parties.
There are certain individuals
that would benefit greatly from a pension audit.
These are people that are divorcing after one year
and their spouse has greater pension provision in
a final salary pension or especially a public
service scheme such as civil service, NHS, teachers,
police, fire services or armed forces and
have also been in public service all their working
life. In addition if this individual is 4 or more years
younger than their spouse who is now aged 45 or
over, then it is very likely that the cash equivalent
value from the scheme administrator will not reflect
the true value of the spouse's pension rights.
It may be the case that the spouse of a final
salary pension or public service scheme has
retired and is already receiving a pension income,
therefore a different approach to that shown in
the step-by-step
guide requiring the CETV Method,
may have to be applied resulting in a suitably adjusted
CETV. Valuing pension rights is not a regulated activity
as specified by the Financial
Services and Markets Act 2000 (FSMA) although advice
given for an external transfer is regulated activity,
and can only be provided by an authorised person.
Pensions expert
During ancillary relief the court may require further expert
evidence to determine the fair value of a complex pension
arrangement such as a defined benefit scheme where such retirement
benefits are expected to represent a significant proportion
of the matrimonial
assets and be a high value in absolute terms. Nevertheless
the cost of such expert evidence must be justified and the
court will consider all aspects of the case, usually at the
first appointment.
In most cases the court would consider projections
from the provider or a pensions consultant as being satisfactory
although occasionally an actuary may be involved but this
would increase the costs. In all cases projections should
be undertaken by a pensions expert. As no product is involved,
this person will be a fee
based adviser with a qualification of G60 Pensions or
equivalent. It is likely that a qualified expert would be
a member of the Society
of Pension Consultants (SPC).
Furthermore the permitted
activity 13 rule of the Financial Services Authority Handbook
of Rules and Guidance requires an pensions consultant with
the G60
Pensions qualification and applies to pension transfer
advice for funds of a defined benefits occupational pension
scheme where an external transfer is required as a result
of a pension sharing order.
During ancillary
relief proceedings the parties may agree to have expert
evidence to determine the fair value of the retirement benefits.
If so a single pensions expert may be recommended through
their solicitors or the parties could select one independently
and instruct the expert to work with the solicitors when conducting
the pension audit. Such action would be presented at the first
appointment as shown in the step-by-step
guide. In all cases the parties should have
sufficient confidence that the pensions expert is knowledgeable
on the area of pensions on divorce.
audit procedure
A pensions consultant will be responsible for the whole pension
audit process of valuing the pension benefits. This
is important as it will ensure that the work done by the family
lawyer as an exempt
professional firm is distinguished from the regulated
work performed by an pensions consultant. If a pension sharing
order is granted and dual membership by the scheme is not
permitted, the former spouse must make an external
transfer. Advice given for the pension
transfer is regulated activity.
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 quote offering guaranteed rates.
Apart from the regulatory aspects
of the audit where there is an external transfer, the advantage
to the solicitor is that they can delegate the time consuming
process of collecting pension data to the pensions consultant.
To keep the costs down for the parties
the pensions consultant should charge a fixed fee for the
pension audit rather than an initial fee plus basis. There
will usually be further requirements asked of the pensions
expert after the valuation report is produced and having an
open ended agreement could increase costs for the parties.
What should the initial stage include within the fixed fee,
is as follows:
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No limits to the number of pensions
involved; |
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|
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Collecting pension data from the provider; |
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|
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Interrogating the data and correction
of errors; |
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An initial valuation report showing
the adjusted CETV gain over the CETV Method. This being
applied as required by the client and their solicitor
to earmarking,
pension sharing and offsetting or calculated percentage to give each party their required
pension incomes; |
The initial audit procedure is to
collect pension data and although this sounds straightforward
it is often the case that the wrong information is given by
the public
service scheme or occupational
pension scheme.This is because the administrators working
for these schemes do not need to know the actuarial basis
of how the scheme works or what effect a divorce has on the
members pension rights.
The resulting information from a request
must be carefully interrogated and any errors corrected before
proceeding to the valuation stage. If this is not done, incorrect
data used in the data collection stage will be used in the
valuation process and will distort the value of the retirement
benefits. This would influence the decisions made between
the parties, any decision made by a court in a final hearing
and potentially result in a negative material impact on the
former spouse.
Valuation approach
The valuation approach will be influenced by the specific
requirements of the parties rather than simply producing a
single value for the retirement benefits. For example, the
parties may request an equal pension
income from the pension arrangements and this will mean
calculations based on the life expectancy of the member and
former spouse. Statistically women live longer than men and
therefore require a larger fund to provide the same pension
income. This means that the percentage stated as part of the pension sharing
order will not be an equal split, but will be higher for
the wife.
The valuation report produced as a result
of the pension audit would explain what 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 scheme administrators cash equivalent transfer value
(CETV).
The calculation is based on the CETV
method that assumes the member leaving
service on the day of valuation and may not satisfactorily
determine a fair value of the retirement benefits, as would
be the case with a final salary pension. The report will show
the valuation options applicable to the pension arrangement
where an adjusted
CETV is required reflecting the circumstances and specific
needs of both parties. This may consider such methods as past
service reserve or fund value and show the valuation result,
if applied to offsetting, earmarking or pension
sharing.
This may include any death in service benefits,
widows pension, any future increases in benefits to the member
and the likely increase in earnings of the member up to retirement.
The report will consider the tax implications of pensions
as opposed to a cash settlement on divorce and a consideration
of any distortion of the members
pension rights due to the current funding of the scheme.
In summary, some of the factors to
consider will be:
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Special features of unfunded public
service pension schemes; |
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State pensions; |
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Ill health and retirement benefits; |
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Death in service benefits; |
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Discretionary increases to pensions
in payment; |
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Solvency of pension schemes; |
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Differences in age and life expectancy; |
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Improving mortality. |
The impact of any
percentage against the members pension rights due to an earmarking
order or pension sharing order will be reflected in the report
by a calculation of the members reduced benefits or negative
deferred pension at the normal pension age, so the final
position of both parties can be clearly seen.
Pension audit examples
The following table summarises the findings from recent cases
of UK divorce and the value added by the the pension audit.
|
Case A |
Case B |
Case C |
|
A |
A |
A |
|
25 |
34 |
22 |
|
23 |
35 |
40 |
|
£18,100 |
£30,100 |
£33,300 |
|
£165,600 |
£292,600 |
£399,700 |
|
£219,000 |
£396,300 |
£557,000 |
|
£53,400 |
£103,700 |
£157,300 |
|
It is often the case that once the
parties realise the fair value of the retirement benefits
rather than just the CETV from the scheme administrator, more
negotiation will be required through their solicitors to reach
a settlement. The solicitor for the former spouse can make
an offer to the other party as the step-by-step
guide shows and include the adjusted value.
Any
negotiations may require further pension calculations
from the pensions consultant to help with the process
or if sufficient time has elapsed, up to date calculations
will need to be done again. This is why it is worthwhile
for the parties to pay a fixed fee rather than an initial
fee plus for expert evidence.
If nearing retirement and requiring an income the spouse may need further advice where there is an internal or external transfer for a money purchase scheme to buy an annuity. Here there is an option to use an open market option to search for the highest pension annuity, adding all the features necessary such as escalation, frequency of payment or a new survivors income. 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 quote offering guaranteed rates.
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