Pensions, you either hate or tolerate them. Only truly sad masochists love pensions….
There are often postings on this forum about pensions and actuarial reports. Most recently, under a thread “Blocking pension share”, there is some discussion about whether the expense of commissioning a report from an actuary is necessary or justified. Rather than clog up that thread with a long post, I have decided to start a new one. That way you can read it if you want or do the sensible thing and move on to something more interesting and exciting.
If you decide to carry on reading, don’t say you have not been warned!
In the other thread, Louise11 wrote “…What an actuary should be working out is how much of the pension was accumulated during the period of marriage…” There is some argument about whether pension accumulated prior to the marriage should be included or excluded (that’s one for the lawyers), but otherwise I agree with this part of the posting.
If the outcome will definitely be a pension sharing or attachment order, then there is a good argument for not spending good money calculating whether the CETV is reasonable. However, this assumes that the way that the shares are implemented is not detrimental to either or both parties. Often they are not, and this is an important area where actuaries can and should add value.
Lawyers instruct actuaries and often there are joint instructions. Each lawyer asks for the report to address issues that favour the interest of their client. The subject of pre-marriage accumulation is a case in point. So the actuary is instructed to compile an increasingly complex report, which the lawyers can use to pursue the arguments, and up goes the cost of the actuaries report.
Professionally, the actuary’s report should look at the value of the pension before it is shared (or attached) and the value afterwards; to ensure that the proposed action will not cause financial harm. This is further work and adds to the cost, which is perhaps why it is possibly not always done. Many lawyers have the view that an actuary’s report is a commodity, and therefore they are instructed to cost rather than added-value. Lawyers shop around to get the cheapest quote. You wouldn’t choose your builder this way but this is often what happens. I don’t blame the lawyers, pension and actuarial work can be very confusing. Those of us involved in this work have failed to provide lawyers with the information needed to issue actuaries with suitably focused instructions. Some of us are working hard to remedy this.
Most people start looking at pensions with the idea of achieving a 50/50 split, but have given little thought to what this means. Share a house 50/50 and most can work out the likely result. Because pensions are promises of a future income stream, sharing 50/50 using the capital value will rarely result in equality of incomes. If that is what the parties have agreed that is fine, but often the objective is to achieve equality of income. That is where another set of problems arise.
Often, a pension sharing order will produce two pensions which will become payable at different times. Depending on the rules of the scheme, the first person may start drawing their pension many years before their ex-partner, so the incomes are far from equal in the beginning. This results in attempts to equalise the incomes at some point when both are receiving a pension; more expensive work for the actuary! The actuary’s instruction may be to calculate shares so that the income is equal when the youngest person reaches retirement age. This makes sense to many because it feels fair. But what about the pension income that the first pensioner receives for all those years before the second pensioner can retire? That can be taken into account in calculating the shares, more work for the actuary! But is that fair, isn’t the first pensioner likely to die before the second? If so, then this should be allowed for in the calculations. More work for ….
The idea of just splitting the pension 50/50 begins to sound like very good sense. This takes us back to how the pension share is implemented and this is the real elephant in the room. Pension shares are based on the Cash Equivalent Transfer Value. The value the scheme will give if the member leaves and takes their pension with them. Putting aside the fact that this is equivalent to a fire-sale value, and is therefore often fundamentally flawed, the CETV has another more significant impact if the pension is to be shared. The valuation assumes that the member has left. This is VERY significant because some schemes have different retirement ages for those who retire from the scheme and those who have left. Prime examples are public sector pension schemes for the uniformed services.
This takes us back to the main issue, how will the pension share be implemented and what is the impact on the value for each person and is there an overall detriment? Ignore these important issues and all you do is store up big problems for the future. Less than 10% of divorces result in a pension sharing order, I wonder why!
The simplest and often cheapest answer for many is offsetting. Quick, cheap and easy. A great idea if you get the value of the pension more or less right, but a big problem if you don’t. It is a fact that CETVs under value pensions. The issue for family lawyers and their clients is how significant is the difference. The answer is that the difference can be very significant. CETVs of a third of the fair value are not uncommon for some public sector schemes; others are often out by a fifth.
Don’t shoot the actuary, s/he is only the messenger. Just make sure that they are instructed to deliver the right message to the right people.
For example - recent govt consultation on pension transfer values/CETVs www.dwp.gov.uk/publications/dwp/2006/response-calc-ptv.pdf
About the use of the CETV for pension sharing on divorce :
"6. the concerns expressed about the use of the process in pension sharing are noted and will be given separate consideration."
Has it been reviewed ?
Pension Sharing Regs say use an actuary to value a pension in payment but not for a defined benefit pension not in payment - why not?
If you get Protected Rights transferred to you on divorce as safeguarded rights why can't you take tax free cash that portion?
Why can't the pension scheme give an illustration of the income from each pension after a 50/50 split as part of the sharing process to show how the pension is devalued.
At the moment people sharing pensions are at the mercy of solicitors who may never have shared a pension before - it should be regulated - ? by the FSA.
I am totally confused by all this. Question, wife and I are separating after 25 years, CETV has being requested. So, is its value based on the 25 years of marriage? Or what it might be when I retire? If the latter then not 50:50 is it. Can wife draw on pension before I retire at 65, that is, at 60 for her? Is it based on date of separation or divorce? Surely if I continue to contribute to pension after a divorce, wife is not entitled to this as well?
Pension sharing is a massive burr under my saddle!!!
My solicitor advised early in the proceedings that, given the length of the marriage, I could expect a 50:50 division of all assets. I didn't have a problem with that applying to the house and a piece of land we jointly own, but I certainly had a problem with it in respect of the pension.
My ex refused to make adequate pension provision for himself after 1992, when he walked out of his job, so all he has is a frozen pension with a CETV of just under 14K.
In the years after 1992 my ex REFUSED to pay into any other schemes, telling me that WE would live off MY pensions. Very selfish (and I told him that on numerous occasions) because, if I had died during that time he would have been very well off. Me? If he had died, I'd have been left with 3 kids and not enough money to pay for his funeral!
I can understand a system that seeks to protect a person who has not been in a position to build up a pension for themselves e.g. house wife/husband, but I could rant and rave all day at the unfairness of a system that forces someone who has 'done the right thing' to top up the pension fund of another who has passed up the opportunity in favour of sponging off their partner.
When I looked into the issue of pension sharing, of transfering my pension to the country I would subsequently be living in and the broader issue of my needs following retirement, I outlined to my solicitor all the disadvantages I saw, should I be forced to share my pension and top his up to a level that is similar to mine.
These disadvantages included:
paying tax of up to 45% to the UK and then to the Australian governments, should I choose to move my pension from the UK;
I was a mature full-time student for three years and was unaware that I was not entitled to NI credits, I therefore have a shortfall in respect of my state OAP;
As I have been living in Limbo between Australia and the UK during the protracted divorce, unable to do paid work due to visa restrictions and responsible for paying all my own legal fees because I cohabit during the time I am in Australia, I now have almost six years NI shortfall to make up;
Ex pats in Australia drawing the UK state OAP don't get the 'uplift' pensioners in the UK receive, so I will draw the same amount of money whether I live to 66 or a 106 years old;
In Australia you are supposed to plan for your own old age by having a 'superfund', so the Australian equivalent of the OAP is means tested.
Taking all these issues into account, I think you will appreciate my fears that, having passed what has now been calculated at 89.7% of one of my frozen pension funds over to my ex, I am likely to be a poorer pensioner than he.
My solcitor suggested engaging an actuary as this is the only way I can present my case - sounded great - but I've had to apply for Ancillary Relief due to the ex's continuing obstruction and I'm facing anticipated costs of around 6K.
I've already paid in excess of 4K in legal costs over the past two years and all I have so far is my Absolute. I simply cannot afford an actuary, it would be the straw that breaks the camel's back!!!
What you outline sounds great Peter, but it is out of reach to people in my position:(
As I understand it for practical reasons the legislators decided to use the CETV for the pension as the basis for valuation. In Scotland it is the pension accrued between the dates of marriage and separation that is relevant. However, a true valuation needs to take into account all the benefits on that portion of the pension. Also;-
1) CETV is what would be payable to another pension arrangement, if the member of a scheme left the scheme, and then transferred those pension rights. If the member is still in pensionable service, the true worth of the benefits will be greater than the CETV.
2) Some schemes award discretionary increases in benefits but ignore these increases when calculating CETVs so the CETV is lower than the true value.
3) CETV bases for public sector pension rights have been in place for some time, and don't reflect current economic or mortality conditions.
The general advice is if a detailed response from the trustees of the scheme isn't forthcoming, a specialist pension adviser should be nominated to recover and interpret the rules and regulations pertaining to that particular scheme.