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FORUM DIGEST: Pensions - Final Salary Pensions

FORUM DIGEST: Pensions - Final Salary Pensions


http://www.wikivorce.com/divorce/Divorce-Forum/Pensions/22623-Final-Salary-Pensions.html MAIN POINTS DISCUSSED AS AT 26TH OCTOBER 2008 ------------------------------------------------------------------------------------------------------------------------------------- QUESTIONING WHETHER CETVs ARE UNDERVALUED MORTALITY ISSUES ADDITIONAL STATE PENSION PENSION OFFSETTING CAN A PENSION SHARE ORDER BE IMPOSED ------------------------------------------------------------------------------------------------------------------------------------- QUESTIONING WHETHER CETVs ARE UNDERVALUED Posted by evanslm - 2008/05/16 14:22 Does anyone know if a cetv valuation of a final salary pension reflects its actual worth? I'm aware that a cetv is a transfer valuation but as you have a guaranteed salary upon retirement shoudn't the valuation reflect this? ============================================================================ Posted by Peter@BDM - 2008/05/16 14:52 Simple answer is no, it doesn’t. Cost of getting a fair valuation is the issue. Probably not worth it if CETV is less than £30k. If pension sharing or attaching, questionable how significant the inappropriateness of the CETV is. ============================================================================ Posted by joy - 2008/05/16 15:12 If i was asking for a cash sum from my x pension around CETV £50 final salary what would i be likely to expect? ============================================================================ Posted by Peter@BDM - 2008/05/16 15:47 The main issue here is that although the pension value is significant, it really is not worth spending too much money proving and arguing points. That said, I’ll make some assumptions to give you something to work with. I shall assume that your ex is still in the same employment (i.e. active scheme member). I shall also assume that he is not in any of the uniformed services. I shall also assume that you are not divorcing in Scotland. On this basis, the CETV is likely to be between 20% and 30% lower than a fair value. This gives a possible value of £60k£65k. Usual starting point is splitting pension 50/50, in which case you could argue for around £30k. ………………………………................. ============================================================================ Posted by maggie - 2008/05/17 10:38 I've just had a BDM quickie - sorry Express Valuation - it values the final salary CETV at a staggering £145,000 over the scheme's own CETV. I didn't have an independent pension valuation at my FDR - I don't know whether this valuation would have been accepted - especially by the final salary scheme actuary - but it would have flagged up the problem and with the same % share I might have walked away with maybe £58,000 more pension CETV with no detriment to my ex's pension. ============================================================================ Posted by maggie - 2008/05/17 11:17 Peter@BDM - could I ask you what happens about getting a pension scheme actuary to accept a valuation higher than the scheme's own, which might result in a lot more cash leaving the scheme he's protecting. If the court accepts the higher CETV, is it a done deal or does the scheme's own actuary have the right to reject it? ============================================================================ Posted by Peter@BDM - 2008/05/17 12:07 I love the new name for our Express Pension Valuation, I'm not sure that it will catch-on with all our clients though! No pension scheme will ever revise its transfer values just because an independent actuarial valuation places a higher value on the benefits. Similarly, a family court cannot order a scheme to increase the transfer value. A family court can accept an independent valuation and this is usually relevant when there is a prospect of offsetting. Another application is where pension sharing is considered and the only option offered to the credit member is an external transfer. If the CETV undervalues the pension benefit then the loss is crystallised (at least for the pension credit member) by the transfer. Therefore, the court may accept the independent valuation and use it when considering the appropriate shares. ============================================================================ Posted by saabgirl - 2008/06/26 13:33 Hi, i have the situation that there are two main marital assets, house with equity of 112 thousand and my ex-husbands NHS pensions of 20 years with CETV value of 118 thousand. His solicitor has proposed swapping his share of house equity for my share in his pension. Since he has been so difficault all the way through and has only paid CSA maintenance and nothing towards mortgage, etc.. since leaving, i was suspicious at his generosity as pension value is not usually equated pound for pound to equity in a house! I had my own financial report done on his pension by an independant adviser, recommended by my solicitor, and he has calculated my ex's pension as being worth 295 thousand!! My ex and his solicito would not accept this and had an actuary report done which disputes the value arrived at by my financial adviser? We have not seen the actuarys report, or the value they give the pension. My solicitor has suggested that the two advisers discuss the value to reach an agreement! No response yet. The discrepancy between the two valuations is obviously quite extreme and I am not sure what to do next and if it is worth pursuing, given the costs and stress involved? ============================================================================ Posted by Peter@BDM - 2008/06/26 14:21 I must start by saying that I am biased in such matters as our firm produces actuarial reports and valuation. I do not know whether we produced the report for your husband but that should not matter in the context of this forum and your post, which rightly preserves your anonymity. I have not seen the report furnished by your financial adviser, nor do I know whom he is. However, I have to say that very few financial advisers have the skills and knowledge required to provide an independent valuation of a defined benefit pension. This is one of the reasons why many courts will not accept valuations unless done by an actuary. Financial Advisers can add considerable value in the divorce process but this should not usually extend to valuing complex pensions. I shall not add to your woes by going into the details of how some financial advisers value defined benefit pensions and discussing why the methods are often inappropriate. Suffice it to say, that they almost inevitably overvalue the pension. You were of course quite right to question the generosity of your husband’s offer. There is no doubt at all that the CETV provided by the NHS pension scheme will have significantly under valued the pension. One option you may like to consider is offering to pay half the cost of your husband’s actuarial report on the understanding that you will use the valuation it provides. There are several disadvantages to this strategy. Your husband’s lawyer will have instructed the actuary and probably specified certain aspects of the report scope; this could mean that the report findings are not necessarily in your favour. Another risk, is that the actuary chose to set out several different alternative valuations (we have seen actuarial reports with five or more “alternatives”). This is not technically incorrect, but you certainly would not wish to commit yourself to following the actuarial report without knowing the instruction basis. These actuarial reports are not inexpensive; your husband may have paid several hundred pounds for the report. You need to be careful about offering to pay half the cost in view of the uncertain outcome. Ideally, you should obtain your own independent actuarial valuation of your husband’s NHS pension, but as you have already paid for the report from your financial adviser I am certain you will not be keen to spend any more money on valuation reports. ============================================================================ MORTALITY ISSUES Posted by sexysadie - 2008/05/17 11:28 Another question: some final salary schemes are currently threatened with being calculated on a different basis because people are living longer, etc. Is it possible to allow for this in any way? What happens if you settle on the basis of offsetting a final salary pension and in the event it's not final salary at all? ============================================================================ Posted by Peter@BDM - 2008/05/17 12:23 Mortality improvements are a huge issue in the pensions world. Pension schemes (including those in the public sector) tend to be slow to adopt the latest statistics because it has a direct effect on the cost of providing the scheme benefits (the scheme sponsor has to put even more money in). Differences in mortality assumptions are one of the reasons why CETVs can undervalue a pension asset. Our actuaries (and those in other firms doing similar work) use more up to date mortality assumptions, so they will normally allow for this. On your question about settling on the basis of a final salary scheme and it transpires that it is not, I think the answer is that the settlement will probably stand, but I think you probably need input from one of the legal experts on that. As to whether anyone has lost or gained, I guess that depends on the offsetting basis. If it was pound-for-pound on the CETV, it is likely that no one lost or gained as for most money purchase pensions the CETV is an appropriate valuation. ============================================================================ ADDITIONAL STATE PENSION Posted by Peter@BDM - 2008/05/16 15:47 ……………………. Don’t forget that the Additional State Pension (SERPS/S2P) should also come into the reckoning (he should get a valuation from the Pensions Office using form BR20). You may find that the Additional State Pension has a reasonable value as well. ============================================================================ Posted by joy - 2008/05/17 10:17 many thanks for that, But do you not contract out of serps? some do. How can i find this out. Oh hang on, when you pay into a company pension does the government not contribute as well. Or was this paid prior to him getting a coy pension, with the then married mans allowance. ============================================================================ Posted by Peter@BDM - 2008/05/17 11:52 Above certain earnings levels you automatically build SERPS now S2P unless you contract-out. You can contract out in two ways, if you belong to a scheme that is “contracted-out” you will automatically be contracted-out and instead the scheme provides benefits that are at least equivalent, or you can chose to contract-out by taking a personal pension. As you suggest, your x may have built SERPS/S2P entitlement before joining the pension scheme. ============================================================================ Posted by amanda - 2008/06/26 14:35 Does the judge at the final hearing then want a value of the x's state pension as well even though I have a private pension valued at about 70 ctv. I thought they just went off the private pension. As this is all the solicitors have gone on about wanting the value of my private pension. So if my x wants half my pension by pension sharing would the courts take into cnsideration how much he has paid into his state pension as well? Would I be entititled to any of his state pension? He does not have a private pension just state pension ============================================================================ Posted by Peter@BDM - 2008/06/26 14:52 Basic state pension is ignored (it cannot be shared etc), Additional State Pension (aka SERPS/S2P) should always be included, it is a Form E requirement but often seems to be overlooked. Most large final salary schemes are contracted out, so any ASP from other periods of employment may be relatively small. As to how all this is sorted out, it does not usually make sense for each party to have half of the other’s pension. The legal and court costs would quickly erode any possible financial benefits. Instead, the usual approach is to net one off against the other then “redistribute” the higher value pension so that the intended outcome (equality of capital or income value) is achieved. Getting an ASP valuation is easy and free, though their turnaround time is not the quickest. You can phone The Pension Service – part of the Department of Work & Pensions) on 0845 6002 537 for a form (snappily called a BR20). ============================================================================ Posted by amanda - 2008/06/26 15:17 But how will I know if my x partener is paying more on his state pension, on his pay slips he is paying 242 per month and thAt seems alot for normal state pension but maybe I do not know I could be wrong. ============================================================================ Posted by hadenoughnow - 2008/06/26 15:48 As far as I know, state pension is funded via the National Insurance contributions so if anything shows up as "pension" on your stbx's payslips this culd be either a company pension scheme or possible contribution as a result of contracting out of SERPS. I think you need some clarification here. Do the payslips show employee and employer's contributions? ============================================================================ Posted by Peter@BDM - 2008/06/26 15:51 You could try to work out from the HMR&C tables, whether he has built up any ASP using the HMR&C tables, see http://www.hmrc.gov.uk/rates/nic.htm . The Pension Service statement on ASP entitlement is (see http://www.thepensionservice.gov.uk/atoz/atozdetailed/addstatepen.asp): “Depending on your individual circumstances, you may be entitled to additional State Pension. This is also called the State Second Pension and used to be known as the State Earnings Related Pension Scheme (SERPS). As its name suggests, additional State Pension is paid in addition to the basic State Pension. Up to April 2002, entitlement to SERPS was based on your record of National Insurance contributions and your level of earnings as an employee. On 6 April 2002, the State Second Pension reformed SERPS to provide a more generous additional State Pension for low and moderate earners, and to extend access to additional State Pension to include certain carers and people with long-term illness or disability. Any SERPS entitlement already built up is protected both for current State Pension recipients and for those who have not yet reached State Pension age. The State Second Pension gives employees earning up to a certain amount £31,100 (in 2008/09) a better pension than SERPS, whether or not they are contracted out into a private pension, with most help going to those on the lowest earnings (up to around £13,500 in 2008/09). Any additional State Pension will also be calculated when you claim your State Pension. “ I suggest that he is merely asked to provide a State Pension Valuation, I am fairly certain that if he does not have an entitlement The Pensions Service will tell him in writing and he can show that to you and your lawyer as proof. ============================================================================ Posted by amanda - 2008/06/26 16:20 …. On theleft hand side it has NI employees 1133.74 NI emloyer 11319.26 NI pay 15531.72 Pension Employee 00000 Pension Employer 00000 Then on the right it has NI -Dirl 242.34 Ten futher down Employers NI 281.99 ============================================================================ Posted by Peter@BDM - 2008/06/26 16:33 From the information you have given, there is no apparent employer sponsored pension scheme (“Pension Employee” & “Pension Employer” both equal zero. At the date of the payslip, he had gross earnings in the tax year for NI purposes of £15,531. The tax year runs April to April, so whenever this was he had already earned at least £15k in the tax year. My guess is that in this period alone he would have built an ASP entitlement. My advice is “go for it” and ask him to obtain an ASP valuation – you have little to loose and much to gain. ============================================================================ I have just found his pay slip for jan 2008 And NI EMPLOYEE 2211.23 NI EMPLOYER 2573.07 NI 25327.10 EMPLOYERS NI 282.00 NI-DIRL 242.34 The one I sent you before was Sept 2007. Okay I will ask for ASP valuation. ============================================================================ PENSION OFFSETTING Posted by tiggy - 2008/06/28 13:50 Hi Peter, in your reply to Amanda you stated-"As to how all this is sorted out, it does not usually make sense for each party to have half of the other’s pension. The legal and court costs would quickly erode any possible financial benefits. Instead, the usual approach is to net one off against the other then “redistribute” the higher value pension so that the intended outcome (equality of capital or income value) is achieved." How does this usually work in practice? My husband is going to be entitled to approx 20k from my pension which he wants in cash from my share of the equity from the house.If we split the equity 50/50 then he will be approx 40k better off than me rather than 20k if his share of my pension was taken off the total equity before the rest was split 50/50. Any idea of usual practice? ============================================================================ Posted by Nigel@BDM - 2008/07/04 16:09 The short, but slow, answer is that you don't split the equity 50/50 to get a final answer that is 50/50. Not sure what your numbers are, but if your pension is £40k and equity £60k then an equal split with you keeping your pension is you £40k pension + £10k equity = £50k, him £50k equity. Whether that makes sense from what you both want / need from division is another thing. ============================================================================ Posted by tiggy - 2008/07/07 12:42 Thanks Nigel, I think it makes sense!! We have agreed on a 37.5% split of pensions as were given very different advice from out sols (25% and 50%)we are keen to come to amicable agreement so settled on this. My pension 70k, his 23k, equity 100k. How would you expect this to be split? ============================================================================ Posted by Peter@BDM - 2008/07/07 13:28 The technical answer is that it will depend on what type of pension schemes they are and how they will implement pension-sharing orders. We would expect to have the share done in whichever way has the least prospect of causing financial harm. Without being too glib about this, given the relative size of the pensions and the fact that, if I have understood the circumstances correctly, around £11,800 of pension value has to be redistributed from him to you there is a risk that implementing a pension share could inadvertently cause financial harm. We estimate that the cost of making a pension sharing order on the average defined benefit pension scheme will be between £2,000 and £3,000, with only a modest proportion of this going in actuarial fees. This looks to me to be an exercise with marginal and debatable financial justification, spending £2,000-£3,000 to redistribute £11,800. If it is not too late, you might like to consider adjusting the offsets instead. ============================================================================ Posted by tiggy - 2008/07/07 13:48 Hi Peter, I am completely baffled now!! Sorry I probably have not explained properly. I have a pension of approx 70k (NHS), my stbx has a private pension of approx 23k. We have a house with approx 100k equity. I have agreed for him to have 37.5% of the difference in our pensions in cash from the equity of the house which is roughly 18k, as he needs cash to fund a house purchase. What I would like to know is do we split the equity 50/50 then I give him 18k, or is the 18k taken of the equity pot and then the rest split 50/50? I want to keep my pension fund intact if possible. My husband has not told me how much his SERPS/ 2nd state pension is worth, but I am awaiting his form E so hope it is on there, althpough dont plan to give him any less even if that is worth quite a bit. Hope I havent confused you more :S ============================================================================ Posted by Peter@BDM - 2008/07/07 14:06 Sorry if I have managed to confuse you as much as myself. I did completely misunderstand the proposals but I believe that I have it now. Am I right in thinking that the house will be sold to release the equity? ============================================================================ Posted by Peter@BDM - 2008/07/07 14:19 There is no compulsion or justification in disturbing the pensions in your case. I believe that the balancing should just be sorted out from the proceeds of the property sale. (sorry again for making such hard work of this for you). ============================================================================ Posted by tiggy - 2008/07/07 14:24 Thanks Peter. I'm still not sure how this would normally be calculated though! If we get 50k each then I give him 20k, he will have 70k and I will have 30k. Does that sound right?? ============================================================================ Posted by Peter@BDM - 2008/07/07 14:55 I believe that it should all be dealt with by you receiving different amounts from the sale of the property. I think that it should look like this: Pensions Female's pension £70,000 Male's Pension £23,000 Total pension value £93,000 Difference (female vs male) £47,000 Agreed balance (female to male) 37.50% Balance required for offsetting £17,625 Property (equity of £100,000) Share of equity £50,000 Male's offsetting balance £17,625 Male's net share of equity £67,625 Share of equity £50,000 Female's offsetting balance -£17,625 Female's net share of equity £32,375 Does that make sense? ============================================================================ Posted by tiggy - 2008/07/07 15:09 It does, but isnt what I want to hear. Perhaps will have to ask him to add his SERPS/ SSP into pot also as need more than 32k to put down on a house for myself and kids. ============================================================================ Posted by JessieJ - 2008/07/07 16:05 Based on the example you gave Tiggy .... am i right in assuming that based on the following figures (£k) if we agreed a 60/40 split in my favour .... I would come out with 159k of the equity. Equity 180 His Pension 100 My pesions 25 ============================================================================ Posted by Peter@BDM - 2008/07/07 16:51 Tiggy’s case is slightly unusual because they have already “agreed” what to do about the differences in the pension values (he will get 37.5% of the difference in their pension values). The arguments about comparing pension values to house values are long and very boring. Our view is that they are directly comparable (that is a pound of pension value is worth the same as a pound of property), but this is not a view shared by everyone (including some highly respected solicitors, barristers and judges). Our view is that the figures in your case should look like this (assuming that both the pension and the property equity are shared 50:50. Pensions Hers £25,000 His £180,000 Total pension value £205,000 50:50 pension split £102,500 Her "shortfall" £77,500 His "excess" £77,500 Property (equity of £180,000) Share of equity £90,000 Her offsetting balance £77,500 Her net share of equity £167,500 Share of equity £90,000 His offsetting balance -£77,500 His net share of equity £12,500 The “challenges” are a) agreeing fair and appropriate valuations of the pensions, and b) agreeing that pound for pound, pensions are worth the same as any other asset. In our view, the figures can be adjusted to take into account other aspects of the financial settlement but we see no technical justification for artificially adjusting the value of the pensions by some arbitrary amount. You have to remember that it is the lawyers and the courts that make the actual decisions on these matters, not the actuaries and their colleagues! ============================================================================ Posted by JessieJ - 2008/07/07 16:57 Sorry Peter .... can't type either his pension should have read 100k ..... thought it was too good to be true!!! ============================================================================ CAN A PENSION SHARE ORDER BE IMPOSED Posted by joy - 2008/07/07 14:25 My OH and i did our split a while ago, now we have to go to court, OH now disputes things. I had a bigger share of the equity instead of pension sharing. If it gets that far, can the judge order me to take the pension share, even though i dont want it? ============================================================================ Posted by Peter@BDM - 2008/07/07 15:05 This is a little outside my area of knowledge. My understanding is that a court CAN make a pension sharing order (or any other sort of order) even if there is no agreement between the parties. I believe that this has happened in some of the important precedent cases. The real issue is whether a court is LIKELY to do so. This really is outside my area and you would do better with an answer from one of the lawyers. I shall give the over worked Amanda a gentle nudge for you and ask whether she might give us the benefit of her expertise on this subject. ============================================================================

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CETV or Fund equilavent cash value
Just had valuation back from final salary scheme, CETV at £26K but another figure for total fund equivalent value at £60K. Would the CETV be used for offsetting or the higher? Would it be more finicially prudent to use another available method? Can a court order force you to accept one of the methods avail, i.e use offset because it suits spouse even though you don't wish to?