Problems With Pensions on Divorce

Valuations

The basis on which pension rights are valued for divorce purposes is the Cash Equivalent Transfer Value (CETV) unless the pension is in payment, when it is a Cash Equivalent Benefit.. The CETV is a value that can usually be obtained easily from pension scheme administrators. However, CETVs will often not take into account matters such as discretionary benefits, even where there is a very high likelihood of payment, or death in service benefits. Thus CETV’s often undervalue the pension by as much as a third, particularly if the pension is final salary or related to salary. On many occasions, it can be worthwhile getting an actuarial valuation in cases when a pension is relevant. Apparently after undertaking a costs benefit analysis often the CETV is accepted rather than spend funds on a proper valuation report.

See Peter J Moore's article What is Wrong With Relying on CETVs in Divorce?

To improve matters the Government would need to set out rules about how the pension schemes must calculate valuations rather than leave significant factors down to the discretion of the scheme.


Pension Sharing

Sharing the CETV 50/50 does not necessarily give 50/50 actual value to both parties, and definitely not 50/50 income. For example, on retirement a pension scheme member might receive significantly more in respect of married service than the ex spouse recipient of a pension credit receives. At the point of divorce couples report a lack of information on which to base informed decisions.

The position could be improved by requiring pension schemes to provide the following information;

• Valuation in connection with a divorce

• Usual literature issued by the scheme on receiving requests in connection with a divorce

• Confirmation of how the scheme would deal with a Pension Credit in the case under consideration

• Confirmation that the valuation assumes no Pension Commencement Lump Sum is taken.

• Commutation rate for converting pension to lump sum at normal retirement age.

• If shadow membership allowed, the factors they use to convert a pension credit award into an income for the recipient

• Confirmation of any protected Tax Free Cash entitlement at A Day

• A copy of the scheme rules

• A copy of the latest member communication

• Scheme definition of spouse (does it include the need for the spouse to be living together at the date of death?)

Offsetting

Instead of pension sharing there is the option to offset the pension against other assets. Typically one party to the divorce will keep their pension in return for losing much of their share in the matrimonial home. However because pensions are unrealisable they are considered less valuable than liquid assets and the question of how much less valuable arises. There is no proper guidance and there can be massive discounts to the pension valuation on top of tax discounts.

I suggest statutory guidance is required to ensure both parties leave the marriage on an equal footing