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

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Effects of Separation on Children

The media is full of reports that twice as many children from separated families have problems than those children from intact families, but not often do we hear what the actual numbers are. According to Children of separation and divorce: surviving and thriving - what makes the difference? at Dad Info 15% of children from intact families and 30% from separated families have serious problems. 70 per cent of children grow up without serious problems after their parents separate. The article was written by Professor Michael Lamb, Head of Department in the Faculty of Social and Political Sciences at Cambridge University, and includes 10 golden rules to protect children from the effects of separation.

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Disputed Relevant Date

The relevant date (the date of separation) was disputed in a recent preliminary proof hearing. Sometime in 2004 a wife discovered that whilst on holiday with her husband in the Autumn of 2003 he had visited a prostitute and had contracted a sexually transmitted disease which had been passed onto her. As a result the husband left the family home in December 2004 although he visited on occasion, staying for a short while. The wife also visited his flat and her position was, until May 2007, she had hoped and expected that they would return to live together full time in a conventional married style. Lord Turnbull ruled, on the balance of probabilities, that the couple had ceased living together as of 15 December 2004 and this was the relevant date for valuing the matrimonial property.

The full judgement is here and the case was reported in the Scotsman article "The dentist, his wife, the prostitute, a nasty disease and a £2m divorce case"

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Secretive Courts?

I was going to blog about a series of articles about the secretiveness of family courts in England & Wales in The Times this week and I've been pipped at the post by John Bolch of Family Lore here. The only things I would add is according to this Times report apparently the Council of Europe is instigating an investigation into the matter and during May the Guardian carried an interesting article here about what really goes on in family courts.

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Unable To Sell

Despite house prices continuing to grow in Scotland The Herald reports here the slow down in the property market is causing problems for some separating couples who are finding it difficult to sell the former matrimonial home. This coupled with problems securing a mortgage means it is more likely divorcing couples will be compelled to continue living together.

Rather confusingly the article continues backing the story by quoting Marilyn Stowe, of the Yorkshire and Cheshire-based Stowe Family Law firm;

"This is a very difficult time because, with their main asset essentially being significantly depleted, the value having gone down, it means that there is less money available to rehouse both parties."

Grr... I'm not sure if the intention was to comment on the situation in England or on what Scotland can expect to come??

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