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The greatest impact of the credit crunch on pensions has been the reduction in investment values.

Most clients with money-purchase (defined-contribution) pensions will find the value of their pension funds lower than before. The FTSE 100, a measure of the price of leading UK shares, has fallen 33% in the last year. Overseas investments have been even worse for sterling investors, the US Dow Jones falling over 50% allowing for currency changes. The price of fixed interest stock has done better, 10-year gilts rising by 9%, though with a reducing income yield.

In general, most of the falls happened in the first 10 months of 2008 and any money purchase valuations in that period may need to be revalued.

Those clients with money-purchase pensions that are invested in with-profits funds may have see the current value of their pensions reduced by temporary surrender penalties. These Market Value Adjustments (MVAs) as they are called may or may not apply in any particular case depending on a number of factors, such as who the pension provider is, when the plan commenced and how near the client is to their planned retirement date.

Money-purchase pension holders should also plan for lower pensions in retirement due to the fall in assets values and lower-interest rates increasing the cost of buying the pension annuity on retirement.

For final-salary pensions the future pension amount is already set and is unaffected by investment falls. Indeed the flip to the money-purchase case is that the underlying fund now needs to be bigger to pay for the same pension in retirement, and so CETVs have increased due to current market conditions. For example, some state CETVs have increased by up to 12% in the last 6 months due to interest rate changes.

Of course, this is only the case if the pension scheme can afford to pay it. This might mean reducing benefits, which can be allowed for in full actuarial reports, or failing altogether. If a scheme fails, one of two statutory safeguards might kick in.

In the rare case that an insurer fails, its plans or pension annuities are covered by the Financial Services Compensation Scheme (FCSC) for the whole of the first £2,000 and 90% thereafter.

Meanwhile private company pension schemes are covered by the Policyholder Protection Fund (PPF). The PPF guarantees all pensions currently in payment, and 90% of other pensions, up to a limit (currently £28,742pa). If a company becomes insolvent, the trustees of its pension scheme can apply to the PPF for protection. Initially the scheme is put into an Assessment Period, while the PPF see if the scheme / employer can be rescued, or if the scheme has sufficient assets to guarantee at least PPF limited benefits. The Assessment Period is likely to last at least a year, and during this time, trustees have to reduce benefits to the PPF limits. If at the end of the review, the PPF accepts the scheme it transfers to them.

A scheme in the Assessment Period cannot generally pay transfers out of the scheme. However, an exception can be made for the pension credit from a pension sharing order. Once a scheme is transferred to the PPF no further pension sharing or attachment orders can be made, though orders made during the Assessment Period, but not implemented will be honoured. Statements of compensation, equivalent to CETVs, can be obtained for members in transferred scheme from the PPF.

We have a checklist that can help in deciding what actions to take due to credit-crunch issues. If you would like a copy of this pdf please complete the request form.

The new transfer value regulations ^[1] came into force on 1^st October 2008. Generally, CETVs for salary related schemes calculated on the new basis are higher. The regulations do not change the method used for valuing money purchase benefits. Most private sector pension schemes were ready for the change and delays were minimised, although some observers have suggested that there are an unusual number of CETVs calculated in late September 2008 as backlogs were cleared.

The legislation only applies to private sector pension schemes. However, the consultation paper, which introduced the draft legislation, stated that guidance for the public sector schemes would be published in due course. On 11 September 2008, HM Treasury published guidance ^[2] that applies to all unfunded public service pension schemes and to the Local Government Pension Schemes. Although it too has an effective date of 1^st October 2008, not all schemes were able to respond last year. The result has been delays in obtaining CETVs. Indeed for certain schemes CETVs have only recently begun to filter through again. As with the private sector schemes, the CETVs are higher.

Although the legislative and guidance changes are specific to CETVs, the fundamental changes mean that CEBs will also be affected and will increase. Less obvious is the affect on the factors schemes use to convert CETVs into annual pension credits. These are the pension scheme equivalent of commercial annuity factors, so they are important when an internal credit is made from a pension sharing order.

If you are hoping that post October 2008 CETVs would be fair and appropriate values for use in divorce, you will be disappointed. The six underlying reasons why CETVs are inappropriate for valuing final salary pensions remain; it is just that generally CETVs have increased a bit.

It is inevitable that some cases will straddle the critical basis change date, with CETVs calculated prior to 1^st October not yet reaching a conclusion. There is no one answer to what you should do in such cases; it depends on several factors, such as which party you act for, the type of scheme, the nature of the settlement and possibly also the amount of the CETV. We have a simple decision tree that can help you decide what to do in such cases. If you would like a copy of this sent to you as a pdf email attachment please click here to submit an on-line form.

•1 Occupational Pension Schemes (Transfer Values) (Amendment) Regulations 2008

•2 “Basis for setting the discount rate for calculating cash equivalent transfer values payable by public service pension schemes” HM Treasury

We have recently published a short series of articles, called "Why do wives lose out?" in the hope of sparking a debate about issues that we feel are important in our field of pension valuation and sharing in divorce.

Please click comments below to read the debate and add your own views.

You might also be interested in a parallel debate on the Wikivorce, the divorce support community site, which can be found here. 

This is the third article in a series looking at three systematic faults in the way the law settles pension issues. Faults that cause the person with the smaller final salary pension, usually the wife, to lose out.

The first two faults were in the valuation of the pension and its use in a pension offsetting solution. The third fault affects wives opting for a credit under a pension sharing order.

When determining the percentage of the CETV to share to the spouse (or value on pounds in Scotland), then the natural assumption is that if you want 50% share of the pension then you determine a 50% share of the CETV.

Natural, and as often with pensions, wrong. In most cases 50% of the CETV will provide less than 50% of the pension value to the spouse.

Although this will not be obvious at date of sharing, it will be when pension benefits become due. It is a catastrophic failure of pension experts to communicate this issue to legal professionals. A failure that is penalising wives every day.

The reason that 50% does not work is down to how different schemes implement pension sharing orders. Due to the restrictions of ensuring a clean-break even the best schemes, in this case including all Public Sector schemes, end up giving higher benefits to the original pension member. Other schemes manage to both provide lower benefits to the credit member and pocket some extra savings as well.

We have identified 3 common approaches adopted by pension schemes to implementing pension sharing orders. The example in our Pension Guide on Divorce shows the pensions finally paid after a 50% of CETV pension share from him to her.

50% pension share for a type 1 scheme
His pension £16,500pa
Her pension £ 7,900pa

50% pension share for a type 2 scheme
His pension £12,300pa
Her pension £ 7,900pa

50% pension share for a type 3 scheme
His pension £12,300pa
Her pension £ 7,500pa

To state the obvious in each case the final share is nothing like 50/50, and in each case it is the wife that loses out. Further schemes using type 2 or 3 approaches to sharing are providing lowering overall benefits for both parties.

The only way to resolve this issue for wives is to investigate how the scheme will implement a pension sharing order and to calculate the share needed to meet the objectives of the two parties: normally equalising capital values or income.

Actuaries, including Bradshaw Dixon Moore, can do these reports for clients. Their use should be considered essential for any proposed pension share.

Nigel Bradshaw is Chairman and actuary at Bradshaw Dixon Moore.