This is the third in a series of three posts, adapted from an original, longer article by Peter Moore. You can download the original here.

A fair valuation of a pension is the cost of purchasing or replacing the benefit in the commercial market. A CETV is a number for a different purpose. As in most cases, one party in a divorce or dissolution will lose part or all of a pension benefit, the value used should be a fair value, otherwise the outcomes will not be those that are intended.

It is unlikely that you would accept a valuation of the family home based upon the cost of the materials and labour that were required to build it, so is it fair and reasonable to make decisions on valuable pension assets based on the wrong numbers? The analogy is not perfect but the effects are the same.

How fair is fair?
A CETV may understate the value of a pension by a significant amount. The problem for lawyers is that it is almost impossible to know how unfair a value is without doing some detailed calculations. As an indication, it is not unusual for a public sector CETV to understate the pension value by 30% or more and that means that it cannot be a scheme funding issue. Public sector schemes are not unique in this respect and similar differences occur on private sector schemes.

Clearly, if the CETV itself is small, even a significant discrepancy is immaterial compared to the cost and effort involved in getting a fair value calculated.

Why it matters that CETVs are not 'fair' values
It could be argued that if a pension sharing order is made, the fact that the CETV is not a fair value is immaterial. If you slice an apple in half, neither the size of the whole apple or the two halves matters. The only concern is that it really is cut in half. The same is true of final-salary pension schemes. If the value of the assets allows all the pensions to be shared equally, by a making pension sharing order, the fairness of the CETVs may be ignored. However, difficulties arise where one asset is offset against others. If a fair valuation is made of each asset, then offsetting is a simple matter but if a pension is offset solely on its CETV the result could be very unfair.

The cost of making and implementing pension sharing orders may mean that it is uneconomic to share all pensions equally, in which case an element of offsetting is inevitable. An important point to remember is that the intention to make a pension sharing order does not mean that the fairness of the pension value can be ignored.

 The most important factors are:

• how the exact “split” is arrived at
• the nature benefits created by the pension credit, and
• whether pension sharing will reduce the total value of the asset.

How can a lawyer fulfil their duty of care?
Primarily, the lawyer must properly identify where the problems may arise. If they are not themselves suitably trained or experienced, they need to obtain professional assistance. Valuing pensions is a technical task requiring the application of actuarial techniques. The work can be done by suitably trained and qualified pension technicians and financial advisors but some level of actuarial input or oversight is often desirable.

Peter J Moore – Director, Bradshaw, Dixon & Moore Ltd

© Bradshaw Dixon & Moore Ltd - Dec 2007