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

Introduction
The calculation basis for Cash Equivalent Transfer Values (CETVs) for final-salary pension schemes is changing. The new basis is due to come into effect in October 2008, but this does not mean that thereafter CETVs will always produce a fair value.

Legislative background
The Divorce etc (Pensions) Regulations 2000 and the Pensions on Divorce etc (Provision of Information) Regulations 2000 set out how benefits under a pension arrangement must be calculated. Regulation 2 of the Pensions on Divorce etc (Provision of Information) Regulations 2000 imposes upon the person responsible for a pension arrangement the requirement to supply pension information, including a valuation. Regulation 3 sets out how the valuation is to be made and calculated, and retains the requirement for the valuation to be consistent with GN11.

It is important to recognise that these regulations concern the manner in which the benefits are valued by the scheme (the CETV). They also provide that a pension sharing order is made by reference to the CETV calculated and quoted by the scheme. The CETV is therefore a consistently calculated number. It is incorrect to regard the CETV as unchallengeable.

Changes to the calculation basis
The new, as yet to be published Regulations are the result of a consultation process that ran between June and August 2006. In January 2007, the DWP published its "Response to the Consultation". The Government intends to regulate on the calculation basis, which is different in a number of technical ways from the current GN11 basis. Broadly, the values will be according to the expected cost of providing the benefits if the member remained in the scheme until retirement. This is some way short of the proposals in EXD54 and, despite two years of debate and consultation, in the values it produces it is broadly the same as the current GN11 basis. We still await the actual legislation.

The revised calculation basis only affects CETVs for defined benefit pensions. These are likely to be the biggest concern for lawyers, largely because they can understate the true value of the benefits by 30% or more. CETVs for defined contribution pensions are unaffected by the change in the calculation basis but that is not to say that the CETVs for these schemes represent a fair valuation of the benefits.

As before, CETVs for public sector pension schemes are to be calculated using factors provided by the Government Actuary’s Department.

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

© Bradshaw Dixon & Moore Ltd - Dec 2007.

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