A guide for family lawyers

Most pension schemes ignore the actual health of a member or their spouse in calculating CETVs and in pension sharing calculations. This will over-value the pension asset if either is in ill-health. The effect will be greater if it is the member in ill-health rather than the spouse or partner.

 
If the pension scheme does not ask for information on the health of the member or their spouse, then it is making simplifying assumptions, which ignore the true state of the individual's health.

More appropriate valuations of pensions for use in divorces and dissolutions should provide the option to allow for the health of an individual in calculating the value of the pension asset and inform the decisions made on pension sharing proportions and offsetting.

Ill-health pension values
If a client is in ill-health, the value of their assets is reduced. Usually a CETV does not account for this factor. It is unlikely that a pension scheme will alter its policy on this matter due to an individual case.

If the spouse is in ill-health then the value of their assets will be lowered by allowing for their state of health. Put another way a CETV that does not factor in ill health will produce a higher value for the spouse's pension assets than is realistic. An independent actuarial valuation that does not take the option to allow for the spouse's state of health will normally produce an even higher value.

Offsetting
In the normal course of events the impetus for using appropriate actuarial valuations for final salary (defined benefit) pensions will come from the party with the smaller pension assets, as appropriate valuations are invariable higher than CETVs.

However, where the party with the larger pension assets is in ill-health their pension values will be reduced and it might be for their benefit to provide the impetus for appropriate actuarial valuations allowing for their health.

Pension sharing
If all pensions are valued by all parties allowing for the state of health of the individuals then this has a neutral impact on the decision of whether and how to share pensions.

However if a pension scheme is valuing pensions ignoring ill-health, then it will have an artificially high value that can be captured by transferring the pension to the partner in better health through pension sharing.

The converse is also true and sharing the pension of someone in good or average health, with someone in ill-health, will normally reduce the actual joint assets.

Other approaches
For clients approaching retirement there may be other ways to capitalise artificially high pension valuations, for example through requesting a transfer to a private scheme and then buying an enhanced annuity from an insurer.

So what?
Applying the above is very straightforward as the hard work can be left to an actuary.

First check with your actuary how they will assess whether someone is in ill-health. With the help of a life underwriter, who is an expert in evaluating the risks of individuals, they should be able to provide a proportionate solution using a simple form.

Second, if you use a financial advisor check they can allow for the health of the individuals in any advice they provide.

When obtaining a value for your client's pensions, or checking that of their partner's, remember their health. Ill-health reduces the value of a pension asset. Similarly remember their health when determining the division of assets.

It may be possible to maximise the value of pension assets by ensuring that the party in better health gets the pensions, because they will benefit from the income for longer. Against this is the cost of pension sharing and the loss in value caused by the way some schemes implement pension sharing orders. Again, your actuary will be able to do the numbers on this.

Finally, never be afraid to ask your actuary their advice: theirs is a dying profession!

Nigel Bradshaw MA, FIA is Chairman and Design Director of Bradshaw, Dixon & Moore Ltd.

© Bradshaw Dixon & Moore Ltd - Jan 2008