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This blog is intended to encourage an exchange of ideas and promote debate about the financial issues that arise in a relationship breakdown. The concept is to create a platform for discussion that is not available elsewhere. Aimed mainly at professionals working in this area; lawyers, accountants, financial advisors and actuaries, it is also a potential source of information for the general public.
In our experience there is a significant variance in how professionals handle pension assets in divorce, with little consensus on which methods give the best outcome. We feel this is due in part to a lack of centralised knowledge and debate on what can be a complex issue. We intend to address this by posting our original articles on key subjects, as well as those contributed by others. Our intention is to post quality, discussion-worthy topics at least once a month, or more often if the need arises.
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Why do wives lose out? - Part 1
Actually the title should be “why does the person with the smaller final salary pension lose out?”. However the given title is somewhat snappier and normally true when the husband is the main bread earner.
My contention is that there are three systematic faults in the way the law settles pension issues in most divorces that causes a wife to lose out. The faults stem partly from a failure of pension experts to communicate on the issues, and partly from ignorance from legal professionals,.
The first fault is the use of CETVs for valuing final salary pensions.
CETVs are convenient as pension schemes have a legal duty to provide them, free of charge once a year. They are also a necessary disclosure in Form E for final salary pensions not yet in payment. However they remain wrong.
CETVs are Cash Equivalent Transfer Values, that is the amount of cash a pension scheme will transfer out to an alternative pension provider in place of the pension. It is the pension equivalent of the price of a house sold at auction for cash today. This would not normally be considered a fair way to value a house within a divorce settlement, and it should not be the way to value a pension either.
When offsetting pension values the pension will be left with the pension scheme and not transferred away. Final salary pensions are provided to motivate employee loyalty, so leaving the pension within the scheme produces higher future pensions. Future pension income cannot be known with certainty now, but we can produce a value for it consistent with market valuations of equities, houses and other non-cash assets.
I contend that such market valuations of scheme benefits, typically produced by actuaries and known as actuarial valuations, are the appropriate approach to valuing pensions for divorce.
Such actuarial valuations are consistent with market values for equities and the value produced by surveyors for houses on a willing buyer / willing seller basis.
The differences in value can be substantial:
Source: Bradshaw Dixon Moore reports
The Court has the power to look at values other than the CETV (T v T [1998] 1FLR 1072, Singer J). In practice this is the exception rather than the rule. Instead I believe that these powers should be the norm, and actuarial valuations should be used to provide the most equitable settlement.
Nigel Bradshaw is Chairman and actuary at Bradshaw Dixon Moore
The Ancillary Actuary
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