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.