Three types of valuation

Practitioners need to be aware of the difference between disclosure values, market-consistent values and offsetting values. They are the equivalent of the forced-sale price for a house, the estate-agent’s price and the actual sale price.

Disclosure values (the forced-sale price)

Ancillary relief requires the CETV must be disclosed for pensions not in payment. However the CETV was not designed for the purpose, as the name, Cash Equivalent Transfer Value, gives away. We have identified 6 reasons why the CETV is not appropriate for use in a divorce, which you can download from the last box in the right hand column.

A number of schemes now refer to CEVs for values produced for divorce where the individual is still an active member of the scheme and therefore does not have the automatic right to transfer. CEVs are just CETVs less the value of all spouse’s benefits. They do not address any of the 6 reasons why CETVs are inappropriate.

Pensions in payment cannot be transferred out, so no CETV exists. Instead schemes have to provide a CEB, Cash Equivalent Benefit. Unlike CETVs, there is no right to a free CEB once a year. With charges of up to £1,000 +VAT and three month turnaround often quoted, most parties would prefer to use our PiP Express Pension Valuations at £100 +VAT with a five day turnaround.
 

Market-consistent values (the estate-agent’s price)

For most assets the value used in divorce is the market price. For some assets such as stocks and shares there is a readily available value from the financial markets. Individual assets such as the family home are normally valued on a basis such as a sale within 6 months.

Although it is not possible to sell a pension, we can create the price that would be used if it were. Pensions are just streams of cash that will be paid in the future, subject to certain contingencies such as the pension holder still being alive. The financial markets value such assets all the time and we can use the assumptions underlying these valuations to create a pension market price.

This is how actuaries produce market-consistent valuations appropriate for use in a divorce.

Offsetting values (actual sale price)

When offsetting pensions it is often argued that the value of a future income is worth less to a cash-strapped divorcee than its market price. Therefore the market-consistent value, or usually but incorrectly the CETV, is reduced in an offset arrangement.

Historically, the custom has been to multiply the pension by a single fixed percentage in all cases, but now less arbitrary or severe reductions seem common. Our Pension Offset Report is the only objective, evidence-based approach of which we are aware.

From a simple indication of the future wealth of divorcees using five broad categories, our expert report provides offsetting values useable in Court.

In one case, we were jointly instructed that a divorcee was financially likely to be “struggling” in future, needing personal loans at times to keep her afloat. We were able to show that a 37% reduction in her husband’s pension was appropriate.

By contrast, in a single-instructed report our 2% reduction supported the claim of a husband for using an unadjusted pension value, as the wife was going to be financially “in-balance” after the divorce settlement. We report on the assumptions we use explicitly, enabling both parties and the Court to discuss the basis of the reduction in simple to understand terms.