Historically, the Armed Forces Pension Schemes presented something of a challenge on divorce or dissolution. Serving members of the armed forces can leave and take an immediate pension from 55 if they meet the service criteria. If a member leaves service before they are 55 they become a deferred member of the scheme and the pension benefits built up before 2006 are paid from age 60; those built up after 2006 are paid at age 65 but can be taken at 60 on actuarially reduced basis.

If a pension sharing order is made against a member of the AFPS 75, the ex-spouse or civil partner (pension credit member) will receive their benefits at age 60 or when the order is implemented if later. For pension-credit members of the AFPS 05, benefits begin when they reach 65 or when the order is implemented if later.

This has led to situations where the member may be able to retire at 55 on a pension but the ex-spouse or civil partner could not. A successful challenge resulted in legislative changes that enabled pension-credit members to take their pensions from age 55.

In short it would seem that the changes were not handled correctly. Some pension credit-members received documentation from the Service Personnel and Veterans agency – who administer the schemes – showing that the pension payable at 55 is the full rather than an actuarially reduced rate. At least one pension-credit member is said to have been receiving their pension since 2009 and has recently been informed that the SPVA has discovered the error and the pension will consequently be reduced by 50%.

Unofficial reports are that about 120 people are known to be affected by this problem and SPVA have apparently set up a special section to handle the complaints. We understand that SPVA are contacting people they know are affected.

The issue was raised in the House on 26 April –www.theyworkforyou.com/debates/?id=2012-04-26a.1099.0&s=speaker%3A24839#g1116.1 so hopefully there will eventually be an equitable outcome. More publicity may help, which is the reason for writing this article. We are aware that another firm has contacted three MPs and the scheme actuary about the problem. 

It seems completely wrong to reduce someone’s pension in this way, purely because of a SPVA mistake. Hopefully with appropriate publicity and political intervention sense and equity will prevail.

You may recall that the current difficulties with public sector pension schemes arose when the Treasury released a document on 26 October 2011 announcing a change to the discount factors used for calculating Cash Equivalent Values (CEVs). After reviewing the guidance, our actuaries took the view that schemes may take the opportunity to revise other factors at the same time; with the result that the impact of the changes could not be estimated with any certainty. The recent GAD document confirms that mortality and contingent partner assumptions are indeed being revised in certain specific circumstances. Whether this will translate into similarly revised mortality assumptions for all public sector schemes remains to be seen.

What does this mean

Our view remains unchanged. We do not believe that we can estimate the impact of the combined discount and mortality rate changes with an appropriate degree of certainty. Consequently, although we are willing to produce interim reports that may assist in moving cases forward, until the new scheme factors are published we are not prepared to produce reports that will be relied upon for final settlements.

Publication of the GAD document does suggest progress is being made with the production of new factors, but there is as yet no evidence that any public sector schemes have received the revised factors. Hopefully, that will change before too long.

HM Treasury has recently published guidance in respect of the discount rate for the purpose of calculating CETVs (Cash Equivalent Transfer Values). As a result, all unfunded public pension service pension providers suspended the provision of CETVs and embargoed implementation of pension sharing orders until new factors are published by the Government Actuarial Department (GAD). The guidance applies to unfunded Public service pension Schemes such as NHS, Fire, Armed Forces, Teachers, Police, Local Government Pension Scheme and the Parliamentary Contributory Pension Fund and until the new factors are known it is possible to reminisce that the last Government intervention saw delays in most instances of 2½ to 3 months.

In the majority of divorce cases pensions are often the most valuable asset and probably one of the more difficult assets to value; a CETV can take up to 12 weeks and adding further delay by suspension of the provision of CETVs will prevent thousands of divorcing public sector workers from finalising their divorce settlement regardless of whether parties are involved in mediation, collaborative law, solicitor led negotiation or court proceedings.  Courts, lawyers and financial professionals will not be in a position to address, with any certainty or confidence, a suitable financial settlement. Legislation provides that pension sharing orders must use a current CETV calculation by the scheme when implementing the order, so without the ability to calculate the CETV or update a CETV calculated under the old guidance it has to be best practice advice to wait until new factors are known in order to negotiate from a level playing field. 

Where schemes have provided a CETV on the basis of the old guidance but no final order has been made the scheme administrators are advised to inform the court if it is in a position to consider the revised calculations.  If the courts hear cases before the new factors and a final order is made or parties reach agreement without knowing the true value, there may be challenges against legal advisors and potentially complaints to the pension ombudsman for maladministration by scheme administrators. In essence court hearings should adjourn, mediation and four way collaborative meetings cancelled. The delay will no doubt cause increased anxiety, stress and cost but there is little option to otherwise protect clients’ best interest in cases involving public sector pension schemes. Since industry observers cannot quantify the extent of the change; speculating that younger members may find their funds increase in value the reverse being mooted for older members and for those in middle age remain the same; surely consultation with an actuarial based professional should be the rule and not an exception.

This is the third time in three years that professionals have been given little or no warning of the proposed changes. How does this reflect upon our standing with our client? As professionals we are expected to be fully informed and up to date yet Government do not give notice of impending changes that have far reaching consequences. The budget in March 2011 and the Hutton report made mention of the proposals but nothing followed until October 2011! Is it likely that we will be faced with a similar situation in future? If so is it time to consider Judicial Review?

______________

Julie-Ann Harris is Head of Family at Frettens LLP The Saxon Centre 11 Bargates Christchurch Dorset. She is recommended as a leader in her field of family law on the South Coast by Chambers 2012. www.frettens.co.uk

_________________________________________________________________________________________________

We are very grateful to Julie-Ann for submitting this article as a guest blogger 

Why is this happening?

Following the March 2011 HM Treasury confirmed that they were considering a review of the calculation basis for cash values of public sector pensions. These are known as Cash Equivalent Values (CEVs) or previously referred to as Cash Equivalent Transfer Values (CETVs.

On 26 October, The Treasury released a guidance note [http://www.hm-treasury.gov.uk/d/public_service_pensions_discount_rates_261011.PDF] for managers of public sector pension schemes. The guidance sets out a revised basis for calculating pension values and it requires immediate implementation. Unfortunately, schemes do not have the calculation factors they need to calculate the values on the new basis, hence the paralysis.

Most schemes have stopped producing CEVs, although surprisingly at least one scheme is continuing to produce valuations on the old basis with a warning that they may need to be recalculated. Pension sharing legislation requires Pension Sharing Orders (PSOs) to use the current CEV calculated by the scheme when implementing the PSO. So, if they cannot calculate the current value schemes cannot implement PSOs; hence the current paralysis.

BDM is committed to help its clients over this difficult period. If you would like to receive more information on this topic and our periodic updates as the situation evolves please email us with your contact details at cev@bdm-mail.com.

Nigel, a qualified actuary is leaving the business after five years.  Nigel now plans to focus on further developing his successful consultancy and other business interests that he has run in tandem with his role at Bradshaw Dixon Moore.

Peter Moore, Managing Director of Bradshaw Dixon Moore, comments on the departure:  “Nigel has been an important part of the firm since its founding and we are sorry to see him go.  We wish him the very best in his new business endeavours and thank him for his commitment and service over the years.” 

In addition to announcing Nigel’s departure, Bradshaw Dixon Moore also today confirms that it will undergo a rebrand over the next few months.  The business plans to shorten its name to BDM to better reflect recent changes at the firm and will use BDM as its trading name.

As part of its ongoing expansion, BDM recently announced the appointment of John Riley as Actuarial Consultant to the firm in February and established a new office in Rustington, Sussex. 

Since April 2008 BDM has delivered over 500 independent reports and has built a reputation for innovation, accuracy and quality amongst both the legal and IFA communities.

John, who will be closely involved in all aspects of Bradshaw Dixon Moore’s actuarial work, is a qualified actuary with experience advising on the valuation of pensions.  He spent nearly 30 years at Sun Life Assurance Society, principally in marketing, product development and corporate and business planning, and oversaw the development of all the Group’s international activities, directly managing its overseas operations. 

Since leaving Sun Life in 1997, John has successfully developed his own actuarial consultancy business, taking on actuarial work in a range of projects and activities, including the industry-wide Pension Review, which took place after the pension mis-selling scandal of the late 1980s.  More recently, he has become involved with work on Pensions on Divorce.  John will now be applying his experience and expertise in conjunction with the other specialists and professionals at Bradshaw Dixon Moore to assist in the firm’s continuing growth. 

Peter Moore, Managing Director of Bradshaw Dixon Moore, comments on the appointment:  “We are delighted to welcome John onboard.  He is an excellent addition to the firm’s advisors, and we look forward to drawing on his talents and expertise as we continue to offer the best technical solutions to complex pension issues.” 

John will be working with the dedicated staff in Bradshaw Dixon Moore’s newly established Rustington, Sussex office, including a legal administrator, pension administrator and actuarial technician.

Two examples will illustrate the challenges.

Example 1. One party has a substantial deferred pension in a dc fund on marriage, although no further contributions are made due entirely to a successful investment strategy, the value of the pension fund has increased significantly by the time they divorce. How would the increase in value be dealt with?

Example 2. There is a salary related defined benefit pension. On marriage, the pension has a reasonable value. Over the period of the marriage promotion to the top of the organisation and attendant salary increases have significantly increased the value of the pension. Due to the salary linking effect, the value of the pension accrued pre-marriage is determined by the member’s current pensionable salary. What are the implications?

As an experiment, I have started a discussion thread within the UK Divorce Network on LinedIn. My reasoning is that the informal and conversational style of LinkedIn may be more conducive to a broad discussion than has so far proved to be the case on this blog. If you have a professional interest in family law you may care to read or even participate in the debate. If you are not yet familiar with LinkedIn, just follow this link http://lnkd.in/YWa5GE.

There are few assets to consider, a joint savings account, a luxury sports car and the ancient run-around they use when it rains. His car is just one of the things over which they argue. Although he ordered it four years ago, he only took delivery last year and he raided their savings account for the £40,000 needed to buy it.

Torquil wants to keep his car, so it is merely a matter of valuing it, the run-around and the savings account. Neither of them wants the run-around so it will be sold. Their savings account has a current balance of £50,000, so the focus is on valuing his car.

The current list price for a new Zola 8 is £41,000, but there is still a three-year waiting list. This has resulted in something of a black market and Zola 8s are allegedly now changing hands for £45,000. Tabatha has found a magazine article in which the founder of Zola Cars bemoans the fact that it costs £35,000 to build the cars, they sell them for £42,000 but one recently changed hands for £50,000.

So what value should be used for offsetting purposes? The list price, replacement cost or some other value? Is there a valid argument for using the £35,000 that the builder says it costs to make the car?

This example has more relevance to pension offsetting than you might think. When dealing with pensions there are similar valuation issues to address, but the answers may not be as simple as they appear. There can be several different values for a pension, the challenge is using one that is appropriate and to do so consistently.

Easiest to value

Potentially the easiest to value are money purchase – defined contribution – pensions. Contributions typically go into an investment fund and it is therefore relatively easy to obtain a value of the fund. For proprietary pensions, the provider will supply a transfer value, which sets out how much will be paid if the pensionholder transfers the pension to another arrangement. In effect, you get this valuation if you request a cash equivalent transfer value (CETV). The question is whether this is the appropriate value to use

There are two main considerations. Some features of the pension are not allowed for in the transfer value. On the other hand, there may be surrender penalties that could be irrelevant for offsetting.

Guaranteed annuity rates featured in a pension are likely to increase its value, as the guaranteed rates will almost certainly be better than those currently available. This will not be allowed for in the transfer value but could effectively increase the value of the asset by 30 per cent or more.

Surrender penalties may apply to the entire pension or just some investment elements. They are often temporary and will rarely apply when the pensionholder retires. As the idea of offsetting is that the pensionholder will keep the pension and it will not be transferred, it is inappropriate to use a transfer value that includes surrender penalties.

Different challenges

Valuing a defined benefit – salary related – pension presents a different set of challenges. Love or hate them, the scheme valuations are an obvious, but inappropriate, option. These have had several different names including cash equivalent transfer values (CETVs), cash equivalent values (CEVs), cash equivalent benefits (CEBs) and cash equivalents (CEs).

CETVs were and sometimes still are what the valuations are called where the member has left service and has the right to transfer the value to another pension arrangement. CEVs are similar but, as the member is still in service and accruing benefits, there is no transfer right. Similarly, if the pension is in payment, there is no right to transfer and the valuations were called CEBs. Since 2008, all valuations are called CEs, though many still use the old names.

How a CE is to be calculated by the scheme is set out in the Occupational Pension Schemes (Transfer Values) (Amendment) Regulations 2000, SI 2008/1050. However, it is wrong to believe this results in a consistent approach between schemes. A CE is effectively the scheme’s best estimate of what it will cost that scheme to provide the members accrued benefits and that best estimate will vary between schemes. Furthermore, there is no obligation on a scheme to value discretionary benefits, which can be significant.

When calculating a CE, it must be done as though the member leaves service on the valuation date. This is particularly relevant for uniformed services pensions that allow early retirement only if members fulfil certain pensionable service requirements; consequently, these valuable benefits are not valued by a scheme CE.

Several public sector pension schemes now offer valuations specifically for divorce purposes and they usually charge for doing them. Whereas, a member is entitled to one free CE (TV) in any 12-month period, providing they have not retired or are within 12 months of retiring. Some divorce specific valuations are calculated as if the member is single and therefore valuable dependant’s benefits are not valued.

It is possible for a defined benefit pension scheme to be in a position where it currently has insufficient funds to cover its current and anticipated pension liabilities. The BA and Post Office pension schemes are two of the higher-profile schemes in this situation. Such schemes can ask their actuary to issue an insufficiency certificate, which then allows the scheme to make an appropriate deduction from the transfer values it quotes. In the past, schemes in this position were said to be underfunded.

If a scheme quotes a value with an insufficiency deduction, the amount of the deduction must be clearly shown. As a schemes’ current funding position does not necessarily mean that it will be unable to meet its future pension promises, there is a strong argument for ignoring it when offsetting.

Valuations done by pension schemes ignore the health of the individual member. This can be an important consideration if the person is in poor health and may have a reduced life expectancy.

Alternative valuations

As pensions unlike other assets cannot be sold, establishing a true market value can be problematic. Some suggest this can be achieved using what it would cost to buy the same benefits in the commercial pension market. This can lead to some heroic assumptions being made. For example, if a policy has a guaranteed annuity rate on retirement, a value could be placed on that guarantee by comparing the guaranteed rate to the annuity rates currently available, then increasing the value of the pension by the same ratio.

Historically annuity rates have gradually worsened over time, in part because of mortality rate improvements. In other words, it costs more to buy £100 a year of pension now than it did ten years ago, and this trend is expected to continue. If the person who has the pension with a guaranteed annuity rate is several years away from retirement, using current annuity rates as described will undervalue the pension asset.

Using commercial replacement values to value defined benefit pensions is also crude and imprecise. It can be difficult to match the benefits provided by the scheme exactly and discretionary benefits are virtually impossible to mirror. As with the guaranteed annuity rate situation, using currently available commercial annuity rates to value a pension commencing several years in future is likely to undervalue the asset.

The different valuation approaches used by defined benefit pension schemes introduces considerable inconsistency of values. Consequently, comparing pensions using CEs is not comparing like with like.

So what valuations should be used when offsetting pensions? The only fair and appropriate approach is to have the pensions independently valued using a consistent methodology. This would usually mean an independent actuarial valuation, which is not necessarily as expensive as might be assumed. BDM offers a range of appropriate actuarial valuation services. See our website for details, or call us for more information. 

Any chance of a discount?

It is often argued that pensions are not the same as other assets because they cannot be turned into immediate cash, and therefore cannot be compared like for like. This can be justification for ‘discounting’ the pension values for offsetting. However, the reasons for using adjusted values can get confused, leading to inconsistencies in the approaches taken. The liquidity argument is reasonable. Given the option of cash now instead of a pension of equal value, some would choose the cash rather than pension. Providing the value of the pension is fair, the degree of the cash need will influence what would be accepted as a reasonable exchange; in other words, the extent of the discount. The greater the need for cash, the higher the discount. If there is no immediate need for cash then there is no justification for a discount. It is not difficult to develop an objective method of quantifying the appropriate discount, but there is certainly no ‘one size fits all’ universal discount.

Another consideration when adjusting pension values for offsetting concerns tax. Pensions enjoy a broadly favourable tax environment compared to most other assets and it is reasonable to take that into account when offsetting as it will not be allowed for in any valuation. In this context, the tax issues to be considered include how the contributions and investments are taxed on one side and how the eventual pension is taxed on the other. Doing the calculations properly means that some information about the financial position of the pensionholder both now and in the future is required. BDM's Pension Offset Reports provide appropriate offsetting discounts using objective measurements to ensure a fair and consistent settlement.

So, that is offsetting. It is not that difficult, but should be done properly.

Peter Moore is managing director of pension valuation specialists Bradshaw Dixon & Moore Ltd. t: 0845 838 2551 www.bradshawdixonmoore.com

This is an adaptation of an article that first appeared in Solicitors Journal www.solicitorsjournal.com

The announcement by Standard Life involves its Self Invested Personal Pensions - or SIPP to you and me. These plans are popular for those who wish to use income drawdown instead of an annuity to provide an income in retirement. Incidentally, income drawdown is now more correctly called Unsecured Pension – still with me so far?

So, what is the earth-shattering announcement from Standard Life? Well, they are introducing a £750 charge for all new customers who transfer out within the first 12 months. That sounds reasonable, Standard Life want to hang on to their investors and don’t want them taking all their money away to an alternative provider in the early days of their relationship.

Why is this important to the overworked family lawyer?

The detail of the announcement is that the £750 charge will not apply on what they quaintly call “life events” or divorce, terminal illness or death to you and me.

Getting to the point of where the pitfall lies for the unwary family lawyer. Imagine the situation where you get the current values of the pension assets in a divorce case. These happen to include a transfer value of a SIPP, all perfectly reasonable so far. However, the transfer value is exactly that, the amount that would be provided if the fund were transferred to another provider. Are you confident that you would spot the £750 charge, or that it would not apply if the transfer is made on divorce, or that it only applies in the first twelve months?

To labour the point a little, which value is appropriate in a divorce? If it comes to a pension sharing order, then clearly the transfer charge will not apply. But what if you are thinking about offsetting? By implication, in offsetting the pensionholder will retain the pension the charge will not apply and therefore the fund value ignoring the charge should be used.

Do not run away with the thought that this is only an issue with Standard Life policies and the more exotic arrangements like SIPPs. There are numerous similar traps such as Market Value Adjustments – also known as Market Value Reductions; your friendly financial professional will be able to help.

Apples & pears

The moral to this story is that great care needed when looking at pension values in divorce. A colleague of mine is occasional heard to remark that comparing pension values using scheme valuations is not even a matter of comparing apples with pears; it is like comparing a whole basket of fruit!

We will do another post on the issues of comparing defined benefit pensions using scheme CETVs. Take care when looking at what should be the simpler defined contribution pensions. If in doubt consult your friendly IFA or actuary – you owe it to your client and professional indemnity insurer.