There is a very interesting article on the blog of Kent solicitors Kaslers Solicitors LLP. By understanding the public sector transfer club (PSTC) rules, this firm has leveraged £36k of pension asset value for their client.

If you have not come across the PSTC before, you might be surprised by just how attractive its benefits are. It is a reciprocal arrangement among final salary schemes that offers employees who move between the relevant employers the opportunity to transfer their accrued pension benefits on special terms. What this amounts to is that when such employees transfer their pension benefits within the PSTC they receive a broadly equivalent service credit in the new scheme. As the Kaslers’ case illustrates the employments do not even have to be consecutive.

Although the PSTC benefits are considerable, the opportunity to use the transfer Club rules strategically in a in divorce or dissolution will not crop up too often because time and age limits apply to Club transfers. The Civil Service Pensions Division administers the arrangements for the Club and more information, including the rules and a list of member schemes is available on its web site.

We were not involved in the Kaslers’ case but we do come across cases where Club transfers have occurred. One recent example was a police constable working in England who had served for a few years in Scotland before moving south. By making a Club transfer, he received credit for his early service in Scotland. Because of the way early retirement rules work in the police pension scheme due to making the Club transfer he had the option to retire earlier than would have otherwise been the case. This in turn had a positive impact on the value of his pension.

Peter J Moore – Director, Bradshaw, Dixon & Moore Ltd

© Bradshaw Dixon & Moore Ltd - Dec 2007

This is the third in a series of three posts, adapted from an original, longer article by Peter Moore. You can download the original here.

A fair valuation of a pension is the cost of purchasing or replacing the benefit in the commercial market. A CETV is a number for a different purpose. As in most cases, one party in a divorce or dissolution will lose part or all of a pension benefit, the value used should be a fair value, otherwise the outcomes will not be those that are intended.

It is unlikely that you would accept a valuation of the family home based upon the cost of the materials and labour that were required to build it, so is it fair and reasonable to make decisions on valuable pension assets based on the wrong numbers? The analogy is not perfect but the effects are the same.

How fair is fair?
A CETV may understate the value of a pension by a significant amount. The problem for lawyers is that it is almost impossible to know how unfair a value is without doing some detailed calculations. As an indication, it is not unusual for a public sector CETV to understate the pension value by 30% or more and that means that it cannot be a scheme funding issue. Public sector schemes are not unique in this respect and similar differences occur on private sector schemes.

Clearly, if the CETV itself is small, even a significant discrepancy is immaterial compared to the cost and effort involved in getting a fair value calculated.

Why it matters that CETVs are not 'fair' values
It could be argued that if a pension sharing order is made, the fact that the CETV is not a fair value is immaterial. If you slice an apple in half, neither the size of the whole apple or the two halves matters. The only concern is that it really is cut in half. The same is true of final-salary pension schemes. If the value of the assets allows all the pensions to be shared equally, by a making pension sharing order, the fairness of the CETVs may be ignored. However, difficulties arise where one asset is offset against others. If a fair valuation is made of each asset, then offsetting is a simple matter but if a pension is offset solely on its CETV the result could be very unfair.

The cost of making and implementing pension sharing orders may mean that it is uneconomic to share all pensions equally, in which case an element of offsetting is inevitable. An important point to remember is that the intention to make a pension sharing order does not mean that the fairness of the pension value can be ignored.

 The most important factors are:

• how the exact “split” is arrived at
• the nature benefits created by the pension credit, and
• whether pension sharing will reduce the total value of the asset.

How can a lawyer fulfil their duty of care?
Primarily, the lawyer must properly identify where the problems may arise. If they are not themselves suitably trained or experienced, they need to obtain professional assistance. Valuing pensions is a technical task requiring the application of actuarial techniques. The work can be done by suitably trained and qualified pension technicians and financial advisors but some level of actuarial input or oversight is often desirable.

Peter J Moore – Director, Bradshaw, Dixon & Moore Ltd

© Bradshaw Dixon & Moore Ltd - Dec 2007

This is the second in a series of three posts, adapted from an original, longer article by Peter Moore. You can download the original here.

A CETV, whether it is on the existing or revised basis, is actually intended for a different purpose. There are several reasons why this is the wrong number and we will look at some of them.

CETVs are calculated as if the member has left pensionable service. This may well be the case, but if the member is still in pensionable service, the true value of the benefits will be greater than the CETV.

Some schemes award discretionary increases in benefits such as inflationary increases and have an established record of doing so. Schemes are free to ignore these discretionary increases when calculating CETVs; in which case the CETV will be lower than the true value.

The present calculation basis requires that the values represent the expected cost within the scheme of providing such benefits and should be assessed having regard to market rates of return on equities, gilts or other assets as appropriate. Under the revised basis, the transfer value should reflect a 'best estimate' of future returns having regard to the existing asset mix of the scheme. The subtle and somewhat technical difference between the existing and new basis is that the new calculation basis reflects the current, rather than theoretical, investment asset mix of the scheme. In a family law context, the effect of the revised calculation basis is marginal.

Generally, over a long period, equities (stocks and shares) have historically outperformed gilts. If a scheme's assets are largely invested in equities (or they are assumed to be for the purposes of calculating CETVs), long-term investment returns will be good compared with those of gilts. Consequently, pension contributions from the employer can be lower than would otherwise be the case. As the CETV is calculated on the cost to the scheme of providing the benefits, actuarial assumptions on future investment returns can have a significant effect on the calculated CETV.

UK mortality rates have changed significantly over recent years. People are living longer than was expected even two decades ago. If people live longer, they draw their pension longer, which makes providing pensions more expensive. This translates into higher pension contributions from the sponsoring employer in order that the pension scheme can meet its pension promises. Not using the most up to date mortality tables has implications for the required level of employer contributions but it also depresses the quoted CETVs.

For private sector pension schemes, legislation requires that they are funded to specific levels. At any one time, they are not required to have sufficient assets to meet all their current and future liabilities. Instead, they are required to make assumptions about current and future liabilities along with assumptions about future rates of investment returns on their assets. In simple terms, the result is the total level of funding required to be reasonably confident that the current and future pension liabilities can be met.

An under-funded scheme may at its discretion, reduce its quoted CETVs proportionately. For example, a scheme may be 30% under-funded and therefore reduce its CETVs by 30%. Whilst this is equitable in the context of the intended purpose of CETVs, it has a distorting effect when the CETV is required for divorce or dissolution purposes.

Other than a few notable exceptions, most public sector pension schemes are not funded in the way private sector schemes are. Instead, pension payments are met out of tax revenue. CETVs for public sector pension schemes are therefore a theoretical value arrived at using factors supplied by the Government Actuary’s Department. As there are no underlying pension assets, the issues concerning investment returns and scheme funding do not apply. Nevertheless, CETVs for public sector pension schemes do not represent a fair value in the divorce and dissolution context.

Special considerations apply to some public sector pension schemes. In calculating the CETV, it is usually assumed that pensions are taken between the ages of 60 and 65. In practice, the rules of some public sector pension schemes allow for retirement at much younger ages, with little or no reduction in pension. This is encountered when dealing with people in the uniformed services, such as police officers and soldiers.

Peter J Moore – Director, Bradshaw, Dixon & Moore Ltd.

© Bradshaw Dixon & Moore Ltd - Dec 2007.

This is the first in a series of three posts, adapted from an original, longer article by Peter Moore. You can download the original here.

Introduction
The calculation basis for Cash Equivalent Transfer Values (CETVs) for final-salary pension schemes is changing. The new basis is due to come into effect in October 2008, but this does not mean that thereafter CETVs will always produce a fair value.

Legislative background
The Divorce etc (Pensions) Regulations 2000 and the Pensions on Divorce etc (Provision of Information) Regulations 2000 set out how benefits under a pension arrangement must be calculated. Regulation 2 of the Pensions on Divorce etc (Provision of Information) Regulations 2000 imposes upon the person responsible for a pension arrangement the requirement to supply pension information, including a valuation. Regulation 3 sets out how the valuation is to be made and calculated, and retains the requirement for the valuation to be consistent with GN11.

It is important to recognise that these regulations concern the manner in which the benefits are valued by the scheme (the CETV). They also provide that a pension sharing order is made by reference to the CETV calculated and quoted by the scheme. The CETV is therefore a consistently calculated number. It is incorrect to regard the CETV as unchallengeable.

Changes to the calculation basis
The new, as yet to be published Regulations are the result of a consultation process that ran between June and August 2006. In January 2007, the DWP published its "Response to the Consultation". The Government intends to regulate on the calculation basis, which is different in a number of technical ways from the current GN11 basis. Broadly, the values will be according to the expected cost of providing the benefits if the member remained in the scheme until retirement. This is some way short of the proposals in EXD54 and, despite two years of debate and consultation, in the values it produces it is broadly the same as the current GN11 basis. We still await the actual legislation.

The revised calculation basis only affects CETVs for defined benefit pensions. These are likely to be the biggest concern for lawyers, largely because they can understate the true value of the benefits by 30% or more. CETVs for defined contribution pensions are unaffected by the change in the calculation basis but that is not to say that the CETVs for these schemes represent a fair valuation of the benefits.

As before, CETVs for public sector pension schemes are to be calculated using factors provided by the Government Actuary’s Department.

Peter J Moore – Director, Bradshaw, Dixon & Moore Ltd

© Bradshaw Dixon & Moore Ltd - Dec 2007.

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