This article originally appeared in Money Marketing magazine. We thought the theme might be of interest to our readers, from both a financial and legal background. Many thanks to Richard Jacobs for his kind permission to re-publish the article.

 

My client having received a pension share is now refusing to give the pension company her details believing that the longer she delays the situation the more money she will receive. What can I do?

 
There is a lot of confusion surrounding this issue fuelled by many errors being made by insurance companies and pension schemes alike. The situation is very clear, once a pension sharing order is made it is issued with a copy of the decree absolute to the pension scheme. 21 days after receipt of the order the transfer day is created. The definition of transfer day comes from the Welfare Reform and Pensions Act 1999 part 4, sections 29 and 31. It means “The day on which the relevant order or provision takes effect”. Further confirmation of this point can be identified from the Pension Ombudsman Determination of Shepherd v Air Products Pension Plan.

The Pension Ombudsman Determination related to Mr Shepherd whose pension was in payment. Although not unduly delayed by the time the pension sharing order was implemented Mr Shepherd had received several additional months pension, which the pension scheme needed to reclaim off Mr Shepherd for the period between the date the pension sharing order took effect and the date his pension was reduced being the implementation date. There are some interesting cautionary notes in the Determination but in effect The Pension Ombudsman confirmed the situation that the pension sharing order took effect from the transfer day.

Regardless of what your client does the pension sharing order has been issued on the pension scheme and therefore the benefits will be crystallised 21 days following receipt of the order. For a Money Purchase Scheme a valuation should be undertaken on that day and it is that valuation that will be used later. For Final Salary Schemes the benefits accrued to that date must be re-valued and a new CETV calculated and it is this value that is subsequently shared. All contributions and additional benefit accrued until the transfer day is taken into account for sharing. If the transfer day is correctly adhered to then any future contribution or accrual after this day should be ignored.

In not providing the pension scheme with information they are unable to create the implementation date. This is the date when the pension scheme has received all the necessary information, after receiving the pension sharing order and if necessary charges, to begin dealing with any pension credit. The pension scheme has 4 months from the implementation date to put the order into affect. Failure to do so can result in substantial fines on the pension scheme.

Interestingly schedule 5 of the Welfare Reform and Pensions Act 1999 allows pension schemes to discharge their liability for a pension credit without the consent of the member.

Unfortunately experience is suggesting that many pension schemes, particularly insurance company personal arrangements, are not dealing with the discharge of the pension credit in the correct manner. It often takes several months to obtain the necessary information and for implementation of the credit to take effect. What often happens is that a new valuation is undertaken at that time and the appropriate share applied against that later value. This is incorrect as further contributions/accrual could have happened under the scheme and the member of the pension scheme could be severely disadvantaged in this situation. It is important that everyone involved with pension schemes should be aware of the transfer day and the need for the valuation at that time.

It is important that you stress to your client that under law by using the delaying tactics she will not be receiving any additional benefits and may well end up having her benefits moved to an arrangement not suitable to her. In simple terms if I was acting for your client's former husband I would be advising the pension scheme to discharge their liability immediately by transferring any credit out of their scheme into another arrangement. Naturally I would make sure that the correct value at the previous transfer day is used.

With the new pension simplification legislation, it is possible to take benefits from a pension scheme at any time from age 50 (55 in 2010) without having to cease employment or retire. Interestingly the application of the transfer day applies to this situation in that the pension sharing order is deemed to be in effect from the transfer day and therefore the pension scheme, if it acts correctly, is restricted on dealing with any benefits until final implementation. It is therefore in everyone’s interest that implementation of the pension sharing order is dealt with as quickly as possible. On the basis the order is dealt with correctly there can only be disadvantages by applying delay tactics.

Richard Jacobs A.C.I.I.

Chartered Insurance Practitioner and Resolution Accredited IFA Divorce Specialist

Richard Jacobs Pension & Trustee Services Ltd

01782 557800 richard@jacobs-pensions.co.uk

A guide for family lawyers

Most pension schemes ignore the actual health of a member or their spouse in calculating CETVs and in pension sharing calculations. This will over-value the pension asset if either is in ill-health. The effect will be greater if it is the member in ill-health rather than the spouse or partner.

 
If the pension scheme does not ask for information on the health of the member or their spouse, then it is making simplifying assumptions, which ignore the true state of the individual's health.

More appropriate valuations of pensions for use in divorces and dissolutions should provide the option to allow for the health of an individual in calculating the value of the pension asset and inform the decisions made on pension sharing proportions and offsetting.

Ill-health pension values
If a client is in ill-health, the value of their assets is reduced. Usually a CETV does not account for this factor. It is unlikely that a pension scheme will alter its policy on this matter due to an individual case.

If the spouse is in ill-health then the value of their assets will be lowered by allowing for their state of health. Put another way a CETV that does not factor in ill health will produce a higher value for the spouse's pension assets than is realistic. An independent actuarial valuation that does not take the option to allow for the spouse's state of health will normally produce an even higher value.

Offsetting
In the normal course of events the impetus for using appropriate actuarial valuations for final salary (defined benefit) pensions will come from the party with the smaller pension assets, as appropriate valuations are invariable higher than CETVs.

However, where the party with the larger pension assets is in ill-health their pension values will be reduced and it might be for their benefit to provide the impetus for appropriate actuarial valuations allowing for their health.

Pension sharing
If all pensions are valued by all parties allowing for the state of health of the individuals then this has a neutral impact on the decision of whether and how to share pensions.

However if a pension scheme is valuing pensions ignoring ill-health, then it will have an artificially high value that can be captured by transferring the pension to the partner in better health through pension sharing.

The converse is also true and sharing the pension of someone in good or average health, with someone in ill-health, will normally reduce the actual joint assets.

Other approaches
For clients approaching retirement there may be other ways to capitalise artificially high pension valuations, for example through requesting a transfer to a private scheme and then buying an enhanced annuity from an insurer.

So what?
Applying the above is very straightforward as the hard work can be left to an actuary.

First check with your actuary how they will assess whether someone is in ill-health. With the help of a life underwriter, who is an expert in evaluating the risks of individuals, they should be able to provide a proportionate solution using a simple form.

Second, if you use a financial advisor check they can allow for the health of the individuals in any advice they provide.

When obtaining a value for your client's pensions, or checking that of their partner's, remember their health. Ill-health reduces the value of a pension asset. Similarly remember their health when determining the division of assets.

It may be possible to maximise the value of pension assets by ensuring that the party in better health gets the pensions, because they will benefit from the income for longer. Against this is the cost of pension sharing and the loss in value caused by the way some schemes implement pension sharing orders. Again, your actuary will be able to do the numbers on this.

Finally, never be afraid to ask your actuary their advice: theirs is a dying profession!

Nigel Bradshaw MA, FIA is Chairman and Design Director of Bradshaw, Dixon & Moore Ltd.

© Bradshaw Dixon & Moore Ltd - Jan 2008

Issues for the family lawyer

1 in 5 of us are obese. 1 in 4 of us smoke. 1 in 6 of us have an adverse family history. All these factors mean that a lot of us are in less than perfect health. Less than perfect health may mean a shorter working life and earlier death.

This article explores the effect of less than perfect health on both the valuation of pension assets.

 
Extreme ill-health
The extreme ill-health of one party in a divorce or dissolution has many implications, which are generally recognised. In addition to the greater emotional issues, the needs of the ill person might be very high, albeit for possibly a limited time. This may impact on the shape of the final settlement.

Where the person cannot carry on working an ill-health, early-retirement pension may have been, or imminently will be, paid. This may be for an enhanced income compared to the normal pension accrued to date. This pension may be payable for a shorter period, for example in the event of cancer, or for nearer to a normal life expectancy, for example on leaving work due to a mental problem.

Careful actuarial consideration of the value of the pension assets is needed in this situation. Such advice could also cover insurance policies, which are now more likely to be paid out.

Less than perfect health
Less well understood is the implication of one or both parties being in less than perfect health. Obesity, smoking and an adverse family history are potential issues, as are other illnesses and injuries.

A certain amount of wear and tear is to be expected as we get older, as is an inevitable tendency to fill-out a little. Therefore, we should not worry about every ache and pain of our clients, nor feel the need to quiz them on intimate medical details.

The impact of ill-health on pensions
Ill-health lowers life expectancy and hence the time over which a pension will be paid. Therefore, the value of a pension of someone in ill-health is less then an equivalent pension for someone in average or better health.

For example, someone in ill-health as defined above might be expected to experience twice the rate of mortality of the average. The value of a pension of £20,000 per annum to them at retirement to them might only be £375,000, compared to a value of £450,000 for someone in good health.

Nigel Bradshaw MA, FIA is Chairman and Design Director of Bradshaw, Dixon & Moore Ltd.

© Bradshaw Dixon & Moore Ltd - Jan 2008

We would really like to hear your views on this subject. If you have relevant practical experiences that would be of interest to others, we would be happy to publish them here.

Please use the comments facility, or email us at ancillaryactuary@bradshawdixonmoore.com.

Many of you will be familiar with the wealth of articles and news items available at Family Law Week. Recently they have commissioned and published an independent review of our Express Pension Valuation service, written by Ian Downing of Act Family Law. We’re happy to say that the review was positive and highlighted the very applications for which the EPV was intended. You can find the article here.

James Moore – Marketing Director, Bradshaw, Dixon & Moore Ltd

© Bradshaw Dixon & Moore Ltd - Dec 2007