We have a natural aversion to upsetting clients; which is why we do not attempt to tell anyone anything about divorce law. It is much better when we find someone to do the job for us! That is why we were so pleased to discover an excellent paper written by Mr John Buck, a member of the Family Law Bar Association. John is a barrister at Tanfield Chambers and he wrote his paper to accompany a “Pensions in Ancillary Relief” seminar last year. Even without the benefit of the seminar, we believe that the paper can help when wrestling with the challenges of dealing with pensions in divorce. For example:

“ … Bennett J rejected a submission on behalf of H that the value of his pension fund (which had not vested) should be the CETV less the 25% which can be withdrawn as a lump sum …”

In just nine pages, Mr Buck has succeeded in dealing with many of the issues that we regularly encounter. We are grateful to him for giving us permission to make his paper available here. The views expressed are of course those of the author and not necessarily those of our firm. Please click here to access and download the paper in pdf.

If you do not have a pdf reader installed on your computer, Adobe™ one of the world leaders in this technology, provide free downloads from their website.

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

© Bradshaw Dixon & Moore Ltd – March 2008

Henry Frankenstein

Frankenstein (1931) Director: James Whale

 
It sometimes seems that with each visit a wealthy divorcing family makes to the House of Lords a new concept is crudely sewn on to the 35 year old divorce law like an extra limb. There was ‘reasonable requirements’ in the 1970’s. ‘Equality’ in 2000. Now after the House of Lords has brutally tortured the wording of the 1973 Act like never before, there is ‘compensation.’ None of this is in the statute. The net result of all this industry is to make the law into an unpredictable lumbering Frankenstein’s monster that roams the land striking terror and confusion into the chambers of District Judges and driving up costs.

This sort of judicial ‘creativity’ can make it harder to advise divorcing parties because none of us know when a limb will fall off the monster or where a new incompatible body part might bolted on. Surely the law needs to be either applied as it is written, or better still it needs to be re-enacted taking into account such concepts as pre-nuptial contracts, equality and the concepts of matrimonial and non matrimonial property.

These days the courts will distinguish between matrimonial property and non matrimonial property. This means that assets built up within the duration of the marriage will be shared, but assets earned or acquired either before or after the period of co-habitation may not be.

Given the emphasis in recent case law Miller [2006] UKHL24 and Rossi [2006] EWCH 1482 – on sharing the ‘matrimonial acquest’ there seems to be no reason why the same principles should not be applied to pensions built up prior to the marriage, or post separation. Many actuaries are instructed in the case of a long marriage to say how a pension might be divided up to provide an equal income in retirement.

I have not yet seen an instruction to an actuary that aims to apply a distinction between matrimonial pension and non matrimonial pension but some readers might have done. In an appropriate case such an approach would be justified. Suppose a husband gained an inheritance 18 months after separation and put in into his existing pension fund. As long as the wife’s needs could be met with a fair share the matrimonial assets there might be no good reason why the husband should not retain the inheritance in the form of the increased pension. It would need to be carved out of the pension fund of course but that is what you use an actuary for.

But what will the wife say if confronted by the husband’s argument of post separation property ring fenced for his own use. She might draw on the ‘extra statutory’ Miller concept of compensation. She could say that but for this divorce she too would be enjoying the fruits of the husband’s inheritance in the form of extra pension.

And to bolster her compensation argument, could she not ask the court to blow the cobwebs and dust off MCA 1973 S:25(2)(h). This subsection is routinely ignored but is clearly still a part of the law. Its purpose is to ensure that the court takes account

‘…..of the value to each of the parties to the marriage of any benefit (for example a pension) which by reason of the dissolution or annulment of the marriage, that party will lose the chance of acquiring’

How long I wonder, will it be before the courts are confronted with the eerie spectacle of S:25(2)(h) as it rises smoking from it’s creaking coffin like a resurrected vampire, woken by the taste of blood on it’s lips that dripped from the alien concept of ‘Miller Compensation’.

Tom Tyler is a family law barrister at 4 Brick Court chambers

Justice Minister Bridget Prentice MP issued a written statement on 6^th March, from which we learn that the Government have decided to consider the research findings on the Family Law (Scotland) Act 2006. The Act has provisions that are similar to those that the Law Commission proposed in their report on 31 July 2007.

The Scottish Executive intends to undertake research into the cost and efficacy of arrangements for cohabitees. The Government will await the outcome of this research and will for the time being take no further action.

Peter Moore is a Director of Bradshaw, Dixon & Moore Limited

© Bradshaw Dixon & Moore Ltd - March 2008

In a normal world sharing a pension 50/50 would mean giving 50% to each party. However pensions are not part of the normal world. There is a great example given by the University’s pension scheme in their literature that demonstrates this.

The example assumes the divorcee has 15 years service and salary of £30,000. The pension is shared 50/50 and the example then moves on to retirement 20 years later. It assumes inflation of 50% between divorce and retirement, with the member’s salary growing above inflation by 100% to £60,000.

At retirement the member gets a pension of £22,031pa, of which £15,000pa is in respect of their post-marriage service (15/80x£60,000), and £7,031pa is in respect of married service. The ex-spouse gets a pension of £4,219pa.

Read that again. In respect of married service the member gets £7,031pa and the ex-spouse £4,219pa. That’s not 50/50, its 62.5/37.5.

So why does that happen? It’s because the University pension scheme only increases the ex-spouse’s pension by inflation, not by the increase in the member’s salary. And in the example salary increases are double inflation.

I’m not knocking the University scheme here. In fact there is a lot of merit in what it does. For a start the ex-spouse’s pension is totally separated from the future fortunes of the members: the clean break pension sharing is there to provide.

Second the sum of the pensions for the two parties is set to equal to what the pension would have been if there had been no sharing. Sharing does not reduce the total assets of the two parties. The same cannot be said for the way some other schemes implement sharing, where the split might be 50 to the member, 37.5 to the ex-spouse and 12.5 to the scheme.

So what does it prove? First that there are no simple answers with pensions, second that it is essential to understand how a scheme will implement a pension sharing order in practice to work out what the effect of sharing will be.

Are there cases out there which have been shared without finding out how it would be implemented in practice? Could they come back and bite you?

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

© Bradshaw Dixon & Moore 2008

Some of our readers may already be familiar with Wikivorce, an online divoce social network. We find the site very useful to follow what is happening at the "grass roots" of the profession (i.e. divorcees themselves) and Peter can often be found lurking in the Pensions section of the forum.

Wikivorce founder, Ian Rispin has recently circulated a press release announcing that membership of the site has now reached the 10,000 mark. Proof, if any is needed, that clients going through a divorce are increasingly arming themselves with information and advice from outside of conventional channels.

This might seem rather unnerving at first, but we see it as a great opportunity to see firsthand what really matters to end clients outside of the sometimes constrained professional/client relationship.

The original press release can be found here. 

Firstly, the Bill brings in a major change to the statutory revaluation and indexation requirements for final salary pension schemes. At present, schemes are required to increase pensions in deferment by either the increase in the Retail Price Index (RPI) over the period between date of leaving and the retirement date (rounded down) or 5% a year whichever is lower. After retirement, schemes are required to increase pensions in payment by the lower of the annual increase in RPI or 5% each year. These are major protections to members of schemes from the effect of inflation. The Bill will remove the 5% and replace it with 2.5% for all service accrued on or after the date the Act comes into force. Therefore, schemes will have to split deferred benefit statements showing pensions accrued before some time in 2008 and that accrued after that date. Schemes will reflect this lower inflation protection in Cash Equivalent Transfer Values and Cash Equivalent Benefit statements so these will fall gradually as more and more of the service considered is after this date.

The aim of this change is to try to encourage employers to keep schemes open by making benefits cheaper (due to lower quality of indexation) in the future. The government is using the excuse that the Bank of England will keep “inflation” at 2% without mentioning that projecting Consumer Price Index (the Bank of England target) at 2% is roughly equivalent to broad inflation (measured by the RPI) of between 2.5% a year and 3% a year. (Note to nerds – CPI is a geometric average and will, therefore, increase by less than RPI which is an arithmetic average just due to maths). Therefore, people’s benefits will decline in real value. At present, a market view of future long term RPI increases taken from differencing the yields guaranteed by the government on their fixed interest bonds and their indexed bonds is about 3.5% a year.

The second change that family lawyers should be aware of is that pension credits created by pension sharing orders will now be subject to protection by the Pensions Protection Board. The Board has to provide compensation to the individuals credited in the same proportion as the sharing order. Cash Equivalent benefits are also payable if appropriate. The payments will be subject to the same proportionate reductions that the Board can apply to their normal payments to scheme members. The Board can also impose charges for applying a pension sharing order and will split the charge in the same proportion as the order applies.

Most of the Bill is taken up by the latest attempt by the government to reduce the means tested benefits bill: Personal Accounts. This will be a pension scheme that everyone will have to contribute 5% of their earnings to (unless they are in a good quality scheme) with their employers being forced to contribute 3%. Tax relief should reduce the 5% to 4% (at current 20% tax rates). Individuals will have the right to “opt out” of the scheme but will need to do this every three years as they will be automatically opted back in 3 years after opting out. There is a degree of cynicism in the pensions market on this innovation due to the fact that the government has not said what the impact is on low earners’ means tested benefits from having modest amounts of pensions from these accounts (and they will be modest – no more than 20% of income at age 65 for people on average pay and even less for low earners).

The Personal Account will be provided by a Personal Account Delivery Authority. The aim is that these centralised accounts will be cheap to run. However, HMRC have ruled out collection of contributions through PAYE (which is the only simple cheap solution of contribution collection centrally) due to the fact that their own systems could not cope. The government has also stated that collection costs will not be subsidised by the taxpayer. It is not hard to see who is likely to pick up the costs – employers. Something to be aware of for family lawyers’ firms’ costs in the future.

The new Personal Accounts are supposed to be available from some time in 2012.

Steve Dixon BA, FIA is Actuarial Director of Bradshaw Dixon & Moore Ltd. 

© Bradshaw Dixon & Moore Ltd - Feb 2008 

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

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

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.

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

© Bradshaw Dixon & Moore Ltd - Dec 2007