If you enjoy the style, you may care to visit Steve’s own blog http://www.jargonfreepensions.co.uk/. You will gather that making pensions understandable is just one of Steve’s talents, he is also an acomplished cartoonist!

1.        CETVs are not appropriate valuations for use in divorce

2.        Distorted CETVs means distorted pension share percentages

The age at which an officer is assumed to leave service or retire is particularly important, as it affects when the pension starts and hence its value.

Depending on the retirement age used, the value can more than double for this reason alone. Except in specific cases, it is unlikely to be realistic to argue for the CETV approach in which an officer is deemed to have left service on the valuation date.

The low CETV value also affects the pension share percentage required to meet a specific objective. The adage “a 50% pension share never equals a 50/50 split of the pension” has never been more relevant.

A simple case from our files with one PPS 1987 pension makes the point. The CETV was £285,000. Our valuation, based on retiring with an immediate pension at age 50 was £640,000. The percentage pension share required to equalise income was 70%, or 87% to equalise capital values.

Help is at hand

If instructing on police cases sounds confusing then we can help. We have produced a fact sheet that shows you the effect of different instructions and the factors you should take into account when setting them. We have a similar fact sheet for armed forces pensions. Both are free, just click here to request both factshhets..

 Pension credits from age 60

Unlike the armed forces schemes, which have reduced the age at which pension credit members must take their pension, there have been no such changes to the police schemes. Pension credits must still be taken from age 60, and it is not possible to transfer them out of the scheme to get around this.

There is talk of this changing, but this would strictly require Amendment Orders to the schemes’ primary legislation so it seems unlikely to happen in the near future.

Pay increases versus salary expectations

A general issue, but surprising common on police cases, is querying the future salary expectations we make when producing reports. Normally a reasonable comparison is made between current increases in pay scales - about 2.5% - and our stated assumption of about 5.25%.

The short explanation is that the important figure is the rate of increases above inflation, which is about 2% in each case. It should be recognised that due to promotional increases or payments for extra responsibilities, salaries generally go up faster than increases in pay scales.

We are aware that reports can raise numerous such questions. However, rather covering them all in each report, we are extending our FAQs on our website to help you and your clients answer specific your queries.

Pension credits from age 55

First some good news. In April ’09 the Government introduced a new statutory instrument, The Armed Forces Pension Scheme etc. (Amendment) Order 2009, that enabled pension credits to be taken early. This is welcome news and will greatly assist financial planning for divorcing couples in their late 40’s and 50’s.

Previously when pension sharing the pension credit had to be kept within the scheme until the credit member reached 65 when the pension could then be taken. The change means that the pension credit must be taken from age 55. Although the new instrument only refers to the 2005 scheme and for pension shares implemented after 6 April 2009, the administrators have told us that they are applying the age 55 rule for all pension credits.

For old pension credits, set-up to pay from age 65, the ability to take the pension early is optional and will be subject to an income reduction - based on actuarial factors. Solicitors may want to make previous clients aware of this change.

CETVs do not value Early Departure Payments

For members of the 2005 scheme their CETVs do not allow for Early Departure Payments, even if they could be taken immediately. This means for members who are aged between 39 and 55 who have completed 18 years service, their CETV only values a pension from age 65. This despite the fact that if they left they would receive a lump sum and between 50% and 75% of their pension immediately.

We recently reported on a soldier in this situation and valued his benefits, including his Early Departure Payments at £1.3m, compared to a CETV of £600,000.

CETVs are not appropriate valuations for use in divorce

The above is an extreme example of the fact that CETVs were not designed for use in the divorce process. They are the amount of cash a scheme will transfer out should a member leave. They ignore the fact that if the member stays in service just a few more years they might be eligible to take their pension early, rather than waiting until 60 or 65.

Some recent examples from our Express Pension Service include two 1975 Scheme cases, one where our appropriate value was £350,000 compared to a CETV of £110,000, another where our value was £600,000 and the CETV £410,000.

Distorted CETVs means distorted pension share percentages

As the CETV is used by schemes when implementing pension shares, then it should not be a surprise that a distorted CETV means a distorted percentage share is needed to obtain a fair result. In fact this is true generally, but more so with uniformed services schemes.

Hence to equalise income in two recent Armed Forces reports we had to recommend 63% and 75% percentage shares respectively.

Pension in Payment CEBs

Finally a straight plug that we can value Armed Forces pensions in payment, allowing for EDPs and level pre-55 income with the RPI catch-up at 55, for only £100+VAT. Cheaper than a CEB from the scheme for initial disclosure and as they are typically delivered within five working days you do not have to wait three months to get the answer.

Peter Moore

Managing Director

Bradshaw Dixon & Moore Ltd

Actuarial reports are often essential tools in divorce and dissolutions, but the perception is that they can take a while to produce. Little wonder then that family lawyers sometimes seek alternative and occasionally inappropriate solutions.

How quickly a report will be delivered is often the first question asked when a report is commissioned. Unfortunately, obtaining information from the pension schemes takes up most of the time. Turnaround standards and the quality of responses vary significantly between schemes.

Although we already have details of many schemes, or can quickly source them on the internet, certain issues still require direct contact. The main ones are obtaining the method and factors used in pension sharing calculations, and validating personal details, particularly in relation to part-time working and transfers received from other schemes.

Where an individual is in poor health, the impact assessment can usually be made from the information the person provides. Occasionally, it is necessary to obtain reports from their GP’s medical records, which generally takes three to four weeks.

So how can you speed up your reports? 

If you can provide full recent CETV and membership statements for each pension these often contain sufficient detail for us to start work straight away. Some schemes, including may state schemes, automatically refer benefit requests back to the member. Faxed or posted signed client authority forms are still essential to query any specific issues or to obtain the pension sharing details we need. Instruct early, so that if there are delays, they do not create problems.

But how can you get reports in just two weeks? 

There are two requirements,

• all the scheme factors being on record, as is the case for the public sector schemes and some others
• you supplying the necessary information

To receive a pdf with the information required for public sector scheme cases, email us at requirement-table@pensionrelief.com or fill out this short form.

We periodically send email briefings to lawyers and IFAs on our database. If you would like to receive these briefings by email instead of waiting for us to post them here, please complete this form.

Most clients with money-purchase (defined-contribution) pensions will find the value of their pension funds lower than before. The FTSE 100, a measure of the price of leading UK shares, has fallen 33% in the last year. Overseas investments have been even worse for sterling investors, the US Dow Jones falling over 50% allowing for currency changes. The price of fixed interest stock has done better, 10-year gilts rising by 9%, though with a reducing income yield.

In general, most of the falls happened in the first 10 months of 2008 and any money purchase valuations in that period may need to be revalued.

Those clients with money-purchase pensions that are invested in with-profits funds may have see the current value of their pensions reduced by temporary surrender penalties. These Market Value Adjustments (MVAs) as they are called may or may not apply in any particular case depending on a number of factors, such as who the pension provider is, when the plan commenced and how near the client is to their planned retirement date.

Money-purchase pension holders should also plan for lower pensions in retirement due to the fall in assets values and lower-interest rates increasing the cost of buying the pension annuity on retirement.

For final-salary pensions the future pension amount is already set and is unaffected by investment falls. Indeed the flip to the money-purchase case is that the underlying fund now needs to be bigger to pay for the same pension in retirement, and so CETVs have increased due to current market conditions. For example, some state CETVs have increased by up to 12% in the last 6 months due to interest rate changes.

Of course, this is only the case if the pension scheme can afford to pay it. This might mean reducing benefits, which can be allowed for in full actuarial reports, or failing altogether. If a scheme fails, one of two statutory safeguards might kick in.

In the rare case that an insurer fails, its plans or pension annuities are covered by the Financial Services Compensation Scheme (FCSC) for the whole of the first £2,000 and 90% thereafter.

Meanwhile private company pension schemes are covered by the Policyholder Protection Fund (PPF). The PPF guarantees all pensions currently in payment, and 90% of other pensions, up to a limit (currently £28,742pa). If a company becomes insolvent, the trustees of its pension scheme can apply to the PPF for protection. Initially the scheme is put into an Assessment Period, while the PPF see if the scheme / employer can be rescued, or if the scheme has sufficient assets to guarantee at least PPF limited benefits. The Assessment Period is likely to last at least a year, and during this time, trustees have to reduce benefits to the PPF limits. If at the end of the review, the PPF accepts the scheme it transfers to them.

A scheme in the Assessment Period cannot generally pay transfers out of the scheme. However, an exception can be made for the pension credit from a pension sharing order. Once a scheme is transferred to the PPF no further pension sharing or attachment orders can be made, though orders made during the Assessment Period, but not implemented will be honoured. Statements of compensation, equivalent to CETVs, can be obtained for members in transferred scheme from the PPF.

We have a checklist that can help in deciding what actions to take due to credit-crunch issues. If you would like a copy of this pdf please complete the request form.

The legislation only applies to private sector pension schemes. However, the consultation paper, which introduced the draft legislation, stated that guidance for the public sector schemes would be published in due course. On 11 September 2008, HM Treasury published guidance ^[2] that applies to all unfunded public service pension schemes and to the Local Government Pension Schemes. Although it too has an effective date of 1^st October 2008, not all schemes were able to respond last year. The result has been delays in obtaining CETVs. Indeed for certain schemes CETVs have only recently begun to filter through again. As with the private sector schemes, the CETVs are higher.

Although the legislative and guidance changes are specific to CETVs, the fundamental changes mean that CEBs will also be affected and will increase. Less obvious is the affect on the factors schemes use to convert CETVs into annual pension credits. These are the pension scheme equivalent of commercial annuity factors, so they are important when an internal credit is made from a pension sharing order.

If you are hoping that post October 2008 CETVs would be fair and appropriate values for use in divorce, you will be disappointed. The six underlying reasons why CETVs are inappropriate for valuing final salary pensions remain; it is just that generally CETVs have increased a bit.

It is inevitable that some cases will straddle the critical basis change date, with CETVs calculated prior to 1^st October not yet reaching a conclusion. There is no one answer to what you should do in such cases; it depends on several factors, such as which party you act for, the type of scheme, the nature of the settlement and possibly also the amount of the CETV. We have a simple decision tree that can help you decide what to do in such cases. If you would like a copy of this sent to you as a pdf email attachment please click here to submit an on-line form.

•1 Occupational Pension Schemes (Transfer Values) (Amendment) Regulations 2008

•2 “Basis for setting the discount rate for calculating cash equivalent transfer values payable by public service pension schemes” HM Treasury

We have recently published a short series of articles, called "Why do wives lose out?" in the hope of sparking a debate about issues that we feel are important in our field of pension valuation and sharing in divorce.

Please click comments below to read the debate and add your own views.

You might also be interested in a parallel debate on the Wikivorce, the divorce support community site, which can be found here. 

This is the third article in a series looking at three systematic faults in the way the law settles pension issues. Faults that cause the person with the smaller final salary pension, usually the wife, to lose out.

The first two faults were in the valuation of the pension and its use in a pension offsetting solution. The third fault affects wives opting for a credit under a pension sharing order.

When determining the percentage of the CETV to share to the spouse (or value on pounds in Scotland), then the natural assumption is that if you want 50% share of the pension then you determine a 50% share of the CETV.

Natural, and as often with pensions, wrong. In most cases 50% of the CETV will provide less than 50% of the pension value to the spouse.

Although this will not be obvious at date of sharing, it will be when pension benefits become due. It is a catastrophic failure of pension experts to communicate this issue to legal professionals. A failure that is penalising wives every day.

The reason that 50% does not work is down to how different schemes implement pension sharing orders. Due to the restrictions of ensuring a clean-break even the best schemes, in this case including all Public Sector schemes, end up giving higher benefits to the original pension member. Other schemes manage to both provide lower benefits to the credit member and pocket some extra savings as well.

We have identified 3 common approaches adopted by pension schemes to implementing pension sharing orders. The example in our Pension Guide on Divorce shows the pensions finally paid after a 50% of CETV pension share from him to her.

50% pension share for a type 1 scheme
His pension £16,500pa
Her pension £ 7,900pa

50% pension share for a type 2 scheme
His pension £12,300pa
Her pension £ 7,900pa

50% pension share for a type 3 scheme
His pension £12,300pa
Her pension £ 7,500pa

To state the obvious in each case the final share is nothing like 50/50, and in each case it is the wife that loses out. Further schemes using type 2 or 3 approaches to sharing are providing lowering overall benefits for both parties.

The only way to resolve this issue for wives is to investigate how the scheme will implement a pension sharing order and to calculate the share needed to meet the objectives of the two parties: normally equalising capital values or income.

Actuaries, including Bradshaw Dixon Moore, can do these reports for clients. Their use should be considered essential for any proposed pension share.

Nigel Bradshaw is Chairman and actuary at Bradshaw Dixon Moore.