by Alison Barnes
How do we value pensions in divorce?
There are several different types of pension scheme, but our starting point is always to obtain a statement from your pension provider to give us a Cash Equivalent Transfer Value (CETV) or Cash Equivalent of Benefit (CEB) where a pension is in payment.
In many cases the CETV does not give us an accurate figure of what that pension is worth to the member in real terms. Whilst any pension sharing order made within divorce is expressed as a percentage of the CETV/CEB, to negotiate on CETV/CEB values alone could potentially give rise to a claim for negligence. Unlike our counterparts, this is an area we will focus attention on from the start and ensure we gather together the proper information to allow us to properly advise our clients.
In money purchase schemes the CETV (Transfer Value) is the contributions made plus investment returns less any surrender penalties which may not apply in all circumstances and therefore need to be evaluated. Money purchase pensions can include valuable benefits such as preferential annuity rates or bonuses that are not allowed for in the CETV (Transfer Value).
A CETV/CEB for a salary related pension represents the anticipated cost of providing member’s benefits within the pension scheme. In a defined benefits scheme the CETV is a value calculated by on actuarial principles which requires various assumptions to be made about the future. It does not however include for example any discretionary benefits of the scheme, it usually ignores issues of health and does not provide for future salary increases.
It is the responsibility of the trustees of the scheme to determine the basis of the calculations for a CETV. This therefore gives the trustees a wide discretion and therefore provides for widely vary results. For example in one of our cases a public sector final salary pension scheme had a CETV of circa £450,000. In real terms, based on the benefits payable to the member, and after making a small adjustment in respect of future inflationary increases, it was determined that the true market consistent valuation of this asset was likely worth nearer £1,100,000.
Sometimes it is to our client’s benefit to rely on the CETV and we would leave it up to the “otherside” to raise this issue, if indeed they did. On other occasions, where perhaps both parties have different pensions, we need to “look behind” the CETV at the true benefits of the respective pension assets and how these are potentially to be shared.
We may consider advising our clients to obtain an Express Pension Valuation (EPV) to determine at face value whether this issue requires further investigation and to allow us to obtain actuarial input from the start of a case as to whether the CETBV/CEB is an reasonable reflection of a pension’s true worth. Most of our clients agree that the nominal cost of obtaining an EPV at the outset of their case is money well spent.
Moving forward, we may look to obtain further detailed analysis of how pensions are to be dealt with within divorce. We may consider instructing an actuary to undertake detailed calculations in respect of how to properly divide pensions to obtain a fair result. This may be to equalise the true capital value of pension provision accrued perhaps during a limited period of time, or alternatively to provide the parties with equality of income on retirement or might be to provide us a appropriate capital figure to enable the pension member to “buy out” their spouse’s interest in their pension.
Whatever route is taken, this is a complicated area and it is important that, wherever pensions are present, you speak to someone who understands the options and has access to the professional actuarial support if required.
We at Barnes Family law offer a free initial consultation; call 01274861096 or email email@example.com.