Posts by Ian

Ian Conlon

I recently prepared a report in relation to pension on divorce where the husband was retired and in receipt of a pension from the BT Pension Scheme. The pension scheme member’s wife was over age 60 so was in a position to draw the proceeds of a pension share immediately. The CETV was a multiple of approximately 20 times the pension, so for a pension of £20,000 per annum, the CETV would be approximately £400,000.

I estimated that, if the pension scheme allowed the Pension Credit to remain within the scheme, then the ex-spouse would receive a pension of around £10,000 per annum from a 50% Pension Share. However, as the scheme insists that the ex-spouse takes the proceeds of the Pension Credit externally, then the ex spouse could expect to purchase an annuity providing an income of around £6,600 per annum (increasing in line with price inflation as per the scheme benefit). So the result of applying a Pension Sharing Order of 50% was an immediate loss of joint income of around £3,400 per annum, with this loss increasing over time in line with price inflation, equivalent to a 17% reduction in overall income (or profit to the pension scheme depending on your perspective).

An Attachment Order was considered but the cost of insuring against the risk of the husband dying before the wife ruled this option out. Both parties needed an income stream so offsetting was not an option. The only way of maintaining the value of the pension assets was to remain married! Also not an option!!

At the same time in a parallel universe the Pensions Regulator is telling scheme trustees that, if an employer wishes to provide an enhancement to encourage pension scheme members to transfer out, then the trustees should start from the presumption that transferring out of a defined benefit pension scheme is not in a member’s interests. So, in the case where the trustees make the decision, how can they come to the view that it is appropriate to force the ex-spouse to transfer his or her benefits out of the scheme? Are trustees looking after members interests in this case?

This is a far from uncommon scenario; those who receive benefits from a Pension Sharing Order are the only group of beneficiaries associated with occupational pension schemes who lack any level of meaningful protection. Pension scheme trustees should be challenged as to the rationale for their approach given that retaining the benefits within the scheme adds no extra liability.

Ian Conlon

About four years ago I was instructed to act in a divorce case for the spouse of a serving senior police officer. The CETV as quoted was approximately £750k and the first task was to satisfy myself that the accrued pension benefits and CETV had been calculated correctly. As the officer had already completed 25 years service the CETV should have reflected the value of benefits payable from age 50. I recall the shock at discovering that the CETV had incorrectly been calculated on the basis that benefits would come into payment at age 60 and that the correct CETV was around £1.25m.

Ok, so that was some time ago, I had assumed that such major issues would have been sorted out by now. So I was really quite taken aback when searching on the internet for some specific details in relation to the Firefighters’ Scheme when I came across a Firefighters’ Pension Scheme Circular from June 2010 which highlighted this exact issue. According to the circular, the pension administration system which they use had been applying the incorrect factors for calculating CETVs for divorce in situations where the member had attained age 50 and had completed 25 years service.

It may well be the case that the scheme administrators were aware of this issue for some time and were manually calculating these CETV requests, however the Circular does start with the words “It has come to our attention” which certainly raises the possibility that past CETVs have been calculated incorrectly and have possibly also led to the incorrect calculation of Pension Credits and/or Pension Debits resulting from a Pension Sharing Order.

Given that the issue relates to those aged over 50, the pension benefits in such scenario will be fairly material so a pensions expert should have been involved who would have picked up on any incorrect CETV of this magnitude. The position could be difficult if a materially incorrect CETV has not been spotted! It does certainly highlight the need for professional support where defined benefit pension benefits are involved.

Ian Conlon

Going through a divorce is a stressful time for all concerned and there are many factors to consider. The division of marital assets is often the cause for the most friction. There are however several places to find help and advice on how this process can be made easier for all.

PENSIONS
Pensions must be taken into account in divorce proceedings as they can represent a significant financial asset. A divorce often means a decision on how the pension benefit one or both parties must be divided must be made.  The calculations can be complex and the sharing method can also have an impact on the value to be shared.

PROPERTY
The family home can represent the largest joint asset and placed in the theatre of divorce is often an emotive subject. This gives a good run down of what might happen to the marital home and easy to follow advice in question and answer form.

BUSINESSES
The divorce of a business’s founder can have a dramatic and dreadful effect – not just through the distress and distraction for those involved, but particularly through the cost of the final settlement – possibly necessitating the sale of some or all of the business to finance it. This explains the impact divorce proceedings can have on the business owner and the business future.

SECURITIES, INVESTMENTS AND INSURANCE
There are many financial products and vehicles used to invest or hold money securely. The rules surrounding these products can be complex and divorce can see these complications increase. This will give an insight into the ways these assets might be dealt with in the course of divorce proceedings.

Ian Conlon Actuary

Ian Conlon

As a result of Government proposals to change the way public sector pensions increase, thousands of divorcing couples may be unable to finalise the financial aspects of their divorce according to a leading pensions consultant.

Government plans mean many pension schemes in both the private and public sector will not be in a position to implement pension sharing orders or even to issue transfer value statements.

“This is a very disappointing state of affairs” said Ian Conlon, Pensions and Divorce expert at Spence & Partners, Consulting Actuaries. “Peoples’ lives move on and they should be able to sort out their affairs and I am afraid this is an unintended consequence of government pension policy.”

The proposals announced by the Chancellor of the Exchequer, George Osborne, in the June 2010 budget state the Government’s intention to link future increases in public sector pensions to changes in the Consumer Prices Index (CPI) instead of increasing in line with the annual change in the Retail Prices Index (RPI).

Over a period of time it is expected that CPI will be lower than RPI and all public sector Cash Equivalent Transfer Values (CETVs) will reduce to take account of this, a reduction that could be around 20% or more in some cases.

As a result, it is understood that most if not all, public sector schemes have already stopped quoting CETVs and it is likely that this delay will continue until further guidance is published. This, in turn, will mean pension sharing orders issued will not be implemented until the position is clearer, and for those in the midst of divorce proceedings, whose calculations are put on hold, it could mean a considerable increase in costs.

Ian Conlon added: “Divorce proceedings are expensive and stressful enough without a log-jam of cases building up while pensions administrators, lawyers and actuaries debate the legal issues and amend software to deal with the changes.”

“Whilst a degree of uncertainty may remain, it may well be attractive for some parties to proceed having been provided with an estimate of the impact of the change.

“Here at Spence & Partners we have developed specific software which can help divorcing parties and their legal advisers with an estimate of the likely impact of the change and the potential change in value of a pension share which was in the process of being agreed which we believe we will be helpful in many cases”.

ENDS

For further information please contact Ian Conlon (07718 365129), Brian Spence (07802 403013), Rebecca McDonald (0141 331 1004) or email us at divorce@spenceandpartners.co.uk

Spence & Partners are a firm of Actuaries, Consultants and Pensions Administrators with offices in Glasgow, London and Belfast and experience of operating pension schemes in England & Wales, Scotland, Northern Ireland and Ireland.

Visit www.spenceandpartners.co.uk

Note:

In the June 2010 budget the Chancellor of the Exchequer announced the Government’s intention for future increases to public sector pensions to be linked to changes in the Consumer Prices Index (CPI). To date, such pensions were increased in line with the annual change in the Retail Prices Index (RPI).

The Pensions Minister subsequently issued a statement on 8 July confirming that the Government also intends to use CPI for determining statutory minimum pension increases which apply to private sector pension schemes.

Over longer periods of time it is expected that CPI will be lower than RPI. All public sector Cash Equivalent Transfer Values (CETVs) will reduce to take account of this; the position with private sector pension schemes is more complicated and the impact will depend upon the specific scheme rules. In the case of a member of a public sector pension scheme, the reduction in their CETV could be as much as 20% or more.

As this is such a material change, we understand that most, if not all public sector schemes have stopped quoting CETVs and it is likely that they will defer the implementation of pension shares on divorce until revised factors are in place. This will delay divorce proceedings and may increase costs for those in the process whose calculations are put on hold.

Spence & Partners Ltd have developed specific software which can provide divorcing parties and their legal advisers with an estimate of the likely impact of the change in the level of increases on the CETV, and the potential impact on the value of the pension share on divorce which was in the process of being agreed. Whilst a degree of uncertainty may remain, it may well be attractive for some parties to proceed having been provided with an estimate of the impact of the change.

Ian Conlon

In the June 2010 budget the Chancellor of the Exchequer announced the Government’s intention for future increases in public sector pensions to be linked to changes in the Consumer Prices Index (CPI).  Historically such pensions were linked to increases in the Retail Prices Index (RPI).

The Pensions Minister subsequently issued a statement on 8 July confirming that the Government also intends to use CPI for determining statutory minimum increases which apply to private sector pension schemes.

These changes will undoubtedly have an impact where pensions are a factor in divorce proceedings.

Although both are measures of inflation, RPI and CPI are calculated using different methods and are based on different “baskets” of goods.  Historically this difference has resulted, for most time periods, in CPI being a lower measure of price inflation that RPI.  Overall, commentators expect CPI to be around 0.5% to 0.8% lower than RPI over the longer term.

For all public sector pension schemes* the expectation is that future increases in pensions will be lower than previously expected.  Therefore, the switch from RPI to CPI will affect the assumptions underlying the calculation of Cash Equivalent Transfer Values (CETVs). This change is likely to reduce CETVs and may have an impact on what is deemed an appropriate percentage Pension Share.

By way of illustration, for someone who is currently 40 years old with a pension in a public sector pension scheme, the impact of this change alone could result in a reduction of around 20% to the CETV.

For private sector pension schemes, the impact of the change is likely to vary by scheme and will depend upon the rules of the particular scheme.

It is likely that many pension schemes will defer issuing new transfer values until the changes have been considered.   Further, pension schemes may decide to put on hold the implementation of Pension Sharing Orders.

For ongoing divorce cases where pension information has been provided, the solicitor and parties involved should carefully consider whether it is appropriate to base any decisions on this information and such advice as may have been provided, whether in relation to Pension Sharing or Offsetting without first seeking further advice from an actuary specialising in pensions on divorce.

Spence & Partners can provide an early indication of the likely impact on the value of the CETV and implications for Pension Sharing on taking account of these changes.

For more information on this or any other pension on divorce issue contact our divorce team divorce@spenceandpartners.co.uk

*Public sector pension schemes include the Principal Civil Service Pension Scheme, Health and Personal Social Services Superannuation Scheme, Armed Forces Pension Scheme, Local Government Pension Scheme, Police Pension Scheme, Teachers’ Pension Scheme and Firefighters’ Pension Scheme.

Ian Conlon Actuary

Ian Conlon

Having many times found the Police Pension Scheme Cash Equivalent Transfer Value (CETV) calculated on a basis that often understates the true value of the benefits I was surprised when a case demonstrating the exact opposite passed across my desk recently.

I was asked to prepare figures for a 48 year old serving police officer who after 20 years of marriage was now divorcing. A current salary of around £33,000 and 29 years of service meant that he had accrued £21,200, which after 30 years would be £22,000. The CETV by the scheme was calculated on the basis that the police officer would take advantage of his entitlement to retire on his 50th birthday.

The initial resolution seemed reasonable with both parties agreeing to a 33% pension share. Having consulted his solicitor however, the officer realised that his financial circumstances would be so altered that retiring at 50 or even 60 would now be highly unlikely.  

The figures produced proved alarming where if the officer should stay in service until 60 he would see a reduction in the benefits of almost 55% instead of a third. Rather than a reduction of £7,000 it would be decreased by £11,600!

No matter what the outcome, it proves that a second opinion in these circumstances can be crucial to make informed decisions that enable both parties to find a resolution that meets both their interests.  The situation is rarely as clear cut as it seems!!

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