From April 2005, most members of final salary schemes, and their families, will be able to sleep that bit more peacefully at night, secure in the knowledge that the level of protection from their pension benefits has increased substantially.
That comforting blanket of security comes courtesy of a couple of legislative changes: recently passed legislation making it more difficult for solvent employers to rid themselves of their final salary pension schemes without securing the full entitlement of members, and the introduction of the Pension Protection Fund which will provide a high degree of protection should employers become insolvent.
Yet one particular section of the public – the spouses of pension scheme members in the midst of divorce proceedings – will miss out on any benefits to be had from these changes.
There are two commonly used methods of dealing with pension assets when dividing matrimonial assets on divorce. The most common is for the party with the most pension assets (often the husband) to hold onto these assets with the other party (often the wife) receiving a higher proportion of the other assets to compensate. On the face of it, this seems like a sensible and pragmatic approach for many divorcing couples.
Unfairness often arises, however, when determining the value to be placed on the pension benefits. The value that the court commonly takes into account is the Cash Equivalent Transfer Value (CETV), the amount available to transfer to another pension scheme. Whilst courts in England, Wales and Northern Ireland have the scope to take into account additional evidence, it is in exceptional circumstances where such evidence is accepted. In Scotland the situation is even worse where the only value that the court can take into account is the CETV.
The CETV calculation is often based on an actuary’s estimate of expected future returns on equities. Whilst this approach is being abolished by the accounting profession insofar as company accounts are concerned, it continues to be used when calculating the CETV.
In divorce proceedings, the CETV is often an inadequate or inappropriate measure of the value of the pension given up.
By way of illustration, let us take as an example a 40 year old man earning £30,000 per annum who has been a member of a typical private sector final salary pension scheme for 20 years while his wife has no pension. He will have built a pension of £10,000 a year and the cost of buying an annuity to guarantee his pension would be over £150,000.
On the face of it, his wife should receive over £150,000 of other assets to offset against the pension. The CETV in this example might typically have been about £70,000. This might seem like an extreme difference but, in fact, if the employer were to wind-up the pension fund then it would need to be topped up so that £150,000 would be available to buy an annuity.
Obviously the fact that the court can only take into account a much lower value than the cost of a guaranteed pension is detrimental to the wife’s position.
The second commonly used method of allowing for pension rights is pensions sharing and in some cases this can produce a satisfactory solution.
In public sector schemes, for example, the wife is admitted into the scheme almost as though she had always been a member in her own right and she would receive a proportion of her husband’s pension. In the private sector, however, the pension scheme has the power to insist that the spouse transfers the value of his or her share of the pension to another pension scheme or personal pension.
In our example, if the parties agreed on a 50/50 share of pension, the husband would be giving up a pension that would cost over £75,000 to secure but his wife would receive a transfer value of around £35,000 and the pension scheme would pocket the difference. The short changing of divorcing couples in this way is in many ways every bit as scandalous as the plight of those workers whose employers have become insolvent.
It is difficult to see how pension trustees can claim it is in the best interests of the divorcing couple to treat their pension scheme members in this way. The law nevertheless allows them to do this and most private sector schemes take advantage of this loophole.
Further changes to the legislation governing pension rights on divorce are clearly necessary. First and foremost, pension scheme trustees should not be permitted the option to renege on part of their liability just because a pension scheme member is unfortunate enough to be going through divorce proceedings.
Unfortunately, the Pensions Act contains no provisions to protect divorcing couples. It seems that, as divorcing couples do not represent a powerful pressure group, they presently remain the forgotten victims of the pensions crisis.
Published in Pensions Management in February 2005