Posts Tagged ‘Pension on Divorce’

Gino Rocco

The Supreme Court has provided some welcome clarification on how a person’s rights or interests in a pension arrangement should be treated as matrimonial property in divorce cases.

Facts

The facts of the case are that Mr McDonald, who was the respondent in the case, was a member of the British Coal Staff Superannuation Scheme (the “Scheme”).

Mrs McDonald sought a pension sharing order from the Scottish Courts on her divorce from Mr McDonald, on the basis that his pension forms part of the matrimonial property which is taken into account in the financial settlement. Read more »

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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