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”.
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.
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.