When considering the division of matrimonial assets the family home usually comes to mind first, it normally being the asset of highest value. Second to that, in terms of value, is often the value of future pension benefits, a fact about which increasing numbers of divorcees are fortunately becoming more aware.
When looking at pension benefits one must consider not only how they are valued, but also how they can then be treated in the division of assets. The following will provide an overview, the intention is to draw attention to the different types of pensions, and hopefully allow you to determine whether your own circumstances warrant further enquiries and action.
Types of Pension Arrangements
Pensions can broadly be divided into the following types:
Employer Pensions (sometimes known also as Occupational Pension Schemes) can take the form of final salary schemes (where the benefits are related to earnings at retirement and length of service) or money purchase schemes (where retirement benefits are linked to a fund value, being dependent on contributions, investment returns and retirement age). Stakeholder pensions were introduced in 2001 in an attempt to make pension arrangements more widely available.
Private pensions exist for self employed individuals or those, for example, whose employer does not have an existing scheme or for which they are ineligible to join. The fund value which provides the pension on retirement will depend on the contributions made and the return on investment.
State Pension benefits consist of the basic state pension and SERPS, the latter having the option of "contracting out" and where funds are invested in private pensions. State benefits belong to the individual and are not available for earmarking or sharing.
Public Service Schemes include those available to Teachers, Civil Servants, NHS Staff, the Armed Forces, Police etc. The benefits available under these scheme are often considerable compared to the private sector and often include inflation protection and provision for early retirement. As such establishing current values often warrants particularly close attention.
What are the options?
When the current value of future pension benefits have been agreed the following options exist:
Offsetting is where the value of the pension is "traded" for another capital asset. For example, you have joint ownership of your home worth £250,000 after repayment of the mortgage, and your spouse has a personal pension fund of £250,000. If offsetting is agreed, you might agree to keep the home and your spouse keeps their pension.
Earmarking is where an agreed percentage of the pension is identified as yours, and ring-fenced for your benefit on your spouse's retirement. This should not be the option of choice in most circumstances because it does not allow for a clean break. In addition, the pension dies with your spouse, or your spouse could elect to defer taking this particular pension until the age of 75, an action that is beyond your control.
Pension sharing was introduced in 2000 for all types of pension except the basic state pension, which will only ever be owned by the individual concerned. Pension sharing provides for the immediate division of the pension into two separate pots, each individually owned, thereby removing the dependency and association applicable to the earmarking arrangement.
Valuing Pension Benefits
The options available include the following:
CETV (Cash Equivalent Transfer Value) is a value produced by the Scheme Administrator/Pension Provider and represents the value of the member's benefits assuming they are leaving pensionable service at that time. Whilst this may be appropriate for a money purchase scheme, for more complex arrangements it does not take into account such additional benefits as death in service payments, spouses rights and discretionary benefits provided by the Trustees. In other words the result is not a fully valued CETV.
Other Options are therefore appropriate when one party disputes the CETV value and feels that other benefits should also be considered, a pensions audit (see below) can therefore substantially increase this value. In other words, an adjusted CETV may either be permitted by the Court or agreed between the two parties.
In conducting a pensions audit, consideration may for example be given to the following, thereby affecting the resultant value:
As you would expect, earmarking or sharing will require a detailed understanding of the schemes and how best the assets may be utilised under each available method. Possible future discretionary increases, the solvency of schemes, tax considerations relating to income versus lump sums are all factors that should be considered when looking at the valuation of future benefits. A pensions audit could substantially increase a CETV.
The above represents a very brief overview of what is an extremely complex subject. In summary, as the value of future pension benefits is often considerable, special care needs to be taken to satisfy oneself that firstly the value provided is appropriate and secondly that the options then available are considered thoroughly. Given the complexity, advice from a suitably qualified professional in this respect should always be taken.
An Independent Financial Adviser (IFA) would be considered to be an appropriate professional, possibly also involving an Actuary depending on the schemes involved. The Financial Services Authority Rules and Guidance require the IFA to have a G60 pensions qualification and an IFA should have professional indemnity insurance cover protecting the client from financial loss should there be negligence in the valuation or transfer procedure.