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Background
We were approached by the solicitors representing Mrs
H and asked to put a value on the pension rights that
Mrs H would lose following divorce.
Both parties were in their early 60s, had been retired
for several years and with their retirement benefits in
payment although Mrs H had no pension rights of her own.
They had been married for 34 years at the time of the
divorce.
The parties had already decided on the division of their
other matrimonial
assets before Mrs H, through her solicitor, appointed
us to determine the value of Mr H's pension rights.
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Pension audit
Mr H was receiving a pension income from an unfunded public
service scheme which he had been a scheme member for a period
of 35 years and this also included a pension from an additional
voluntary contribution (AVC). At the point of retirement
the benefits to Mr H were as follows (rounded to the nearest
£100):
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Pension income
of £30,100 per annum; |
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Tax free lump sum of £90,300. |
Based on Mr H's personal circumstances,
additional commutation was granted at the normal
pension age (NPA), further reducing the pension income.
This was permitted under the terms of the public service scheme
as it is governed by the rules of prerogative
instruments. As Mrs H had no independent pension arrangements,
technically Mr H's pension was supporting both of them. Had
Mr H and Mrs H remained married they would have continued
to enjoy equally Mr H's pension. Mrs H could benefit by:
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Continuing to help Mr H spend the pension
income of which she would lose 50% on divorce; |
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Remaining married, had Mr H died, Mrs
H would have benefited from a widows
pension (which Mr H could never have benefited from),
however she is not entitled to this after divorce. |
The widows pension is calculated as a proportion
of Mr H's pension entitlement before commutation, this being
1/3rd in respect of service up to 31 March 1973 and 1/2th
in respect of service thereafter up to retirement age. Making
the appropriate actuarial assumptions it is possible to determine
a value for the contingent widows pension, based on age and
life expectancy to show the potential benefit.
In the event of Mr H's death, it is calculated that Mrs H
would be entitled to 45% (rounded to the nearest percent)
of the retirement pension or a widows pension income of £15,000
per annum (rounded to the nearest £100). This result
is significant to the outcome as the valuation will require
an adjusted CETV.
Outcome
The unfunded public service scheme administrators calculated
a lower widows pension income of £8,900 per annum (rounded
to the nearest £100) and this produced a lower cash
equivalent transfer value (CETV) of £292,000. Although
to the layperson this official statement would have been accepted
without question, in fact it does not properly value the widows
pension. In this case the adjustment valued the pension rights
at £396,300, an increase of £103,700.
This is a crucial reason why a pensions
expert must be appointed to value the pension rights.
This error occurs because on divorce all public service scheme
administrators must use the Government
Actuary's Department (GAD) information to calculate a
widows pension rights based on the second wife, not the first
wife. Consequently, only the pension entitlement of Mr H accrued
since 6 April 1978 is used in the calculation.
Therefore the formula of an unfunded public
service scheme does not value the full amount of Mrs H's
pension payable on the death of Mr H. Whilst the CETV formula
from the scheme administrator may well be adequate in all
other respects for members that have already retired, for
the above reason alone an adjustment will be necessary by
a pensions expert. To satisfy the court this should be submitted
as an "adjusted" CETV for presentational reasons.
Another outcome of this
case was that the adjusted CETV resulted in the parties,
having agreed the other matrimonial assets, now having
to renegotiate the settlement. It would therefore benefit
both parties and their solicitors if we as the pensions
expert were appointed to conduct the pension
audit early during ancillary relief proceedings.
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