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Since
the introduction of pension
sharing by the Welfare Reform and Pensions Act
1999 (WRPA
99), the structure of a pension can now be changed
and divided between the parties divorce and nullity
but not for judicial separation.
This means that as a result of the pension sharing
order, a pension
debit will be created and the members retirement
benefits will be reduced. |
At the same time of the pension
debit as the step-by-step
guide shows, an equal value will
be transferred by a pension credit to the former
spouse, thereby achieving a clean break between
the parties. This pension
credit can be achieved by an internal
transfer to the existing scheme where dual membership
is allowed or if not permitted, an external transfer
to another scheme.
If the pension arrangements are money purchase schemes
such as a personal
pension or stakeholder pensions and are low
in value in relation to other matrimonial assets
or in absolute terms, it is unlikely the court would
require a pension audit but instead rely on the
cash
equivalent transfer value (CETV) from the provider,
especially if the cost of expert evidence could
not be justified.
Where this is not the case the court must have regard
to procedure rules. The court can apply expert evidence
rules to appoint a single pensions
expert, that must themsleves comply with financial
services rules. |
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Applying orders
Where the parties intend to use pension
sharing it is important to achieve a fair value of the
retirement benefits as once the order has taken effect it
cannot be varied later, in part because it will be out of
time as stipulated in the provisions of the Divorce etc (Pensions)
Regulations 2000, as well as new provisions in the MCA 1973
inserted by the WRPA 99 protecting the pension scheme and
scheme trustees
from variation.
This means that if
the pension arrangements are found to have been valued
incorrectly at the time the order was made by the court, for
example the providers CETV was used for the valuation of a
defined benefits
scheme creating a shortfall compared to a fair value for
these benefits, the former spouse will be unable to apply
for further compensation from the members pension rights.
A pension
audit should also be used where the parties intend
to apply offsetting and earmarking as solutions to pensions
on divorce. In practice, financial services rules of best
advice must be applied to give the parties the correct information
initially on divorce.
Although a variation
of settlement order can be applied for at a later date
if the retirement benefits are initially valued incorrectly,
this additional process would create extra cost in time and
money for both parties. It would therefore be preferable given
the relevant pensions for both parties to appoint a pensions
expert to value the benefits whether the outcome is offsetting,
earmarking
or pension sharing.
A pension audit will also indicate from
the information supplied as shown in the step-by-step
guide to the former spouse whether the pension
credit can be applied as an internal transfer or as an external
transfer where further pension transfer advice may be
required.
Court procedure rules [step-by-step
guide]
In divorce cases where there are complex pension arrangements
and the parties have appointed a pensions expert to provide
expert evidence the court will work with the parties to this
end, whether this results in offsetting
against other matrimonial assets, earmarking or pension sharing
of the members
pension rights. In all cases there will be the need for
the court to be satisfied that the extra costs associated
with expert evidence are justified.
The court will have regard to rule 2.51B
of the Family Proceedings Rules 1991 that states that the
overriding objective of the court must be to ensure that the
parties are on an equal footing and deal with the case in
ways which are proportionate to the amount of money involved,
to the complexity of the issues and to the financial position
of each party. For an earmarking
order the court will require projections to retirement
rather than the CETV, however, as earmarking orders can be
subject to variation in the future complex and expensive expert
evidence from an actuary may not be justified and the court
would look to the provider or an pensions consultant that is suitably qualified
as a pensions expert to provide the projections.
For pension sharing there will be no opportunity
for variation before the court grants the decree
nisi or after granting the decree
absolute so the court will be particularly concerned with
achieving a fair value of the retirement benefits for both
parties and therefore inclined to need expert evidence to
produce a CETV adjusted as appropriate, such that can be provided
by a pensions consultant that is a pensions expert and it
would be likely they were a member of the Society of Pension
Consultants (SPC).
Expert evidence rules [step-by-step
guide]
During ancillary relief proceedings the court can have regard
to rule 2.61C of the Family Proceedings Rules 1991 that apply
to part 35 of the Civil Procedure Rules 1998 regarding expert
evidence. This states that expert
evidence will not be allowed (whether written or oral)
unless permission has been given by the court and the court
will only give such permission if expert evidence is reasonably
required and justified in light of the overriding objective
as stated in rule 2.51B of the Family Proceedings Rules 1991.
Only where the pension arrangements as part
of the matrimonial assets of the divorce are substantial and
complex would the court consider such evidence. In most cases
the need for additional actuarial evidence provided by an
actuary
will not exist and the court will be satisfied with projections
from the provider where the CETV is acceptable or projections
from an independent
financial adviser as a pensions expert where an adjusted
CETV is required as evidence as would be the case for a final
salary pension or public
service scheme.
If the court has established the need for expert evidence
but there is no agreement between the parties as to the pensions
expert to appoint, the court will use its powers to instruct
that evidence be given by a single pensions expert.
Financial services rules
Under the Financial Services and Markets Act 2000, formally
the Financial Services Act 1986, the best
advice rule means that anyone advising on buying or selling
investments or pensions must give clients and prospective
clients best advice. This means the adviser will need to be
aware of the client's circumstances and show where possible
that the recommendations are based on an unbiased evaluation
of what is best for the client.
For the know
your client rule, the requirement of the adviser to evaluate
an existing or prospective client's circumstances and investment
objectives as would be reasonably expected in order to provide
the best advice to the client. Both these rules are applicable
to pension transfers on divorcerelating to an external transfer
of the pension credit.
For an independent
financial adviser advising on an external transfer from a
defined benefit occupational
pension scheme the Financial Services Authority (FSA),
formally the Personal Investment Authority (PIA), Handbook
of Rules and Guidance for permitted activity 13 requires the
IFA to hold a professional qualification being G60 Pensions
or equivalent. The PIA had previously confirmed that this
rule applies even when a court makes a pension
sharing order but the occupational pension scheme does
not allow for dual membership, effectively imposing an external
transfer with no advice given. Individuals giving advice on
investments and pensions must be an authorised person.
The new rules brought
in by the FSMA on the 30 November 2001 mean that there must
be a clear distinction between the activities of an IFA regulated
by the FSA and the activities of exempt professional firms
regulated by designated
professional bodies (DPB) such as accountants and solicitors
that choose this designation because they will not be advising
clients on any regulated activity, such as a pension transfer,
that is not exempt regulated activity.
However, the valuation procedure of pensions is not a regulated
activity.
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