An actuary offers some tips on locating pension rights and obtaining the cash equivalent transfer value (first part of three on practical issues that arise)

Family lawyers might be forgiven for thinking that, because the Executive chose not to address any issues in relation to the treatment of pension rights on divorce in the new Family Law Act, there were no problems that needed to be addressed. Our view is that, not only has the Executive missed an opportunity to address a significant unfairness that affects an appreciable number of divorcing parties, and particularly women, but also that many traps remain for the unwary lawyer when dealing with pension rights on divorce.

In these articles we consider each of the main steps that a family lawyer should always take in dealing with pension rights – from locating all the relevant pension rights, through obtaining valuations, apportioning for the period of marriage, considering the issues of offsetting against sharing, and then managing the risks from financial agreement through to the implementation of the pension share.

We are sure that all family lawyers set out intending to offer the best possible advice to their clients. However they also have to ensure that they do not leave themselves exposed in this increasingly litigious world. In these articles we explore the areas where risks may be being taken, perhaps unconsciously, and how those risks might be managed.

One final point to note is that during these articles it will be assumed, where appropriate, for brevity and clarity, that it is the husband’s pension rights that are being considered or shared, and the wife who will receive the pension credit; however exactly the same considerations would apply if the reverse was the case.

Locating pension rights

How should you approach the issue of collecting information about your client’s spouse’s pension rights? Is it sufficient simply to rely on all rights being declared by the other side? Or do you ask your client to recall what pension rights his or her spouse might have acquired during the marriage? Or do you need to do more: do you have to demonstrate that you have made reasonable efforts to locate the pension rights that might exist?

Clearly any effort and expense to locate the pension rights that may exist, particularly if co-operation is not forthcoming, have to be balanced against the time and expense of doing so. However if the marriage has been reasonably longstanding or if the parties are not young at separation, it is very likely that the pension rights that have been acquired will be significant in value; making an effort to locate the acquired rights is therefore likely to be worthwhile, and demonstrating that reasonable efforts have been made is important.

Pension rights fall into three main categories: state scheme benefits, personal pensions (including stakeholder pension schemes) and occupational or employer sponsored schemes. We will consider important issues about each below – but first we must consider how to locate those rights.

The key tool that is available to the family lawyer is to construct an employment history – with dates of employment and the names of employers, if appropriate; most spouses should be able to recall those details of their partner’s working life. A brief analysis of the history should enable a breakdown between periods of employment and self-employment to be determined: this is a critical split.

If details of the pension rights have been supplied by the other side, then it will be relatively straightforward to compare those details with the history that has been obtained, to establish if there are any obvious unexplained gaps. Clearly any gaps, possibly of a year or more, should be investigated.

It is worth considering briefly how the different types of rights might be acquired and also how they can be located.

State scheme pension rights

State scheme benefits can be acquired in the basic state pension, the state earnings related pension (now the state second pension), and the graduated pension scheme. The basic state pension is ignored by lawyers in divorces, probably because the divorced spouse will inherit their partner’s contribution record if their own is deficient. SERPS can only be acquired by the employed, either directly from state benefits, or indirectly by virtue of membership of a contracted-out pension arrangement. The value of directly acquired SERPS can be considerable – in some cases comfortably over £100,000 – so SERPS should never be dismissed when considering where valuable pension rights may have arisen. And finally, graduated pension may have been acquired by those who were employed between 1961 and 1975, and can be appreciable for older people – the maximum pension being £800 pa for males.

It will be well known that SERPS valuations can be obtained by submitting form BR20 to the Department of Work and Pensions in Newcastle. Information about any graduated pension that might have been acquired can be obtained by requesting a retirement pension forecast using form BR19, but an independent actuarial valuation would have to be obtained if the pension is appreciable; in larger cases, values could easily exceed £10,000.

One practical issue worth noting on SERPS is that the balance of values of the rights between each party may appear to be counter-intuitive. Someone who has been employed on relatively low earnings, perhaps on a casual basis, and has not benefited from pension scheme membership, could well have a considerably higher value of their SERPS rights than their partner who has been in highly paid employment but with membership of a contracted-out pension scheme.

Personal pensions

Personal pensions can be effected by both the employed and the self employed; indeed this is the only way that the self employed can acquire pension rights. Personal pensions are normally administered by insurance companies, and it would be reasonable to ask your client to recall the institutions with whom their spouse may have effected pension arrangements. It would then be quite practical, given the appropriate authority, and given basic information about the spouse, to approach a small number of institutions to confirm whether any pension rights are held in the spouse’s name with them.

Occupational schemes

Pension rights can only be acquired in occupational pension or employer-sponsored schemes, which include final salary schemes, when in employment. However, given the employer’s name, it is generally possible to locate the current administrator of the pension scheme by making an enquiry with the Pensions Regulator (formerly the Occupational Pension Regulatory Authority). Again, given the appropriate authority, it will be possible to confirm whether any pension rights are held within each scheme, and obtain the required information. It is possible to locate group personal pension schemes and stakeholder pension schemes in the same way.

From the above it should be easy to understand the value of assembling the employment history. It should show where SERPS, or substitute rights may have been acquired; it will show periods of self employment; and, of course it will indicate where occupational rights may have been acquired, and how they might be located.

Points to remember

There are two further issues that are worth noting. First, even if the other side is not co-operating, it should be possible to locate the existence of possible pension rights, and obtain information from a pension provider by way of a court order. Secondly, the information to which the various parties are entitled is laid down in SI 2000/1048 (The Pensions on Divorce etc (Provision of Information) Regulations 2000). Many lawyers are content simply to obtain the value of the pension rights at the relevant date; however, to understand the rights fully, and to give appropriate advice, it is most important to obtain the information laid down in the other provisions of those regulations, particularly regulation 3.

Cash equivalent transfer values

Having located the pension rights, the next step is to obtain valuations of those rights for matrimonial purposes.

The basis on which pension rights should be valued for matrimonial purposes is laid down in SSI 2000/112 (The Divorce etc (Pensions) (Scotland) Regulations 2000). For practical, and understandable, reasons the legislators decided to use the cash equivalent transfer value (CETV) that would have been payable on the relevant date as the basis for valuation. While all pension professionals would agree that, within the matrimonial asset pot, this means that apples are being compared with pears, the CETV is a value that can usually be obtained easily from pension scheme administrators, since the systems to produce it have had to be put in place to satisfy pensions legislation.

To make it clear, the CETV is what would be payable to another pension arrangement, if the member of a scheme left the scheme, and then transferred those pension rights on the specified date. Of course, it is never possible for the CETV to be paid directly to the member: the government does not want assets on which significant tax relief has been given to be taken other than predominantly in the form of taxed pension after age 55.

The first important point for family lawyers to check is that, unless the “12 month rule” applies, the value that is supplied by the scheme is confirmed to be the value that would have been transferred had the member left the scheme on the relevant date. In our experience, it is not at all unusual for scheme administrators to misunderstand what the regulations require, particularly if the administrators are not based in Scotland.

Another important point to note is that, particularly for Scottish divorce actions, the CETV is normally being requested at a date in the past. This has two consequences. First, the scheme administrators know that any CETV calculated for this purpose will never in fact be transferred. This means that there is no financial consequence if an error is made – and they are certainly made from time to time. Secondly, it is arguable whether schemes are obliged to provide retrospective valuations – and some won’t.

Spouse’s pension rights

One other issue that crops up from time to time relates to the valuation of spouse’s pension. It has been accepted for some time that, where they are payable, spouse’s or dependant’s pensions should be included in the value of pension rights – on the basis that this is a benefit from which the wife continues to benefit after divorce. However this is not always the case – and there is a specific issue that family lawyers should be aware of where pensions in payment are being paid by an insurance company. It will not be uncommon in these contracts for the spouse’s pension to be payable to an individual nominated at the date the pension commences, to be the recipient of that pension – and this typically will be the wife at that date. This nomination may not fall when the divorce occurs – which means that the value of the spouse’s pension is an asset of the wife rather than the husband, and the value of the spouse’s pension should be transferred from one side of the matrimonial assets to the other: in football parlance this makes it a “six-pointer”!

As a result of all of the above, it is important for family lawyers to perform, at the very least, commonsense checks on the valuations that have been obtained. Should they have doubts about the validity, or indeed the ownership, of the valuations, it would be wise to obtain professional help.

Importance of date of separation

In many cases the date of separation will be clear and unambiguous. However where this is not the case, family lawyers need to be conscious of the impact on pension rights of the date of separation that is chosen.

It might be thought that the CETV would change gradually as time passes, simply reflecting changes in economic conditions; in an appreciable number of cases, this would be an incorrect assumption. The CETV can change very rapidly over short periods of time, and indeed in the uniformed services (e.g. armed forces, police, firemen) on specified single days; it would not be uncommon for the CETV to rise by well over 50% on some of these break points.

It might also be thought that the CETV will always fairly reflect the true value of the pension rights that are being valued at a given point in time. However personal circumstances, particularly health, would only exceptionally be taken into account by a pension arrangement, and this could have a profound effect on the true value of the pension rights. Furthermore the CETV will often not take into account discretionary benefits, even where there is a very high likelihood of payment. So the CETV can understate or overstate the true value of the pension rights by a significant margin.

Since, most disappointingly, the Executive has so far declined the opportunity to address this issue, it is clearly important for the family lawyer to be conscious of the impact on the matrimonial assets of the choice, and agreement, of the separation date. It would be even more important to advise appropriately if a client approached a family lawyer when considering separation. Indeed, we suspect that in the uniformed services, the “barrack room” lawyers will be actively advising those whose marital relationships are poor, to time their date of separation well, since the right date of separation will typically save them tens of thousands of pounds; and, of course, the spouse, who would typically be the wife, will be legally, but unfairly, deprived of those assets. One might have thought that a female Justice Minister would have had more consideration for her kinfolk!

One further point to consider, where it is clear that there has been a significant rise in the value of the pension rights post-separation, is whether an action could be raised in England – since the Lord Chancellor has long recognised the potential for unfairness in CETVs, and given guidance to the courts to allow them to consider other evidence where it is clear that the CETV provided does not reflect the true value of the pension rights.

However it is to be hoped that the Executive will consider amending the Scottish regulations, as it is in their power to do, to address this unfairness.

John Buchanan is an actuary with Collins Actuaries, Edinburgh and Glasgow

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