The following Family practice note produced in partnership with Rebecca Dziobon of Penningtons Manches Cooper provides comprehensive and up to date legal information covering:
IP COMPLETION DAY: 11pm (GMT) on 31 December 2020 marks the end of the Brexit transition/implementation period entered into following the UK’s withdrawal from the EU. At this point in time (referred to in UK law as ‘IP completion day’), key transitional arrangements come to an end and significant changes begin to take effect across the UK’s legal regime. This document contains guidance on subjects impacted by these changes. Before continuing your research, see Practice Notes: Brexit and family law, What does IP completion day mean for family law? and Brexit—financial remedies.
Whether a pension is to be the subject of offsetting, attachment or sharing, the prescribed method of valuation is the cash equivalent (CE) value. If the pension is in payment, this may be referred to as the cash equivalent benefits (CEB). The provisions for calculating and verifying CEs are set out in the Pension Sharing (Valuation) Regulations 2000, SI 2000/1052:
reg 4 specifies how CEs in respect of rights in occupational pension schemes may be calculated and verified
regs 5 and 7 specify how CEs in respect of rights in pension arrangements other than occupational pension schemes may be calculated and verified
The date that the CE is valued will be the date when the request is received by the pension provider. The Divorce etc (Pensions) Regulations 2000, SI 2000/1123, reg 3
, see Pensions—glossary — Valuation date.
The pension will be revalued by the pension arrangement during the implementation period if pension rights are the subject of a pension sharing order; this is known as the valuation day
Generally, no charge may be made for the provision of a CE where that information has not previously been provided within the preceding 12 months, but there are numerous exceptions to this and careful consideration should be given to both the terms of the specific pension scheme (in particular the schedule of charges) and the provisions of the Pensions on Divorce etc (Charging) Regulations 2000, SI 2000/1049.
SI 2000/1049 sets out the circumstances in which a charge may be made by a pensions provider and that no charge shall be recoverable in respect of the provision of a CE value unless the person responsible for a pension arrangement (PRPA) has specified in the written schedule of charges that a charge may be recoverable in respect of that item. There are exceptions to this provision and notably SI 2000/1049, reg 2(8)(a)–(c) provides that a charge may be made by the PRPA where either:
the CE information has already been provided in the preceding 12 months, or
the pension member has reached normal pension age, or
they will reach normal pension age within 12 months of the request
See also SI 2000/1049, reg 2(4), which sets out various other circumstances, and types of pension schemes, where a charge may be levied by a PRPA.
In addition, further exceptions set out in SI 2000/1049, reg 3(2)(b) provide that any charges shall not include any costs incurred by a PRPA as a result of complying with a request for, or an order of the court requiring, a valuation under the Pensions on Divorce etc (Provision of Information) Regulations 2000, SI 2000/1048, reg 2(2) unless:
the valuation is required within a period of less than three months, beginning with the date the PRPA receives the request or order
the valuation is requested by a member who is not entitled to a CE under any of the provisions referred to in SI 2000/1049, reg 2(4)(a), or
a CE has previously been requested within the 12 months immediately prior to the date of the request
A CE comprises the lump sum value of the rights under a pension scheme that have accrued to date to the scheme member, as measured by the amount that would be available in the event of a transfer being made to an alternative pension arrangement were a member to leave service or the scheme.
A CE valuation does not include:
death in service benefits
Therefore, these must be separately projected. Different types of pension will be valued in very different ways and the CE may not be a reliable indicator of value or a reliable way to compare different pension funds.
In T v T (financial relief: pensions), Singer J commented on the assumptions on which a CE is calculated:
'…these [pension] values are at best a guide, and that their apparent precision (down to the nearest pound) is illusory, and the product of mathematical rather than predictive accuracy. For they necessarily incorporate various assumptions (as to the rate of future inflation before and after the pension commences in payment; an appropriate discount rate reflecting the tax-exempt environment (currently) enjoyed by the pension fund; and of course that ultimately unpredictable factor, mortality). Another important assumption is that H will in fact start drawing his bank A pension at age 60, for he has in fact the option under the scheme rules of deferring that until he is 75, subject to the pension provider's consent. Thus, as has been said of a Duxbury fund [see Duxbury v Duxbury  2 All ER 77], the only fact which can be predicted with absolute accuracy is that the prediction will turn out to be inaccurate. These figures are therefore, at best, and when it is appropriate to have regard to them at all, a guide rather than a rule.'
As such, the CE can be misleading as a guide of a pension’s real value. It may undervalue or overvalue the pension. In general terms it is easier to value defined contribution (money purchase) schemes than defined contribution (salary related) schemes.
Examples when unreliable CEs might potentially be produced are:
uniformed services pensions, (eg police, armed forces, firefighters) where the member has the right to exercise a favourable early retirement option that is not included in the CE calculation
other salary-related pension schemes where the method of calculating the CE uses financial assumptions that may be seen as outside a reasonable range
defined benefit schemes where the CE does not include the total value of the fund
salary-related schemes that are under-funded (ie there is a shortfall in the assets held by the scheme compared to the amount needed to meet its pension promises to its members) may apply an unrealistic reduction to the CE
some public sector pension schemes will provide divorce-specific valuations for a charge—these are calculated as if the member is single and therefore valuable dependant’s benefits are not included in the CE
money purchase pensions that have guaranteed annuity rates that are not reflected in the CE calculation—these are likely to increase the value of the pension as the guaranteed rates will almost certainly be better than those currently available and will not be allowed for in the CE calculation but could effectively increase the value of the asset by 30% or more
money purchase schemes that offer a favourable guaranteed pension on a specific retirement age but do not offer this pension if retirement takes place at an alternative age, and
foreign pensions where CEs may not be available or, if provided, may be calculated using a different methodology from that used in the UK
CE valuations also ignore:
the health or life expectancy of the parties
when the pension rights were accrued, ie perhaps before cohabitation/marriage/civil partnership or after separation
the parties' ages
certain non-pension capital and income benefits that can be provided in a similar way to a pension under some public sector schemes, for example, early departure payments in the armed forces pension scheme; see Practice Note: Public sector pensions and family proceedings
the likely accrual of future pension benefits by the parties—CEs represent a snapshot valuation on a given date, and
the liquidity of the assets held within the pension arrangement—for example, it may not be possible to implement a pension sharing order against a small self-administered scheme (SSAS), or a self-invested pension plan (SIPP) where the assets are held in commercial property or shares
In H v H, it was held that the court should look to the prospective value of what has been earned by contributions made during cohabitation rather than look to the prospective value of what may be earned between separation and retirement age. This may be useful regarding the courts' approach to pre- and post-separation acquired pension rights and in considering the pension rights of couples in their 30s and early 40s.
A final salary scheme may be considerably more valuable in terms of the benefits it provides than a money purchase scheme, even if the schemes have the same CE. See: Limitations of cash equivalent values.
Different pension schemes may use different approaches when producing CEs, eg a defined benefit (salary related) scheme must produce a CE in accordance with the Occupational Pension Schemes (Transfer Values) (Amendment) Regulations 2000, SI 2008/1050. This does not mean there is a consistent approach between defined benefit schemes. A CE represents a scheme’s best estimate of what it will cost that scheme to provide the members' accrued benefits and that best estimate will vary between schemes. There is no obligation on a scheme to value discretionary benefits, which can be significant.
The CE is not the only method for valuations and it may be possible to agree to use an alternative calculation. The most common alternative methodologies used are:
net replacement value for defined benefit schemes
net realisable value, showing what capital would be available if the pension was drawn down and any tax paid
net actuarial value, which assumes an annuity will be purchased, and
Duxbury value, which calculates what lump sum is required to meet an income need for life
These also have their limitations. For example, the Duxbury tables in At a Glance 2020–2021 may project an unrealistic rate of return and make various assumptions about life expectancy, tax liabilities and state pension entitlement (particularly in light of the new state pension scheme and the fact that some people may not qualify for it). Using commercial replacement values to value defined benefit pensions is also crude and imprecise. It can be difficult to match the benefits provided by the scheme and discretionary benefits are virtually impossible to mirror. The reliability of the valuation decreases if the person with pension rights is many years away from retirement. Where the pension assets are substantial consideration should be given to instructing an actuary to prepare a bespoke calculation of value, see: Instructing an expert re pension valuations. Any valuation should be adjusted in light of any tax payable.
The difficulty for both practitioners and the courts is whether a pension should be categorised as a capital, income producing, or hybrid asset. In SJ v RA, Mr Nicholas Francis QC, sitting as a deputy High Court judge (as he then was), considered that a capital approach might be adopted in a case where assets exceed needs, and that a projected income stream approach might be used in a needs-based case. In M v M, HHJ Wildblood QC took the approach of cross-checking the income effect of a division of CEs (to adjust for fairness).
Case law highlights that the family courts continue to grapple with the methodology to be applied.
Consideration should also be given to whether it is appropriate to apply a discount to a Duxbury based valuation when looking to offset pension benefits against non-pension assets to reflect the advantages of having cash now, rather than pension benefits at a later date. This was discussed in WS v WS. Since that judgment, many family law pensions experts have rejected Duxbury as a basis to assess the quantum of non-pension capital to be received in lieu of pension assets.
Valuing the assets within an SSAS pension scheme can be problematic. These schemes are typically associated with owner-managed businesses. Valuation can be complex because the assets can be varied, for example, bank accounts, commercial property, loans to the company and managed investment portfolios. Valuations stated in scheme accounts can be historic and therefore inaccurate. Care should be taken to ensure that the assets are understood both in terms of their value and liquidity if there is to be a pension sharing order, and that these issues are discussed before a pension sharing order is made to ensure it is feasible to implement it.
The implementation of a pension sharing order creates a pension credit for the recipient party. This may be invested as:
an internal transfer by becoming a member of the pension scheme from which it was debited, or
an external transfer by investing the pension credit in another pension scheme or policy
Both internal and external transfers are not possible in all scenarios.
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