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Essential Issues for Pensions on Divorce – Technical Actuarial

• Nov 7, 2022
• Latest Journal

17 Bullet Points

1. Pension Offsetting and Pension Sharing are different in principle
2. While Pension Offsetting involves imply putting a value on a pension, involving assumptions regarding real interest rates, mortality and any expenses…
3. Pension Sharing for equalising incomes also requires an assumption that an annuity contract will be purchased in the future – (failing this, a structured drawdown process, expected to match lifespan). More assumptions are needed.
4. For Offsetting, a useful starting point is to consider formally published generalised advice. This can be obtained from a number of sources – some of which relate to different divisions of law. However, their suitability can be assessed according to their characteristics – eg – is mortality suitable for the unfairly dismissed also suitable for divorcees?
5. Cash Equivalents (CEs) provided by a scheme can be considered for valuing pensions – however, these suffer from issues which may make them mutually inconsistent.
6. Defined Benefit and Defined Contribution CEs are not compatible – nor are those for private and public sector schemes, the latter being particular poor value for money.
7. On top of this, Defined Benefit private sector CEs for have recently become more volatile, and more variable between schemes, according to funding strategy.
8. Defined Benefit public sector CEs, at least, has a published explanation of the source. This shows assumptions that are far more penal than would be allowed in the private sector.
9. Our offsetting values for each pension should consider tax, but only utility value if specified in instructions.
10. As with all actuarial work, it’s best to look at the figures emerging before making a decision, rather than simply viewing in the abstract.
11. For pension sharing, the usual structure is to equalise pensions at a predetermined age.
12. Allowance should be made if any pension(s) have different retirement ages, or increase at different rates, as this would disturb equality. (Clearly, this also applies to valuations for offsetting)
13. Instructions to equalise at more than one retirement age may clarify the options and facilitate negotiations.
14. Equalising capital at retirement involves careful thinking. To equalise the cost of capital to equalise pensions is the same as equalising incomes. To equalize CEs introduces the flaws shown in 5-7 above.
15. Offsetting and/or Sharing are often required to be calculated involving the marital period only. For Defined Benefits schemes, there are two options which are based on practical arguments.
16. For Defined Contributions, there are four options.
17. All of these options vary between simple and complex. The former are quickest, and require the least information – for the latter, the opposite.

Happy Offsetting and Sharing!

Article by Peter Crowley of Windsor Actuarial who are an independent firm of actuarial consultants with considerable expertise in corporate pensions. Established by Peter Crowley in 2005, their excellent actuarial and pensions consultancy is complemented by cutting-edge software and technical support.

Peter Crowley combines a wide experience of pensions and financial products with a speciality for explaining the concepts in plain English. He has experience of most aspects of company pension schemes, from technical design, financing and reporting, to member communication and support. Peter also advises solicitors and other professionals on the individual aspects of pensions in divorce, compensation on the loss of pension rights, and reversions. He is also experienced in swaps or scheme actuarial work.

He has produced a substantial number of expert reports on this subject, involving cases of varying complexity, and including overseas pensions. He lectures regularly on the subject, (Law Society accredited), and carries out peer reviews of other actuaries’ pension work. Immediately prior to establishing Windsor Actuarial, Peter worked for five years in the SIB Pension Review, gaining additional experience in UK pension schemes at a detailed level. His skills were used as an independent auditor of other actuaries’ calculations.