Posted March 13th, 2013
Technically speaking the cash equivalent transfer value (CETV) represents the expected cost of providing the member’s benefits within the scheme.
In divorce settlements, thought needs to be given as to whether the CETV is the most appropriate method of valuing the overall pension benefits. Consideration needs to be given as to whether the CETV accurately reflects the benefits on offer and if certain benefits are not counted within the CETV, what should be done about it.
In the case of money purchase benefits, this is generally straightforward – it is the accumulated contributions made by and on behalf of the member together with investment returns. (There can be exceptions).
But with defined benefits (like final salary), the CETV is a value determined on actuarial principles, which requires assumptions to be made about the future course of events affecting the scheme and the member’s benefits.
So when negotiating settlements it should be noted that it is not that the CETV has been inaccurately valued but that it may not be the most suitable valuation to use for divorce purposes.
Look at the definition again and note that it states “the expected cost of providing the member’s benefits” The CETV may therefore be valuing the member’s benefits but not the spouse’s. (Spouse’s pensions can often be very valuable). Trustees will also provide a CETV based on the normal retirement date of the scheme, even where it is likely that the member will retire early.
Of course, agreeing on a higher valuation does not mean that there are extra funds available as the CETV is the only value the scheme will place on the pension. However, when completing a pension sharing order it is possible to take a higher pension share (based on the higher valuation agreed) to compensate.
So what does this all cost and surely every actuary/pension expert would take all this in to account? Firstly, for no more than a few hundred pounds a second opinion valuation can be obtained. Secondly, unfortunately not and many reports I see only work of CETVs thus potentially undervaluing the pension assets at the most crucial stage!
My approach is to work hand in hand with an actuary to ensure that you get the best result. It should be noted that on several occasions we have managed to increase the valuation considerably (doubled it one case) resulting in a significant pension sharing increase for our client.
So before proceeding any further why not allow me to review the pension CETVs (for free) and see if we can improve the settlement today.
Posted August 16th, 2012
I was recently contacted by a client who had not implemented their Pension Sharing Order since 2003.
Not only was this a breach of the original order, there were a number of consequences that had occurred since the order was made. These were:
- The Cash Equivalent (CE) was recalculated at £213000 rather than the original £280000.
- Therefore my clients share of the CE was considerably lower, by £67000.
- The reason for this was that her husband had drawn benefits and as a consequence of this she was unable to take any lump sum from the pension.
- As the order was over 7 years old she had no recourse to go back to her solicitor for redress.
Therefore if you have a pension sharing order and are looking to implement it, my advice is to do so immediately. In the case of my client she has lost out on £67000 of CE and 25% pension commencement lump sum of the higher share figure £280000 / 50% (c.£.35,000)
Don’t let this happen to you please get in touch today!
Posted December 17th, 2010
Sometimes when dealing with pensions it is easy to miss the fact that additional contributions have been paid. This is because not all additional voluntary contributions (AVCs) will be reflected in the cash equivalent transfer value (CETV) being quoted.
Where AVCs are being paid on a money purchase basis they will often accrue in a separate insurance company policy alongside the main scheme benefits.
So, my advice when dealing with a final salary scheme on pension sharing is to ask the question – have any AVCs been paid? It has not been unusual for an extra £30,000 plus of CETV to account for the AVCs and like the main scheme benefits they are able to have a pension sharing order placed against them.
If you would like to discuss pension sharing and AVCs, please contact me on 0800 092 1220 or send me an email – email@example.com
Posted October 9th, 2010
The Public Sector Pension schemes – (NHS, Police, Civil Service, Local Government, Teachers, Armed Forces) are changing the way that they increase pensions in payment and revalue pensions in deferment from being linked to the Retail Price Index (RPI) to the Consumer Price Index (CPI).
RPI and CPI are measures of UK domestic inflation which are calculated by collecting a sample of prices for a selection of goods and services.
The major difference between the two measures is that RPI includes mortgage interest costs but CPI does not. Historically, this has meant that CPI has increased at a lower rate than RPI and it is therefore, expected to do so in the future.
In pension on divorce cases this change will potentially have two main knock on effects.
- It will have a negative impact on cash equivalent transfer values – the actuarial experts I have spoken with estimate that CETVs will be potentially up to 20% to 25% lower in some situations.
- It will mean that in retirement the amount of revaluation that each parties’ pension will receive will be lower.
If you would like more information on how these changes might affect you, please get in touch.
Posted October 4th, 2010
Whilst the NHS call centre and website are saying it could be up to next April before the new cash equivalent transfer values (CETVs) / Cash Equivalent Of Benefit calculations (CTVs) commence again, I understand that the new CPI factors are now starting to become available for the Public Sector Schemes.
The Fire Service and NHS pension scheme have confirmed receipt and they will be testing their systems over the next two weeks. The other schemes – Local Government Pension Scheme, Police Pension Scheme, Armed Forces- are expected over the coming weeks.
It is hoped that the end of this embargo (see here) will be soon and we can return to normal with requesting public sector pension transfer values.
If this is something that is currently affecting you, please feel free to contact us.
Posted April 6th, 2010
Clients often worry about whether the cash equivalent transfer value (CETV) they have been quoted represents fair value. It should be noted that there can be two types of challenge to the fairness of the CETV but in many cases, such challenges will have a low chance of success.
1. Does the CETV itself represent fair value
It is important to understand that the CETV may seriously undervalue the total pension benefits due to a variety of reasons (for example, it may not cover all the pension benefits or it may have been discounted due to the state of the scheme’s funding). It is therefore, possible to argue that another (higher) figure should be used which represents a fairer valuation.
The CETV itself cannot be changed and so a higher proportion of pension benefits may be shared or other marital assets may be distributed more favourably.
To prove undervaluation it would be necessary to present expert actuarial opinion and to negotiate strongly on this point. This should not to be confused with..
2. Does the split of the CETV represent fair value
Where equality of outcome is desirable (i.e. both parties want the same income at an agreed retirement age) a 50:50 split of the pension assets may not represent fair value.
Here a split in favour of the wife may be greater than 50% to take account of a number of factors, but mainly that women have a greater life expectancy than men.
Of course, it should be noted that it is likely that the final benefits received will not represent the same values quoted due to the time lag between the valuation date and the valuation day.
If you would like to know whether your CETV represents fair value, please call or email me for a confidential chat.