A glass shoe?
There was a paper that was presented at the FLBA (Family Law Bar Association) Conference in Cardiff on October 21st 2015 which addressed the ‘Cinderella’ of financial remedies on divorce. This is the offsetting of pensions against non-pension assets. Now you understand why I used ‘a glass shoe’ as a reference.
Who contributed to the paper?
The paper contains contributions of 14 of the leading pension experts who all discussed their different approaches towards pension offset valuations, based on 3 simple scenarios: a small, middle and bigger money case.
The authors analyse the reasons for their differences and highlight some of the key factors to consider when offsetting, concluding that there is a pressing need not only for more interdisciplinary discussion between lawyers and pension experts, but also for judicial guidance.
Why you need to read the paper now
The paper questions how such a substantial divergence in approach to offsetting could have continued for so long, unchecked by the courts.
The paper highlights the dangers of using the cash equivalent as the starting point for pension valuation, and the importance of seeking financial advice and/or instructing an expert, in all but the most straightforward, defined contribution pension cases.
The authors critically explore the use of the Duxbury algorithm as a method of valuing a pension offset, and it’s somewhat unrealistic rates of return, the lack of account for administration costs and the differences between earned and pension income, concluding that Duxbury may not be appropriate in the pension context.
The inclusion of the utility discount in pension offsetting is discussed, having elicited a lively exchange of views amongst the experts when considering whether it is a computation or distribution issue and the relevance of the parties’ personal circumstances. The utility discount reflects the perceived advantage of holding cash now rather than waiting for pension benefits in the future and an amorphous judgment of the value of cash over other, more illiquid forms of holding wealth. The authors suggest that it may have too much prominence in offsetting calculations.
The paper also briefly considers the effects of the 2015 pension freedoms on the liquidity of pensions in general, and on offsetting in particular, and outlines the experts’ view on the observations of Nicholas Francis QC in SJ v RA [2014] EWHC 4045 (Fam).
The conference version of the paper is available to download here – Apples or Pears – Pension offsetting on divorce (FLBA Conference paper).pdf.
This is always a difficult and contentious topic and it is to be commended that the authors are trying to find some common ground. It will be interesting to see what becomes of this and whether actuaries and pension experts can find common ground when they are often at odds over methodology.
