Q. I read with interest the answer you provided to a recent question regarding the methods of dealing with pension benefits upon divorce. I am a substantial way through the divorce process myself (my wife having left me and having instigated divorce proceedings) and, thankfully, it has remained relatively amicable to date. However, my wife has commissioned an actuary to prepare a “pension sharing report” that suggests that, were my wife to receive a cash lump sum in lieu of seeking a share of my pension, this lump sum is less valuable and, therefore, ought to be in the order of three to four times the value of my pension savings. This strikes me as being somewhat unfair and would result in my wife gaining almost all of the matrimonial assets (which may well be her motivation in putting forward the report). Is it common for cash settlements to be considered less attractive than a share of retirement savings?
A. First, I would agree with you that to suggest that a cash settlement needs to be significantly greater than retained pension benefits seems somewhat unfair. Whilst it is difficult to provide you with definitive advice without knowing the details of your – and your wife’s – financial circumstances, as well as having sight of the report to which you refer and the assumptions upon which it is based, I would go so far as to suggest that it would appear that the actuary has erred in producing his report and has inverted his calculations.
As a rule, when valuing matrimonial assets for the purpose of financial remedy proceedings, it is usual to take account of the parties’ pension savings when negotiating a financial settlement. There are a number of methods for dealing with those pensions savings, including “pension sharing” (which involves one party transferring an agreed percentage of their retirement savings to the other party) and “attachment” (under which one party is given a right to a certain proportion of the other party’s retirement income).
However, the most common method is that to which you refer – “offsetting”. This involves increasing one party’s share of the matrimonial assets (excluding pensions) to take account of the fact that the other party is retaining all of their retirement savings.
There is no set formula for offsetting pension benefits and the factors used to reach a recommendation depend upon the circumstances unique to the divorce in issue. However, certain assumptions apply almost universally. For example, it is accepted that a cash lump sum paid now is more valuable than a pension potentially payable in the future (and, as such, one would expect a discount to be applied to the amount of the offset). Similarly, a pension is likely to be taxed and, as such, one would expect a further discount to be applied to take account of taxation. It is the extent of these discounts that will vary, depending upon the parties’ circumstances.
It strikes me that – based upon the information you have provided – the pension sharing report commissioned by your wife may present a somewhat distorted view (in her favour). If you have not yet instructed a solicitor, I recommend that you do so asap and raise your concerns regarding the report with them. Your solicitor ought to be able to pose additional questions to the actuary who prepared the report and ask them to clarify their calculation (one would hope that they would realise their error at this stage).
Q. I have received a letter from my former employer stating that they are conducting a “pension increase exchange exercise” (or PIE exercise, as they refer to it) for former employees who were members of their final salary pension scheme. The information I have received is unclear and states that the exercise is intended to save costs for the company. I am therefore sceptical as to whether the offer is in my best interests and whether I should participate in the exercise. Can you offer any assistance, please?
A. Yes. A pension increase exchange (or PIE) exercise involves an employer (who is the sponsoring employer of a defined benefit pension scheme) making an offer to members of the pension scheme to give up their entitlement to certain future increases to their pension, in exchange for a greater pension now that does not increase (or does not increase to the same extent).
Often, members of a final salary scheme consider the option of a greater, flat-rate, pension at retirement as an extension of the common practice of offering a tax-free lump sum, in exchange for a reduced pension. It is common practice therefore, when conducting a PIE exercise, to offer non-pensioners an additional option upon retirement of a greater lump sum (which is often tax free) and a higher pension (which is level, or at least flatter, once in payment). Existing pensioners are usually offered a one-off opportunity to forgo some of their increasing pension for a larger, non-increasing, pension.
The Pensions Regulator has issued guidance in respect of exercises which incentivise members to give up some or all of their rights under an occupational pension scheme, as would be the case if you accepted your employer’s offer under the PIE exercise. Their guidance can be accessed on their website at www.thepensionsregulator.gov.uk/guidance/incentive-exercises.aspx.
In short, the Pensions Regulator states that any communication you receive from your former employer should be clear (and not misleading) and the exercise ought to be conducted in a fair and transparent way. Your former employer ought to provide you with access to an independent financial adviser, at their expense. You ought to check that that adviser is truly independent, they have the appropriate qualifications and a track record of advising in respect of such exercises, how they are being remunerated and that they will consider your financial circumstances in their entirety (and not just your former employer’s offer in isolation).
If you are not certain that the selected adviser does not fulfil all of these criteria, then I urge you to engage your own chartered financial planner, who specialises in pensions, before you consider your former employer’s offer.
If you have a question you would like Trevor to answer, please email it to: yourmoney@rwpfg.co.uk or post it to Your Money, Rutherford Wilkinson Ltd, Northumbria House, 21-23 Brenkley Way, Blezard Business Park, Newcastle upon Tyne, NE13 6DS.
0191 217 3340
