House view on impact of Covid19 on divorce settlements involving pensions.

There seems to be much discussion on social media about the implications of the current economic conditions on pension funds, and how this may impact financial settlement in divorce cases.

There are so many unknowns at the moment. For example, we do not think anyone has a clear idea as to what the long-term economic impact of government market interventions worldwide will have. We certainly live in interesting and worrying times.

However, we hope the following may help lawyers decide how to proceed with cases involving pensions, as they near settlement.

Factors to consider:

1. Actuarial

  • Lower stock market values:
    • Have an immediate impact on defined contribution (DC) / money purchase valuations.
    • Increase the possibility of private sector defined benefit (DB) schemes having significant deficits and therefore paying reduced transfer values.
  • Reduction in gilt yields:
    • Have an immediate impact on annuity rates (reduced).
    • Potentially increases the quoted transfer value, usually cash equivalent value (CEV), for many private sector DB schemes.
    • Will increase funding problems for private sector DB schemes (perfect storm combination of increasing the transfer value but the reduction in share values hits the scheme assets used to pay transfer value).
  • Mortality assumptions:
    • It is too early to say whether Covid19 will have a material impact on standard mortality assumptions.

The combination of all of these factors may require DB schemes to review actuarial basis, with CEVs changing in future. Actuaries are unlikely to change actuarial basis immediately, and so the impact on CEVs will probably not be immediate.

 

2. Impact on settlements:

  • Scenario 1 – only public sector DB schemes in a case (e.g. NHS / Police / Civil Service / LGPS etc).
    • No impact on settlement if pension sharing. We do not expect CEVs to change in the short term. No money leaves the scheme (all internal implementation) therefore immune from whatever is happening in the market.
    • If offsetting, and an Expert is being asked to calculate an appropriate value for offsetting (CEV is NOT appropriate) then reduction in gilt yields may mean the Expert will be increasing the Open Market Value (OMV) of such a pension for offsetting.
  • Scenario 2 – only DC / money purchase schemes in a case (e.g. Standard Life Personal Pension, or self-invested personal pension (SIPP), or stakeholder pension).
    • If pension sharing, probably not an issue – If value was £200,000 on Form E three months ago, and this fund was to be divided equally (50% PSO) then both parties would have ended up with £100,000. If pension sharing order (PSO) of 50% now to be implemented and the value is say £140,000, both will end up with £70,000 – in other words equality is maintained, without the need to adjust the PSO. If intended recipient of a pension credit says “I don’t want the credit now when values are supressed”, then this is not logical. The £70,000 the recipient may receive now, can be assumed to recover (if recovery happens) at the same rate whether the monies are retained in a new fund for the recipient or in the existing fund of the member.
    • If offsetting, values almost certainly down. If using the CEV as a basis for negotiating a settlement (which may be appropriate) then it would be sensible to obtain an up-to-date valuation – but remember the markets are extraordinarily volatile at the moment, and a valuation is almost out-of-date before it is received.
  • Scenario 3 – only private sector DB schemes in a case.
    • If pension sharing, possibly no significant impact. CEVs are guaranteed for 3 months from issue. But there is a concern that there will be a rise in schemes paying reduced transfer values, on grounds of deterioration in funding position. Absent a private sector DB scheme paying a reduced transfer value on grounds of funding position, it is quite conceivable (funding permitting) that, perhaps counter-intuitively, the transfer value could have risen of late.
    • If offsetting, then hopefully the parties are not using the CEV as a basis of valuation, but instead relying on an expert valuation – perhaps an open market valuation. In which case there may be a slight increase in calculated open market values to reflect the reduced gilt yields.

It then gets more complicated if there are combinations of DB / DC funds and public / private sector schemes in a case. See matrix below:

DC Private Sector DB
Public Sector DB Public sector DB will have stayed constant, DC fund reduced, therefore may need to revisit settlement whether pension sharing or offsetting As long as private sector DB scheme is not paying reduced transfer values (on grounds of finding deficit) then probably no need to worry too much whether pension sharing or offsetting. Longer term we would expect private sector DB CEV to increase in value (absent funding problems) but public sector may be constant for longer, leading to some imbalance
DC DC only covered above Subject to comments above regarding (i) reduced transfer values and (ii) some increase in CEV, the DB CEV may well have stayed relatively constant against a falling DC CEV. Therefore, may need to revisit settlement whether pension sharing or offsetting

 

3. Impact on PODE Reports

We continue to produce reports. All of our report writers are settled into the routine of home working and producing the reports. We also know from past experience, that notwithstanding market volatility, in so many cases our reports are robust in that even with the benefit of 20/20 hindsight, the calculations withstand the market fluctuations. However, we are inserting the following extra caveat in reports for the time being:

Special considerations

At the time of compiling the report, we are seeing particularly volatile investment markets due to Covid19. We expect pension values to fluctuate more than usual over the next few weeks, and thus whilst the calculations provided in this report will give a very good guide as to the quantum of required orders, it may be the parties decide that some fine tuning, with the benefit of up to date values, would be sensible in this case, as they approach the time for courts to seal any orders.

For example, a report we are currently writing:

  • H and W both in their 70s and retired and in receipt of pensions. We are asked to look at pension sharing only (no offsetting), for equality of income.
  • H has two private sector DB schemes, with pension in payment, and a DC SIPP in drawdown (not annuity purchase).
  • W has a public sector DB pension in payment.
  • We do not expect the CEVs of the DB pensions to have changed yet. The DC SIPP valuation is c. 3 months old, and so we are thinking this may have fallen in value, and will need to flag this, as this will be the pension which we will assume will be shared.
  • As neither of the DB pensions will be shared, even if the CEVs of H’s DB schemes do change, or if the schemes start paying a reduced transfer value, this will not actually be relevant to the case – all we are interested in for the DB pensions is the incomes they will generate. The CEV is only relevant, in this case, if the pension is to be shared.
  • Whether by the time a PSO is implemented the Government Actuary Department (GAD) changes the actuarial basis, and thus the CEV for W’s Teachers Pension, is again not material to calculations for equality of income.

(One of the joys of what we do is that no two cases are the same – the possibilities of combinations of pensions are endless. It really is not practical for us to set out similar examples for all possible combinations of pensions.).

4. Other Factors

i) Staffing problems at life offices / scheme administrators may cause issues with obtaining information required for Form E.

ii) General public concern over markets may cause increased workload for schemes and life offices, at a time when they have reduced staffing levels.

iii) Delays in getting advice regarding the implementation of pension sharing orders.

iv) As a PODE it is necessary for me to surmise what may happen to the value of pensions prior to settlement and indeed post settlement. As a company we will be reviewing our in-house assumptions regularly to ensure our reports adapt to the changing environment. Please do remember that we act as Expert Witness and not as a financial adviser. This company is not authorised to give FCA regulated advice.

The role of a suitably qualified financial adviser becomes even more important in the current market volatility. We believe it is essential that the recipient of a pension sharing order, or offset capital should take regulated financial advice from a suitably qualified financial adviser at the earliest opportunity. The recipient should not wait until he / she receives a pension credit to seek such advice. Where there are lifetime allowance (LTA) issues, we often work in conjunction with the financial adviser for the benefit of both parties.

If the parties do not have their own advisers Brewin Dolphin, our parent company is very experienced in assisting solicitors and their clients in this area. Should you wish to explore how they can help please call them directly on 0203 201 3023 [1]

[1] In order to preserve our independence when acting as a Single Joint Expert, Mathieson Consulting Ltd requires that contact is made directly to Brewin Dolphin.

We wish you all, your families, and your colleagues all the very best during this troublesome period.

George Mathieson (CEO Mathieson Consulting Ltd)
Dr Catherine Anderson FIA, Senior Actuary Mathieson Consulting Ltd
Jonathan Galbraith FIA, Senior Actuary Mathieson Consulting Ltd
Chris Goodwin FIA, Senior Actuary Mathieson Consulting Ltd
Kate Routledge FIA, Senior Actuary Mathieson Consulting Ltd