When it comes to the remedy of offsetting on divorce—distributing non-pension assets of the marriage so as to take account of differences in pensions—there is a question that we at Mathieson Consulting Ltd get asked more than any other, and it is about multiplying by two versus dividing by two.
I jest not: despite the fact that we are often performing some complex actuarial modelling of parties’ pension rights, the one thing that often gives rise to further questions is about how the offsetting figures are to be used, and whether they are “half” or “double” numbers.
This is because there are two ways in which offsetting amounts can be expressed, and these can easily be confused. We can discuss how much non-pension capital one party needs “more than” the other to take account of pensions, or we can consider how much one should give to the other from his or her own share of funds. These amounts are not the same, and this is where the complication creeps in.
Let us take a hypothetical example, and suppose that we had written a report where we stated that “H(usband) has pension benefits that are £500k more valuable than those of W(ife)—after tax adjustments etc—and as such W need retain some £500k more than H in non-pension capital”. Then by way of happy coincidence, it transpires that the net assets of the marriage, barring pensions, amount to £500k: it follows then that W will get all of the £500k of non-pension assets, to match the £500k excess of pension assets held by H. So far, so good.
Things become more complicated when, as is more often the case, the non-pension assets to be used for offsetting exceed the pension asset figure being offset. Let us now suppose H and W have looked down the back of the proverbial matrimonial sofa, and gosh, there is actually £700k of non-pension assets available. The pension differential remains £500k, so how might we now divide up the non-pension assets?
There are two ways to look at this, but both ultimately give the same result:
In both calculations, the end result is that W has £500k more than H in non-pension capital, which is what we wanted to happen.
But why do we use the “half” number in the second approach? It is because for every £1 that H gives W from his share of the funds, she then has £2 more than does he. As such, for W to have £500k “more than” H, he needs to transfer £250k (half) from his share of funds to her.
Note that in most cases, when we write our reports we will not have any details of the non-pension assets, and this is why we seek to explain the results in terms of the offsetting amount itself, whether as an “W more than H” figure, or as a “H needs to give W from his share” figure.
We have a house style and a report template here at Mathieson Consulting Ltd, which all report writers seek to follow wherever possible. However, the wording is reviewed from time to time—not least following feedback from solicitors on the clarity of our prose—and we are always striving to improve both the quality and the readability of our reports. We will have failed as expert witnesses if we send out something that is completely unintelligible to the end user.
To end on a light-hearted note, I promise the reader that when I qualified as an actuary, it was imperative that I could demonstrate that I knew how—and when—to multiply by two rather than divide by two. If all this seems a bit too complicated, it’s not quite as bad as this sketch from the Fast Show, to be found at https://www.youtube.com/watch?v=y6QgHUJIQ5Q. If you have to borrow £2 from a lady’s purse in your local to get the offsetting figures to balance, you are doing it wrong!
In conclusion, my advice is: don’t worry if you spend time pondering the offsetting section of our reports. You are in good company with many others and on occasions such pondering also happens within this organisation!
Jonathan Galbraith
Head of Mathieson Consulting Limited
