Pensions in Divorce
|Mr A & Mrs B EXAMPLE Actuarial Report on Pensions on Divorce 22 March 2013|
Report of Geoffrey Wilson MA FIA MAE MEWI
10 Chiswick Wharf
London W4 2SR
Tel: 0208 581 4132
1.1 This report has been prepared on the joint instructions of XXX Solicitors, acting on behalf of their client Mrs B Example (the wife, W), and YYY LLP, acting on behalf of their client Mr A Example (the husband, H). It is intended for use by them in the matter of divorce and ancillary relief proceedings. This report is addressed to the Court, and is also intended to be disclosed to those with whom the parties wish to discuss these issues.
1.2 My declaration that I have complied with the obligations of an Expert is contained in section 5 of this report. The purpose of my report is to give my opinion on pension sharing issues as set out in my instruction letter dated 13 November 2012. I have been provided with information attached to that letter of instruction and subsequently.
1.3 I have carried out my calculations as at a date of 22 March 2013. I am a Fellow of the Institute of Actuaries, and partner of Excalibur Actuaries, practising as actuaries and pension consultants. I attach a statement of my qualifications (Appendix D).
2. SUMMARY OF FINDINGS
2.1 I describe the pensions concerned, with comments, in section 3 and Appendix A of this report. This shows that, without pension sharing, Mr Example’s income in retirement is projected to be £20,868 a year more than Mrs Example’s (from age 65), and that Mr Example’s pensions have a current CETV of £384,370 more than Mrs Example’s.
2.2 I set out in section 4 my calculations and comments on pension sharing. I show that pension sharing of 40.51% on Mr Example’ AAA pension is calculated to equalise the retirement income of the parties from retirement age 65, which increases to 43.01% for equality if Mrs Example starts her pension at age 62. I show other calculations and comments.
3. INFORMATION AND PENSION BENEFITS
3.1 I have been informed that Mr Example was born on 18 August 1948, and is therefore 64 years 7 months old, and that Mrs Example was born on 13 October 1951, and is therefore 61 years 5 months old, at the calculation date of this report. I have assumed that both parties have normal life expectancy.
3.2 I set out a description and analysis in Appendix A of the pensions I have been informed about. I cannot provide any calculations or advice in connection with any other pension benefits of the parties. I summarise this below in terms of current CETV and of projected retirement income. The pensions are shown as projected retirement income from pensions accrued now starting from age 65 for Mr Example and age 62 for Mrs Example (ie assuming she retires soon). The pension shown includes the pension equivalent of the NHS retirement lump sum. Pensions are in today’s money terms, in other words stripping out the effect of future inflation, with provision for increases in payment reasonably covering inflation.
|H – AAA||£519,707||£27,531|
|H – BBB||£112,826||£5,706|
|H – State||£0||£4,740|
|W – NHS||£248,163||£12,402|
|W – State||£0||£4,707|
|Gap if no sharing||£384,370||£20,868|
3.3 I have been asked to comment on the value of these pensions – I set out in the Appendices my methods and assumptions in calculating fair actuarial values, and the fair actuarial value of the pensions in this matter, with my comments. The CETVs are a little below fair value, which is reasonably typical of CETVs in company and public service pension schemes.
4. PENSION SHARING CALCULATIONS
4.1 Pension sharing arrangements in Mr Example’s pensions are described in Appendix B. Mr Example’s pensions will reduce after implementation of any sharing order by the percentage specified – in other words a 10% PSO will reduce his gross accrued pension by 10%. Mrs Example’s extra pension from sharing is calculated as described in the Appendices – money-purchase pension credits would be set up as transfer values paid into Mrs Example’ personal pension.
4.2 I comment that CETVs can change significantly between the date the CETV have been provided to us and the date any sharing order is implemented, and that this can significantly affect the retirement income for Mrs Example from sharing – but I am unable to predict this and have based my calculations on methods and assumptions as described.
4.3 I have been asked to advise on pension sharing to equalise the parties’ retirement income (a range of different objectives could be set by the parties and/or by the court for these calculations – my calculations below are the ones requested in my letter of instruction). I advise that since the BBB CETV is slightly more favourable than the AAA CETV (a multiple of 19.8 times pension compared to 18.9), then it is more favourable actuarially to the parties’ combined retirement income to share the BBB pension 100%, with the balance from AAA. However, since this incurs two administration fees, costing £2,000 more than sharing the AAA pension only, and the gain is only £126 a year (see below), I suggest that it would be better to share only the AAA pension.
4.4 I calculate that sharing of 40.51% on Mr Example’ AAA pension will equalise the parties’ retirement income from age 65, as will sharing of 100% on the BBB pension plus 19.33% on the AAA pension. I illustrate this below:
|Sharing for equal income 65||Sharing AAA||Sharing both|
|PSO on AAA||40.51%||19.33%|
|PSO on BBB||0.00%||100.00%|
|H – AAA after sharing||£16,377||£22,209|
|H – BBB after sharing||£5,706||£0|
|H – State||£4,740||£4,740|
|H – Total pension||£26,823||£26,949|
|W – Own pensions||£17,109||£17,109|
|W – Sharing pension||£9,714||£9,840|
|W – Total pension||£26,823||£26,949|
4.5 I further calculate that sharing of 41.35% of the AAA pension only will equalise the parties’ retirement incomes if Mrs Example starts drawing her pension at age 64, that sharing of 42.18% will equalise the parties’ retirement incomes if Mrs Example starts drawing her pension at age 63, and that sharing of 43.01% will equalise the parties’ retirement incomes if Mrs Example starts drawing her pension at age 62. I illustrate this in the table below.
|Sharing for equal income from:||W age 64||W age 63||W age 62|
|PSO on AAA (only)||41.35%||42.18%||43.01%|
|H – AAA after sharing||£16,147||£15,918||£15,690|
|H – BBB + State||£10,445||£10,445||£10,445|
|H – Total pension||£26,592||£26,363||£26,135|
|W – NHS + State||£17,109||£17,109||£17,109|
|W – Sharing pension||£9,484||£9,254||£9,026|
|W – Total pension||£26,592||£26,363||£26,135|
4.6 I comment that the calculations above are on my fair value methods and assumptions, and assume Mrs Example would accept some investment risk in setting up her retirement income from sharing– in effect preferring a higher income with that risk to a lower income with guarantees (see Appendix B, with my comments on why I consider that to be the most reasonable assumption in the circumstances as known to me). If however the parties consider it more reasonable to assume she would in practice (after taking independent financial advice, on a fund of around £200,000) choose to use the funds to buy a guaranteed annuity, with 3% a year increases, then I calculate that the sharing for equality of retirement income changes from 40.51% to 42.97% on the AAA pension for equality ate age 65, and changes similarly (approximately + 2.5% on the pension share) at other ages.
4.7 I have assumed that any charges for implementing pension sharing are split appropriately between the parties. The charges are described in Appendix C.
5.1 I have highlighted in this report including in the Appendices the difference between my assumptions and other possible assumptions, such as present market annuity rates and bases typically used by scheme actuaries in calculating CETVs. My projection of benefits before and after pension sharing would have been smaller for example if I had assumed the parties were to purchase an annuity at retirement from their money-purchase funds at present market annuity rates, and would have been larger for example if I had assumed a larger real rate of investment return after charges before retirement such as those typically assumed in calculating CETVs. The actual pensions payable will depend on many factors such as inflation, and the investment returns obtained on money-purchase pensions. My calculations have been made, as described, on what are in my opinion the most appropriate methods and assumptions.
5.2 There is timing uncertainty, since pension sharing will be calculated by the scheme administrator based on a re-calculation of the CETV at the time the order is implemented, which will necessarily be different from the values at the calculation date of this report. There are also some uncertainties in the information, with some estimates having been made (for example updating CETVs to the report date) as set out in Appendix A.
5.3 I hereby confirm that:
(1) I am aware that my duty as an Expert is as set out in the Family Procedure Rules 2010, Part 25, and is to provide independent assistance to the court by way of objective, unbiased opinion in relation to matters within my expertise and that my evidence, as an Expert, presented to the Court must be, and must be seen to be, independently produced by myself uninfluenced by the instructing parties.
(2) I have complied with my duty noted in (1) above.
(3) I have considered whether there are any conflicts of interest in giving the opinions expressed in this report, and I declare that I do not believe that there are any such conflicts.
(4) I confirm that I have made clear which facts and matters referred to in this report are within my own knowledge and which are not. Those that are within my knowledge, I confirm to be true. The opinions I have expressed represent my true and complete professional opinions on the matters to which they refer.
(5) I have not, without forming an independent view, included or excluded anything which has been suggested to me by others – in particular by my instructing solicitors.
(6) I will notify my instructing solicitors immediately if, for any reason, my report requires correction or qualification.
(7) I have not entered into any arrangement where either the amount or payment of my fees is in any way dependent on the outcome of the case.