Tuesday, 19 February 2013

They're all after your money!

I had my attention drawn to this article in the Telegraph by John Bolch of Family Lore.

Pensions on divorce

Now I'm sufficiently long in the tooth to remember the first foray into pensions by divorce law in the late nineties.  This took the form of pension earmarking -  a cumbersome and risk laden exercise for any court.  Back then, divorce lawyers were given severe warnings by pensions actuaries that they faced negligence claims from disgruntled clients if they didn't get an expert report (and a very expensive one, I may say) from an actuary, valuing the transfer value of any pensions.

For those of you who don't know, the transfer value is a theoretical figure which is supposed to be what it would cost to buy a given bundle of pension rights on the open market.  It's underpinned by a number of assumptions, such as how long a person is likely to live and what rate of return can be realistically expected on investments pending retirement.  Of course, this becomes relevant only in relation to what are now called defined benefit schemes (final salary or average salary schemes).  This is because these produce a certain set of benefits which then have to be valued.  A defined contribution scheme (money purchase, private pension policy) doesn't need this exercise.  This is because the contributions are used to buy investments which have a value at any given moment in time and this can be disclosed.  The investments are used at retirement to buy whatever benefits can be afforded at that point.

So, anyway, we were all going to be negligent if we didn't use actuarial valuations.  Except we weren't.  The courts very quickly got fed up with reports assigning fabulous values to pension schemes - money that simply wasn't available to the parties until retirement and wasn't available to them to buy a house now, for example.  The only use for such a report was limited to two scenarios:-

1.  Where there was to be a set off - i.e. where one party would keep the pension but concede a greater share of other assets by way of compensation.  For this to be fair, there needs to be a fair value assigned to the pension asset.

2.  Where identical outcomes are being sought from a given pension fund.  Until now, the same pension fund would give different pension benefits to a man compared with a woman.  This was because a woman would be expected to live longer, so an identical sum of money would be spread more thinly.

Now as to the first, I have to say that set off arrangements are pretty rare.  Usually there just isn't enough for one party to be bought off in this way.  What's more, to allow one party to have immediately available money and the other party to have to wait years before actually benefiting is plainly inequitable.  I'm just not seeing this happen often.  And that means that I have very little need of actuarial reports!

As to the second, this is how Liverpool Victoria pithily sum up a fundamental change in how pensions are to be dealt with in the future:-

"From 21 December 2012, new European gender law has meant that men and women are to be treated the same when it comes to annuity rates."

In other words, the fact that women live longer does not mean that they can be paid less.  Instead, men will have to receive less in order to equalise the pensions that women receive.  So there won't be any gender variation to compensate for and there will consequently be no need for a report quantifying the difference! 

The big marketing push by pensions actuaries - and the Telegraph report is nothing more than that - is frankly overstated.  Set off is rare and gender difference is vanishing, so what would the point of a report be, other than to keep reporting actuaries in the style they are accustomed to?

There is one sentence in the report I find particularly puzzling:-

"Solicitors have advised that divorcees could stake a claim up to 12 years after the legal separation has been settled."

How?  If the order has been properly drafted, it just isn't possible to come back at a later date to change it at all.  If it was the result of negligent advice, the limitation period in professional negligence is six years, not twelve.  What am I missing?


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