TVAS vs CETV for pensions on divorce

SallyG

About TVAS [mentioned in another thread] compared with the CETV offer:
I googled TVAS
http://www.sharingpensions.co.uk/leavingser.htm#text2
"The transfer value analysis system (TVAS) was introduced from 1 July 1994 and is a method specified by LAUTRO on the 1 January 1995, then the Personal Investment Authority (PIA) and now the Financial Services Authority. The TVAS is applied to all transfers from a final salary occupational scheme. The critical yield calculated by the TVAS is required from a receiving personal pension or section 32 policies to match at retirement age the benefits provided by a final salary occupational pension scheme. For the purpose of valuing the TVAS and future pension payments, a rate of interest based on the annuity interest rate (AIR) is used.
The AIR reflects the yield to redemption on high coupon medium and long term gilt edge securities and is reviewed quarterly by the FSA. The AIR will have an impact on the critical yield such that a higher annuity interest rate would reduce the critical yield, discounting future pension payments at a higher rate and result in a lower capitalised fund value needed to provide a given pension income at the retirement age for the scheme member."
Transferring out of a final salary pension is regarded as a move so toxic that extra special care and a dedicated critical yield calculation is required.
Meanwhile over in the divorce court increasing numbers of spouses, mainly wives, sharing private occupational defined benefit pensions CETVs on divorce are being quietly transferred out of defined benefit pensions with no legal requirement on the court to consider the effect on the value of the pension or the fairness of the outcome.

JamesU

SallyG, In a previous post (below) you mentioned reduction of CETV values (for divorce purposes) following the switch from RPI to CPI. Do you have an links or info where the % difference has been quantified?

http://forums.moneysavingexpert.com/showpost.php?p=41333348&postcount=648

JamesU

Loughton_Monkey

So let's summarise....

1. A Defined Benefits Pension Scheme is a package of rights and guarantees for the payment of (as yet unknown) amount of money at some future date. Hence, as is well known, to put a specific £ value on this package of rights, for an individual, at any one point in time is a far from exact science. It can only be an estimate.

2. The law now requires that this package, at a specific point in time, is assessed in value, so that it can be taken into account fully for the purpose of asset allocation between divorcees.

3. Futher than that, the 'difficult' and 'uncertain' valuation must also be adjusted for things such as death in service benefits, spouse pension, and future earnings potential, making it's valuation even more uncertain.

OK. I can see the difficulty. But sadly I cannot see a solution. It is not too dissimilar to valuing a house that is not going to be sold. It can only be a judgement of a local surveyor, who, as we know, could be anything up to 10% either way out.

Bunter_2

Loughton_Monkey wrote: »

So let's summarise....

1. A Defined Benefits Pension Scheme is a package of rights and guarantees for the payment of (as yet unknown) amount of money at some future date. Hence, as is well known, to put a specific £ value on this package of rights, for an individual, at any one point in time is a far from exact science. It can only be an estimate.

So, presumably when the individual actually retires, or is about to retire, the estimate then changes to a specific sum.

2. The law now requires that this package, at a specific point in time, is assessed in value, so that it can be taken into account fully for the purpose of asset allocation between divorcees.

Suppose that the pension is already being paid out and has been for a number of years; how is the value assessed then? (Following divorce) Presumably the value of the "package of rights" diminishes as more money has been paid out in pension and the pensioner is getting older?

Loughton_Monkey

Even upon retirement, it is not exactly a specific sum. At crystalisation, a specific sum is quoted, and it is much more accurate than a transfer value. A 25% tax free lump sum does become 'specific'. But the remaining 'pot' still might need topping up (or may produce a surplus) by the employer depending upon RPI/CPI linking etc.

Presumably, if the pension is being paid, then that can easily be 'valued' as an income stream and apportioned reasonably accurately. But I'm no expert on divorce rules or practice.

SallyG

JamesU - the info is anecdotal/unattributable but entirely credible - from people negotiating on pensions for their divorce ancillary relief claims - often a long drawn out process -some had an initial RPI CETV done which pre-dated CPI indexing but went "out of date for subsequent hearings" so new CETVs had to be provided - people were caught out by and complained of the suspension of CETVs while schemes waited for the new rules - and then surprised by the much lower CPI CETV offered for sharing on divorce. We're used to seeing CETVs change - but not nosedive like these did. Previous Pensions Ombudsman decisions have found that any damage caused on pension sharing by rule changes in CETV calculations are not grounds for claims against pension schemes. CETV offers made on divorce are recalculated on a date chosen by the pension scheme during the 4 month post Pension Sharing Order implementation period according to the rules applying at that chosen date.

LM - pension sharing is so much better than what went before - and people sharing defined benefits are starting to follow the "DIY" make it up as you go along ancillary relief tradition and doing pension income equalisation which can protect against the worst of the process but it's not in the legislation which itself seems to ignore the huge differences between splitting defined benefit and defined contribution pensions.

SallyG

Dangerously little is known about all of this - so little is reported - no-one seems to know really what goes on on a regular basis /no sort of overview.
Occasional glimpses of defined benefit pensions on divorce come up in court appeals and pension ombudsman reports.
People are getting actuarial reports no-one seems to understand - not even the solicitors commissioning the reports.
It's entirely possible to comply with all the legislation and regulations and various protocols and still walk out of court having no idea what you've just agreed to in the way of trashing the most valuable asset of your marriage.

JamesU

SallyG wrote: »

JamesU - some had an initial RPI CETV done which pre-dated CPI indexing but went "out of date for subsequent hearings" so new CETVs had to be provided - people were caught out by and complained of the suspension of CETVs while schemes waited for the new rules - and then surprised by the much lower CPI CETV offered for sharing on divorce. We're used to seeing CETVs change - but not nosedive like these did.

Yes, that was my understanding too when the RPI CETVs were suspended around July, pending new instructions that came through before Xmas. From what I remember last year, there were some furious OPs as they wanted to transfer according to RPI values that were suspended until lower CPI values were calculated (this was in relation to transferring pensions abroad by QROPs though, which is generally frowned upon by IFAs due to poor regualtion and value).

At the time my thoughts were that irrespective of the merit in pursuing CETV for QROPs, it was probably a breach of contractual obligations between the OP and trustee/pension provider when the provision of CETV and opportunity to transfer was denied pending new Governement actuarial guidelines and costings.

JamesU

Peter_at_BDM

The following may help.

Divorce legislation requires that the pension valuation to be used is in effect the Cash Equivalent Transfer Value. Although this is now more correctly referred to as the Cash Equivalent where the member is still active and therefore does not have the legal right to transfer out – without first opting-out of the scheme. In effect, the valuation basis is broadly the same, although the public sector schemes will calculate divorce specific valuations, which exclude Widows/Spouses benefits.

As a generality, CE(TVs) tend to under value the pensions compared to an independent actuarial valuation. Some are worse than others, though the early retirement options in the uniformed service schemes mean that the differences can be very marked indeed. Fortunately, most family lawyers are aware of the uniformed services issues.

Where the pension is in payment, the valuations are different, but the same underlying actuarial basis applies and therefore the risk of undervaluation remains.

If the pension is redistributed using a pension sharing order, the scheme implements as internal rather than external credits and the split are determined by capital value equalisation, the undervaluation can become rather irrelevant. Equalise on incomes or by sharing the CE(TV) 50:50 and the result will be unfair on one party.

As Sally G says, so little is reported and this is because the family courts are not open to the public. Only the exceptional cases are reported and these can be misleading. I take the point that even the solicitors instructing actuarial reports sometimes do not understand them. Some of us are trying hard to make this better but the issues are complex.Cases are regularly settled without proper consideration being given to the pensions issues and this is a serious concern. Some are dealt with by offsetting and this is worrying because the undervaluations are often not recognised. I won’t even start on how liquidity discounts are sometimes arrived at, suffice to say that it can amount to little better than licking a finger and waiving it in the air.

Family lawyers do meet considerable resistance in getting their clients to take appropriate action regarding pensions on divorce and dissolution. Client naivety and costs being significant factors.