Public sector pensions: divorce and delays
The Public Sector Pension is one of the main assets taken into account when negotiating a financial settlement upon divorce. Unlike the family home, its value cannot be released immediately. You will be asked to obtain a Cash Equivalent Transfer Value (CETV) as a starting point for negotiations. However, many public sector workers are now unable to obtain this information following the emergency budget announcement that public sector pensions will in future link to the consumer prices index (CPI) rather than the retail prices index (RPI) as it is now.
The time period for implementation of this change is three months. It could take longer. In the meantime, pension administrators have been told not to provide CETV calculations which require projected values based on employer contributions and life expectancy. This has resulted in delays for thousands of divorcing public sector workers who cannot finalise their financial settlement until that pension information is known. Once public sector pensions have been linked to the CPI, CETVs are likely to reduce. This will result in lower pension settlements.
The approach to Public Sector Pensions on Divorce
Once the value of the pension is known, the following options are available when considering how to deal with it:
The pension remains with the public sector worker whose spouse will receive a greater share of the other assets to compensate them for their loss of interest.
Your spouse is likely to demand an actuarial report as CETVs often undervalue Public Sector pensions by thousands of pounds. This will put a different value on your pension, resulting in more complex negotiations.
Offsetting can be attractive. You retain your pension intact and your spouse receives more capital now. This is particularly important to those who need to house the dependant children. The question is whether there are sufficient non-pension assets to ‘buy out’ the other party? With little equity or savings, this is unlikely.
A share of the pension CETV is transferred to the spouse upon implementation providing a pension within the scheme in that person’s own name. A pension share will reduce your pension upon retirement. However, it is applied to the value at the date of implementation, so any contributions you make thereafter are solely for your benefit. This gives those of you who have not been in the job long plenty of time to rebuild your pension. It also enables you to receive more of the capital now to pay off debts or re-house. It is those who have built up a significant pension over many years who will be harder hit by a pension share, facing a reduced pension in retirement.
There are also administration charges upon implementation.
The NHS for example has just published its schedule of charges for January 2011 onwards. The charge to implement a pension sharing order goes up to £2,760 from £393.62. Increases across all Public Sector schemes may follow.
A percentage of the pension payable upon retirement (lump sum and/or income) is paid direct to the spouse by the pension trustees.
This is useful if your pension is already in payment or if there is a prospect that your spouse may remarry (the order can provide for this benefit to be lost on remarriage). However, the value of your pension at the date of retirement will apply so your spouse will benefit from any further contributions by you after divorce.
Public Sector pensions are a complicated and crucial aspect of divorce. For specialist advice, contact Sarah Orrell – Head of the Emergency Services Family Law Legal Team.