Public sector pension schemes and the danger for divorcing couples
9 September 2024
Public sector defined benefit (DB) pension schemes have recently seen an increase in their value due to changes in the way their benefits are calculated. This article will explain why these pensions are now worth more and what this means for people going through a divorce.
What are defined benefit pension schemes?
Defined benefit pension schemes provide a specific amount of money upon retirement, based on your salary and the number of years you’ve worked. These pensions are common in the public sector, including for teachers, NHS staff, police officers and civil servants.
Why have these pensions increased in value?
In 2023, the Government Actuary’s Department (GAD) updated the factors used to calculate the value of these pensions. The main reasons for the increase are as follows:
- updated economic assumptions: The new actuarial factors reflect changes in economic assumptions, such as lower interest rates and increased life expectancy. These adjustments lead to higher present values for future pension benefits, thus increasing the CEVs
- lower discount rates: The discount rates used to calculate the present value of future pension payments have been reduced. Lower discount rates mean that the future pension payments are valued more highly in today’s terms, resulting in higher CEVs
- longevity improvements: Increased life expectancy means that pension benefits are expected to be paid out over a longer period. This longevity improvement is factored into the actuarial calculations, further increasing the value of the pensions.
What is the danger for divorcing couples?
The recent changes that have been implemented by GAD, have meant that public sector CEVs are now tending to exceed what might be regarded as a fair valuation of the actual pension benefits.
A good example of this was recently reported by Jonathan Galbraith from Mathieson Consulting. He outlined in his blog that a police pension had recently come across his desk, and the CEV of that pension had been overestimated by approximately £75,000.
The danger for the pension member spouse is that if they are potentially looking to use “offsetting”, whereby they retain their pension benefits and offset that capital against other matrimonial assets in the pot (for example the equity in the family home), they could potentially now be costing themselves £10,000’s if relying on public sector CEVs. These CEVs can no longer be treated as though they are automatically a reasonable estimate of the underlying pension rights held.
The Birketts view
Given the higher pension values, it will now be crucial to seek expert legal and financial advice to ensure a fair outcome. Both parties need to understand the “true value” of the pensions which are available for division, prior to any financial agreement being reached.
Pension on Divorce Experts (PODEs) can help to navigate the complexities and ensure that both parties receive a fair settlement. At Birketts, we work closely with several well-respected PODEs, who can advise our clients on the “true value” of their DB pension schemes. In turn, this helps to provide our clients with clarity, reassurance and the ability to negotiate with confidence
If you would like to know more about the topics discussed in this article, please do not hesitate to contact Stefan Donnelly or another member of Birketts’ Family Team.
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Stefan Donnelly
Services
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at September 2024.