Pension Sharing FAQ – When is a Cash Equivalent Transfer Value the right value to use?
Mar 13, 2013
Technically speaking the cash equivalent transfer value (CETV) represents the expected cost of providing the member’s benefits within the scheme.
In divorce settlements, thought needs to be given as to whether the CETV is the most appropriate method of valuing the overall pension benefits. Consideration needs to be given as to whether the CETV accurately reflects the benefits on offer and if certain benefits are not counted within the CETV, what should be done about it.
In the case of money purchase benefits, this is generally straightforward – it is the accumulated contributions made by and on behalf of the member together with investment returns. (There can be exceptions).
But with defined benefits (like final salary), the CETV is a value determined on actuarial principles, which requires assumptions to be made about the future course of events affecting the scheme and the member’s benefits.
So when negotiating settlements it should be noted that it is not that the CETV has been inaccurately valued but that it may not be the most suitable valuation to use for divorce purposes.
Look at the definition again and note that it states “the expected cost of providing the member’s benefits” The CETV may therefore be valuing the member’s benefits but not the spouse’s. (Spouse’s pensions can often be very valuable). Trustees will also provide a CETV based on the normal retirement date of the scheme, even where it is likely that the member will retire early.
Of course, agreeing on a higher valuation does not mean that there are extra funds available as the CETV is the only value the scheme will place on the pension. However, when completing a pension sharing order it is possible to take a higher pension share (based on the higher valuation agreed) to compensate.
So what does this all cost and surely every actuary/pension expert would take all this in to account? Firstly, for no more than a few hundred pounds a second opinion valuation can be obtained. Secondly, unfortunately not and many reports I see only work of CETVs thus potentially undervaluing the pension assets at the most crucial stage!
My approach is to work hand in hand with an actuary to ensure that you get the best result. It should be noted that on several occasions we have managed to increase the valuation considerably (doubled it one case) resulting in a significant pension sharing increase for our client.
So before proceeding any further why not allow me to review the pension CETVs (for free) and see if we can improve the settlement today.