Public Sector Pensions – 2023 Changes
Cash Equivalent Transfer Values (CETVs) and their relevance
Cash Equivalent Transfer Values of pensions are the values to be stated in any disclosure documents when dealing with finances in divorce and dissolution matters. Where a pension sharing order is made by a court in England and Wales the order must be expressed as a percentage of the Cash Equivalent Transfer Value even though other values may have been used in actually determining the percentage of the pension value to be shared.
What has changed?
The Government has recently announced a change to what is called the SCAPE discount rate. This discount rate is used in the calculation of factors used by public sector schemes for CETVs, pension sharing credit factors, pension commencement lump sum factors and other factors used for pension sharing calculations.
The technical background is that the discount rate used to calculate CETVs and pension credit factors has been reduced and if no other changes were made it would have the effect of increasing both (as the lower discount rate means that less discounting is applied). However, due to the nature of this revision not all CETVs and pension credit factors will change to the same extent, with the impact being more pronounced at younger ages.
In most cases it is expected that the changes to CETVs and the pension credit factors will approximately offset one another and there will be little or no change to the pension sharing percentage calculated. It is more likely that there will be material changes in the pension sharing percentage when there is a large age gap between the parties and/or a big difference in retirement ages and so a different amount of discounting is applied to the two parties’ pension benefits in order to get the value today.
Schemes may take the opportunity to make other changes to the underlying actuarial CETV calculation basis at the same time. Consequently, the impact of the multifactorial revisions is not entirely straight forward and unlikely to be linear. The overall impact on pension sharing is not simple to predict and will vary on a case by case basis.
Pension sharing orders – relevance of the implementation process.
Pension sharing orders are made by the court and in most cases take legal effect 28 days later. For the order to be implemented the scheme must be in receipt of all relevant documents and any fees required. Once these requirements are satisfied the implementation period commences and the scheme administrators set the valuation date to use. Pension sharing legislation requires that the CETV is recalculated on the valuation date. This means where a pension sharing order is made or has been made and the valuation date is after 30th March 2023 the CETV and pension credit factors will be calculated using the revised factors. It is important to note it is the valuation date that is relevant, not the date on which the pension sharing order is made by the court or when the order takes legal effect. This will inevitably mean that in some cases the CETV and pension credit factors applicable when pension sharing order is implemented will be different to those when the order was made.
Duties of an Expert Witness to the court
Family Procedure Rules govern the procedures used in England and Wales courts and are supplemented by Practice Directions issued by the President of the Family Division. Practice Direction 25B relates the duties of an expert and 4.1(h) places the expert under an obligation to inform those instructing the expert without delay of any change in the opinion and the reason for the change.
This revision in Public Sector Pension CETVs and pension credit factors is such that we are obliged to notify those who have instructed us in respect of matters involving Public Sector Pension Schemes of the change and that it will potentially affect recommendations, results and information in some Expert Witness Reports.
Calculating revised CETVs
Most Public Sector Pension Schemes have decided that no further CETV quotes should be provided using the current (pre-30th March 2023) calculation factors. Effectively this means that production of CETVs will be suspended until schemes receive revised calculation factors from the Government Actuary’s Department (GAD).
Private Sector Pensions
This change has no impact on private sector pensions including private sector defined benefit (salary related) pensions and their CETVs.
EPS is reviewing cases where we have produced or are in the process of producing reports involving Public Sector Pensions and is contacting impacted clients.
Reports Issued Prior to the change to these changes
Where any pension sharing order has been fully implemented, which effectively means that the valuation date was before 30th March 2023, no further action is necessary.
For those cases where a settlement has not yet been reached or a pension sharing order has not yet been fully implemented, we can provide a brief supplementary report giving headline numbers based on the information which is available about the change in discount rate, ignoring the possible impact of changes to any other elements of the calculations (as these simply cannot be known at the present time). As such, the results will inevitably be approximate but will be closer to what we now professionally believe the position is likely to be.
Post-Change expert witness reports
The ideal approach is to wait until the revised factors are published and use them in the report. Based on previous experience this could introduce a delay of several months.
Where it is not practical to wait for publication of the revised factors or it is desirable for a report to be prepared as soon as possible, EPS’s recommendation is that we are instructed to produce a report based on the information which is available about the change in discount rate, ignoring the possible impact of changes to any other elements of the calculations (as these simply cannot be known at the present time). As such, the results will inevitably be approximate, but should represent a better professional actuarial estimate than simply using pre-March 2023 factors without further consideration.
Option 3 We could be instructed to produce a report using the pre-March 2023 calculation factors. EPS’s view is that it would be inappropriate and unprofessional for our firm to produce an actuarial report using calculation factors which are known to be out of date and which would therefore produce incorrect results. Such a report would potentially mislead clients, their advisers and the court. We would therefore be reluctant to produce a report on this basis and will only do so if clients and their advisers insist.