UK – LONDON: PENSIONS Trends and Developments Contributed by: Beverley Morris, HCR Law
schemes aged 55 or over to access their pensions early. Options include: • withdrawing up to 25% of the pension tax‑free; or • using flexi-access drawdown. These choices have forced the courts to consider both the flexibility available to the pension holder and the nature of the underlying asset. A solution I have long believed that attempts to categorise pen ‑ sions on divorce are misguided. Lawyers and judges should accept that pensions are unique assets. Their treatment will depend on many factors, includ ‑ ing: • whether the pension member has already retired and is receiving pension income (as with Harry); • whether the parties are young (eg, in their early 30s), in which case pensions may be less signifi ‑ cant because they have many years to contribute; • whether the pension is held abroad, in which case the English Court cannot make a pension sharing order; • whether the pension scheme is underfunded, cre ‑ ating uncertainty about future payouts; or • whether the pension is part of a “gold‑plated” scheme offering guaranteed, generous, infla ‑ tion‑proofed benefits. If there has to be a definition, then perhaps we should accept that it is more useful to define a pension as a form of deferred pay – a mechanism enabling some ‑ one to defer gratification from earnings today in favour of enjoying these in some form when one is unable to work. The problems associated with valuing pensions on divorce In every divorce where finances must be addressed, all assets must be valued before the parties or the court can decide how they should be shared. Valuing a pension on divorce, however, can be par ‑ ticularly complex.
Returning to Harry and Sally: • If Harry is retired and receiving GBP60,000 per annum net, should GBP1 of pension be treated the same as GBP1 in a bank account? • How should the court value this GBP60,000 annual income? Does it have a capital value? Consider each question. • One option for Sally is to receive capital (such as cash or property) instead of sharing Harry’s pen ‑ sion. This is known as offsetting. • Offsetting is technically complex and carries pro ‑ fessional negligence risks. • Harry’s pension guarantees him income for life. • He bears no investment risk – the scheme is con ‑ tractually obliged to pay him. • If Sally receives cash instead, will it last throughout her lifetime? • What if she outlives her expected life span? • What if investment returns underperform? • What will future inflation be? • Sally will likely face professional fees for invest ‑ ment and financial advice. This illustrates that offsetting can be risky and that GBP1 of pension in Harry’s scheme is usually worth more than GBP1 of cash in Sally’s bank account. The court will therefore need a value for Harry’s pen ‑ sion. • Harry belongs to a defined benefit scheme, which provides a guaranteed income in retirement. • A defined contribution scheme simply reflects funds paid in and investment growth. • Valuation methods differ significantly between the two types. • Defined contribution valuations are straightforward – the pot value is the value. • Defined benefit valuations are far more difficult. • The terminology used in pension valuation is com ‑ plex. • A wide array of specialist terms are used, including: (a) best estimate market consistent capital value; (b) defined contribution fund equivalent; (c) fair actuarial value;
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