Last year there was an interesting article in the Guardian about a teacher who was struggling to finalise her divorce as she had waited over three months for the Teachers’ Pension Scheme (TPS) to produce a Cash Equivalent Transfer Value (CETV).

Capita are the firm that manage the TPS and currently have a backlog of CETV requests. Although Capita have been running the TPS for 27 years, the scheme will be administered by TATA from October this year.

However, it is not only Capita that can take a long time to provide a CETV, in one of our longest running cases, we had to wait almost 12 months for a CETV from the Royal Mail Pension Scheme.

Providers of defined benefit (DB) pensions (also known as “final salary” or “career average pensions”) are expected to produce a CETV within three months of a member requesting one.

Why do CETVs take so long to produce?

The first element is cost-cutting: DB pensions are an expense to the sponsoring employer, so there has been a “race to the bottom” to run pension schemes as cheaply as possible.

If pension members are disgruntled about the quality of services, they cannot go shopping around for a better experience. There is little benefit for an employer in providing anything above a standard service.

In fact, many employers would be relieved if their pension members transferred their benefits to another scheme as it removes the future pension liability away from them.

To compound matters, most public sector pension schemes have been impacted by the “McCloud judgement”, which has meant that they have needed to recalculate many members’ benefits. When coupled with skeletal pension administration teams who have minimal spare processing capacity, this has created a significant backlog.

All of this may leave you (and your clients) feeling dispirited if you are dealing with a divorce involving DB pensions (particularly public sector ones), and you may be wondering if you could avoid a three-month waiting period, or longer.

How can we reduce delays?

A simple solution to minimise these delays is to only request a CETV if you really need one.

This may seem counter intuitive, after all, part four of the Form E asks for a CETV for each pension scheme, which would imply that one should obtain a CETV for every pension held. This is not a problem for Defined Contribution (DC) schemes as the values are readily available, but for DB schemes it can be problematic.

As we have discussed in previous articles and in our Webinars, the CETV for a DB scheme is likely to be a red herring as it is the pension income that the scheme will provide (and not the CETV) that will be the basis for any pension sharing calculation. In fact, the only time a CETV for a DB scheme would be required is when that scheme has been identified as the one from which a pension share should be paid to an ex-spouse.

What is the actual value of a defined benefit pension?

If I offered to pay you £100 as a lump sum or £20 per month over five months, these two figures are effectively the same thing, and you could quote either figure for what you would receive.

However, if I offered you £20 a month for life or a lump sum of £4,800 then we hit a dilemma as to which is the best option, based of course, on how long you will live.

If you felt that you were going to live for less than 20 years, then the £4,800 seems the better option, otherwise the £20 a month for life sounds more attractive. It would be fair to say that the £20 a month figure is an accurate value but that the £4,800 is a guess and an attempt to capitalise the income figure.

The same dilemma comes when trying to work out a CETV for a DB pension. The CETV of a DB scheme can rise and fall with market conditions. On the other hand, the income that the pension will provide is constant and will typically rise in line with inflation, depending on the rules set out by the scheme.

For example, if a nurse has built up a pension worth £10,000 a year in the NHS pension scheme, this will rise with inflation each year and is the exact value of her pension. A CETV is a best guess at the capital value of her pension, but the actual capital value of the pension will only be known at the time of her death, when all payments have been made.

Most, if not all DB schemes will send their members an annual statement letting them know what benefit they will receive from the pension at the scheme’s normal retirement age.

Some schemes will also have an online portal that the member can log into and obtain a current benefit statement. These could be used for attaching to the Form E and are more readily available than a CETV calculation.

When can I avoid obtaining a CETV?

As a rule of thumb, if the likely recipient of any pension share has a DB pension, a CETV may not be required. Instead, they may just need a benefit statement showing the income payable from the scheme.

For example, let us consider the following situation, in which a husband, aged 60, holds:

• A SIPP with £450,000
• A DB pension providing £15,000 a year from age 65 and a CETV of £350,000.

Meanwhile, his wife, also aged 60, holds:

• Teacher’s Pension providing £7,000 a year from age 67
• A personal pension valued at £50,000.

The wife will need a pension credit from the husband to achieve equality of income. The CETV for her Teachers’ Pension is irrelevant, it could be £1 or it could be £150,000. The pension credit needed to bridge the £8,000 a year gap is the important figure, and this is dependent on the husband’s pension values.

However, the CETV for the ceding party is important. If the CETV for the DB pension is very generous it may be a sound decision to share that pension first to maximise the benefits between both parties. Alternatively, if the CETV is undervalued, then it would be prudent to avoid sharing the DB pension.

It is not always obvious from the outset which party will require a pension credit, so it can be worthwhile asking a pension on divorce expert (PODE) in the first instance for a general opinion on the outline of a case prior to asking your clients to gather further data. You can read more about the role of PODEs in our previous article on the topic.

Obtaining a CETV for a Form E can be premature as they can quickly go out of date if short term economic conditions alter significantly.

Furthermore, most schemes will charge for providing more than one CETV in a year. So, if the Form E is completed in February but a PODE report isn’t instructed until October, then the value will be out of date by the time the PODE comes to calculate the figures and even more so when the pension eventually gets shared.

Finally, if the scheme is in payment, then the DB administrator is likely to charge a significant fee for calculating the CETV in the first place. Therefore, it makes no sense to pay for a CETV unless it is necessary.

As always, we would suggest that you speak with a financial planning divorce specialist or a PODE to help identify such issues.

To find out more, get in touch.

Email info@blueskyifas.co.uk or call us on 0118 987 6655.