The earliest any pension- sharing order will be effective is the later of the decree absolute or 21 days later. The pension scheme then has time to get information. From the date when all information is received, known as the implementation date, the pension scheme has four months to implement the order when a new transfer value is required after all negotiations have concluded.
So whatever is agreed today is going to change again and this can be to the advantage or disadvantage of both parties.
There are two types of pension. Defined benefit (also known as final salary) and defined contribution (which is also called money purchase).
The final-salary scheme promises a benefit relative to the member’s length of service and their salary. The transfer value is an estimation of the value today of the accrued benefits.
With money-purchase pensions, such as personal pensions, the cash equivalent value represents the surrender value. In today’s dramatic economic crisis, it is easy to understand why their value can change dramatically on a day-by-day basis.
With final-salary schemes, the situation is very complex. There are many different factors taken into account when calculating transfer values for a final-salary scheme.
It has always been the duty of the scheme’s actuary to undertake such calculations and utilising guidance note 11, GN11, a degree of conformity existed in that it was the actuarial profession that broadly laid down the factors to be utilised.
Unfortunately, from October 2008, this has now all changed and while it is the actuaries that still undertake the calculation, the responsibility for identifying the different factors utilised in the calculation is now placed in the hands of the trustees.
Trustees are changing those factors with dramatic effect. Some trustees are taking very pessimistic views of the future, which are creating an increase in transfer values. Others believe that the economic conditions of the past will return, creating a reduction in transfer value. Since October 1, transfer values for final-salary schemes have seen a huge variation in changes in value from halving to doubling, depending in the scheme.
As far as your clients are concerned, it is vital that the most up to date transfer values are used and in all cases values created since October 1.
When comparing one employment with another, it is the type of scheme that matters, not so much the earnings and service.
Naturally, for the higher-earning longer service period, one should expect a higher cash equivalent value. However, with longer service and higher earnings, if the pension scheme is only a low- contributory money-purchase arrangement, this could have a significantly smaller transfer value than, say, a shorter lower earnings’ service within a good final-salary scheme, say, the Civil Service.
To protect your clients, it is important to ensure that up-to-date values are available, along with documents provided by the pension scheme. Both parties must be made aware that values will continue to change until any pension- sharing order is implemented.
In a recent case the transfer value on a final-salary scheme rose from £800,000 to £1.5m after the share was implemented. That is a measure of how dramatic this situation has become.
Richard Jacobs is director of Richard Jacobs Pension and Trustee Services