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How much pension is your house worth?

The Pensions Advisory Group (PAG) is a multi-disciplinary group on the subject of pensions on divorce. This summer the PAG released a substantial guide to good practice in England and Wales. All practitioners in the area of pensions on divorce will need to be familiar with the guide. Pensions actuaries more generally will benefit from familiarity with the issues addressed.

In this blog, Ian Sharpe reflects on his experience participating in the PAG as an IFoA volunteer. Views expressed are his own.

Ian Sharpe“How much pension is your house worth?” It may seem like an odd question, perhaps even nonsensical. But arriving at some sort of answer is essential for most divorcing couples, and there are around a hundred thousand of them each year in England and Wales. After any family home, pensions will generally be their largest asset and most couples will offset pensions, ie one party will keep their pension in exchange for a lower share of other marital assets.

How about an easier question instead: “How much is this accrued DB pension of £X a year worth compared to this DC pot of £Y?” In other words, what’s a fair way to share different types of pensions (putting aside other assets)? If you don’t already know where this is leading then you may well say that surely it’s the Cash Equivalent Transfer Value (CE). If so, then it’s true that the CE would often work well. But often it wouldn’t, and there are some serious pitfalls. In some cases the CE could result in not only the wrong size of settlement but even the wrong direction. Expert advice, often from an actuary, is used to help couples, lawyers and the courts navigate these pitfalls.

Despite the availability of expert advice, the study Pensions on Divorce found that there was a widespread lack of confidence amongst practitioners in the field, poor quality pension disclosures and a substantial proportion of potentially unfair outcomes. The PAG report seeks to address this.

A study by Scottish Widows found that almost three quarters of divorcing couples do not discuss pensions at all and that it is women who lose out. Further studies by Age UK and the Chartered Insurance Institute found similar inequalities.

An upcoming article in The Actuary will discuss the PAG report. Here, I share some more personal reflections about what I have taken from PAG:

  • There may be unknown unknowns:
    • PAG was well underway when I picked up the baton of IFoA representation at the group. As a practicing pensions actuary, I knew plenty about pensions and plenty about setting factors for CEs and divorce. But I had previously had little cause to know much of the practice of offsetting and sharing on divorce. I was struck by the breadth of knowledge that may be required. It is easy to see how an unwary actuary might assume that they have the appropriate knowledge for this specialist area. The PAG report lists competencies to help with this.
    • Actuarial factors may not be used in the way you expect. For example, actuaries working on pensions for the millions of public sector workers in unfunded schemes might find it helpful to consider that, since transfers out of those schemes are restricted (and offsetting is generally more common than pension sharing), pension offsetting may be the main use to which the CEs they calculate are put, even though those CEs are not meant for that purpose. What action, if any, should an actuary or scheme manager take in those circumstances?
       
  • Terminology matters: For example,
    • More is hidden than is revealed by the word “valuation”. Do we mean the realisable value of a DB pension? (So perhaps the CE, at least for someone over 55.)  Or the value of assets that would need to be held in a DC fund to provide a similar pension income with a similar level of risk? (So perhaps a value that reflects market annuity rates.) Or the DC fund reflecting the likely real-life investment choices? (So perhaps a lower fund is needed.) The term “DC Fund Equivalent (DCFE)” used by PAG may admittedly be a mouthful, but it goes some way towards saying what the number is meant to represent.
    •  “Actuarial report” is common shorthand for a divorce expert’s advice. But the expert will often not be an actuary or an IFoA member, and may have a different type or level of expertise and accountability.
    • The phrase “true value” may be widely used, but is generally misleading. It implies that the expert has access to a uniquely “correct” answer, and that recipients do not need to engage with its application or interpretation.
       
  • Government and regulators won’t always be the ones to step in when something isn’t working as well as it might: To their credit, the academics and practitioners who founded PAG were aware of a problem and took action to make things better.
     
  • Experts must take responsibility, but so must users: We have all encountered users and other professionals who do not engage with advice and “just want the number”. This isn’t necessarily complacency on the part of users, but may be a fundamentally different understanding of what the expert’s role is, which can be challenging to reconcile.
     
  • What’s in the public interest may be a fine balance: There’s a clear public interest in experts being accountable to a disciplinary scheme, and in the standards of professionalism that membership of a professional body brings. Divorce work is over-represented in the IFoA’s disciplinary scheme. However, not all competent experts will necessarily be actuaries and have a relevant professional body available to them. The public interest wouldn’t be served by excluding such people. The PAG report doesn’t suggest that experts should be required to be members of any professional body, but it does recommend that membership or otherwise is one of the factors disclosed by an expert.
     
  • A problem shared…: The fundamental issue of comparing diverse assets and income, including pensions, in a way that’s fair, consistent and intelligible to individuals goes far wider than divorce and the actuarial profession. As technology moves forward (eg, the Pensions Dashboard), many will need to grapple with this. I’m sure divorce practice will need to move with it.

Dr Ian Sharpe FIA is an associate professor in the Department of Actuarial Mathematics and Statistics at Heriot Watt and an experienced pensions actuary.