COVID-19 impact on pensions
The current situation will undoubtedly have an effect on many aspects of life but in this blog we explore at length the COVID-19 impact on pensions.
When divorcing couples are negotiating a financial settlement and trying to work out the most fair and reasonable way to divide their marital assets, it is fair to say the division of pensions confuses many people.
Generally it is best for each party to take independent financial advice from either a financial advisor who specialises in pensions or from a pension actuary. Formal scientific calculations can be produced showing the parties how best to divide pensions under a pension sharing order so that both parties achieve some form of equality, whether that is equality of income on retirement or equality of the capital value of the pension schemes.
COVID-19 is throwing up some problems regarding pension schemes and it is important divorcing couples are aware of these new challenges. There has been a reduction in the stock market so any pension plan which has invested in shares will have decreased in value. There has also been a reduction in interest rates, which has decreased the gilt rate making it more expensive to purchase annuities. This has resulted in an increase to Cash Equivalent Transfer Value (CETV) for defined benefit schemes (usually final salary pensions).
There are three main categories of pensions:
- Defined benefit – final salary public sector schemes
With this type of scheme an external transfer is not possible so under a pension sharing order the recipient has to become a member of the scheme on an internal transfer. Since these pension schemes are not exposed to the stock market the CETV of the scheme is unlikely to be affected so a pension sharing order should still work. However, if couples are planning to offset pension claims against capital, it is not good practice to use the CETV when offsetting as the true value of pension is usually higher than the CETV. Offsetting against the capital in the former matrimonial home, which is likely to have decreased in value due to the crisis, may mean the overall settlement is not fair or reasonable.
- Defined benefit – final salary private schemes
Generally the CETV for these types of pension schemes is correct for the first 3 months following its production. However, since COVID-19 has led to a combination of a decrease in asset holding and making it more expensive to buy incomes for life, some pension funds which fall into this category will be facing funding challenges so pension trustees may have to issue revised CETV based on this lack of funding.
- Defined contribution schemes (Money Purchase)
COVID-19 has had less of an effect on these type of schemes since they are generally funds where an employee contributes a percentage of their salary and their employer tops up the pension with a contribution. If the pension has gone down in value it can be assumed that pension holder’s original share and person who will benefit under a pension sharing order will both have a lower value pot. However, if the parties plan to offset pension against capital, an up to date CETV should be obtained.
COVID-19 has also thrown up an issue which affects all three broad categories of pensions. If up to date CETV’s are required, it will take longer to get these. the Pension Regulator has also set out guidance for pension trustees making it clear they are not obliged to issue CETV in these circumstances. Therefore delay is almost inevitable.
Parties also need to be aware of the timing of pension sharing orders and Decree Absolute, especially if the spouse who is giving up part of their pension has fallen ill and may die as a result of COVID-19.
If the parties have already obtained Decree Absolute and a pension sharing order has been made, there is a 28 day window between the making of the Order and when it can take effect. However, usually parties will wait until a financial order has been sealed by the Court before getting Decree Absolute. In this case the petitioner in the divorce should wait until the 28 day window has expired before they apply for Decree Absolute.
There is a risk that if the party who is transferring their pension dies between the date of Decree Absolute and the end of the 28 day window, the spouse with the benefit of the pension sharing order may not receive this because they will no longer be a widow and they do not have the benefit of a pension sharing order which has come into effect.
It is clear that pensions are complex but they are usually a very important and valuable asset on divorce. Anyone who is experiencing a relationship breakdown should seek clear and independent legal advice. Contact one of our family solicitors today for an initial consultation.
Amanda Erskine is a solicitor in the Family department at Barker Gotelee Solicitors in Suffolk.