On 30 March 2023, the Government announced that the SCAPE discount rate, that is the discount rate used by the Government Actuary’s Department (GAD) for calculations in relation to the public sector pension schemes is reducing from 2.4% per annum above CPI Consumer Prices Index) inflation to CPI + 1.7% per annum. This includes schemes for the NHS, civil service, local government, teachers, police, judiciary, the armed forces and fire and rescue workers. The discount rate is used to place a current value on a future cash payment. For example, this discount rate is used to place a present value of future benefit payments when calculating Cash Equivalent Values (CEVs).
In this blog I have summarised the implication of this change that I believe are most relevant for divorce settlement.
Delays in issuing CEVs and implementing Pension Sharing Orders
The immediate impact of the recent announcement is that delays are expected while the change is implemented. CEVs in the public sector pension schemes are typically calculated using a factor-based approach. These factors are issued by GAD using the SCAPE discount rate along with other key financial and demographic assumptions, and are based upon the age and gender of the member at the date of the calculation. Therefore, an update to the factors will be required following the change to the discount rate. The schemes are expected to suspend issuing new CEV quotations and processing Pension Sharing Orders until revised factors have been issued by GAD. For example, the NHS Pension Scheme and Teachers’ Pension Scheme have both announced that they are suspending the calculation of CEVs and implementation of Pension Sharing Orders.
As a result, I would expect delays in obtaining CEVs for cases currently at the financial disclosures stage and delays in implementing any pension share that has currently been or soon to be agreed. At this stage I am unable to say when the new factors will be available so that schemes can resume calculations. Previously some schemes had their factors available within several weeks, which if repeated may not significantly alter timescales for the production of our reports or to implement a pension share. However, it is possible that longer delays may be experienced.
Nevertheless, it is still worthwhile commencing the data collection process, because some of the scheme providers (not affected by this issue) are very slow to respond to queries, and so contacting them now may avoid having to wait even longer. Also, it may still be worthwhile doing calculations on the old basis, because this may be sufficient to enable the parties to agree a share in principle, particularly noting that CEVs and benefits may in any event alter by the time of actual implementation. Finally on this point of not delaying starting the pension calculations process the CEV of this pension may not be required for settlement purposes, for example if it is not being shared.
CEVs and Pension Sharing
As noted above the factors used to calculate CEVs are expected to be reviewed to reflect the new discount rate. Given that CEVs are effectively placing a discounted present value on the future pension income stream from a member’s retirement until their eventual date of death, a lower discount used when placing a present value on future cashflows arising from a pension means that the CEV is expected to be higher.
However, I would expect the increase to CEVs to be offset by a similar increase to pension credit factors as these are typically calculated on a consistent basis. These factors are used to calculate the amount of credit pension awarded to an ex-spouse for a given level of CEV transferred to them as part of a pension share.
In many cases the change to CEVs could be cancelled out by the change to credit factors such that the overall impact of a given percentage share is similar when the new factors are adopted. However, there may still be some change to equalisation of pension income calculations, especially where there is a significant age gap between the parties.
In addition, the Local Government Pension Scheme generally offers ex-spouses a choice between an internal or an external share. Under an internal share they would be awarded a credit pension in the scheme as outlined above. However, following an external share the ex-spouse would be able to transfer their share of the CEV to an external provider of their choice. Therefore, under an external share the expected increase to CEVs will result in an increase to the external credit fund available to the ex-spouse which could also impact the relative attractiveness of an internal or external share.
Other considerations
In addition to CEVs and pension credits, there may be changes to other factors used by the schemes. For example, the factors used to calculate adjustments on early or late retirement may change. In general, I would expect a lower discount rate to result in smaller reductions applying where pensions are drawn early but any uplift applied on late retirement may also be smaller. Any changes to these factors would impact calculations to equalise incomes where pensions are assumed to be drawn earlier or later than the normal retirement age for each pension.
For cases involving public sector pensions that are not expected to be shared I generally do not expect any changes to CEV factors to impact calculations. This is because there is no change to the underlying benefits but the value that the relevant scheme would place on that benefit entitlement. This might apply for example where the party holding a public sector pension has the lower pensions overall.
Similarly, I would not expect the offset value of public sector pensions to change as a result of the change to factors as this would typically be calculated based on an independent valuation of the underlying benefits.
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Disclaimer – The views expressed here are the views of the writer only and do not necessarily represent the view of Actuaries for Lawyers. Whilst every effort has been made to ensure the accuracy of the information in this post, it is important to always check the benefit rules with the schemes before making any financial decisions based upon these. Actuaries for Lawyers cannot be held responsible for any losses incurred as a result of relying upon information contained in the blog section of our website as these do not constitute advice or act as a substitute for providing individual advice in relation to the specifics of a particular case.