Pension offsetting example
For example, let us consider a case with the following pensions to be considered:
- Mr A has a defined contribution pension with a CEV of £100,000
- Mrs A has a defined benefit pension with a CEV of £150,000
When considering the ‘fair value’ of these pensions, it is important to note the differences in the way that these pensions have been valued. For this example, let us suppose that the scheme Mrs A is a member of uses fairly optimistic assumptions of future investment return, resulting in a potential undervalue, and so the actuary estimates its value to be £200,000. Since the CEV of Mr A’s defined contribution pension is just the value of the assets that the fund has been invested in, the actuary deems this a suitable value to use for divorce purposes.
The next point to consider is the issue of taxation, since the parties will need to pay tax on their pension rights once these come into payment. The actuary estimates the future average amount of tax that each party will pay on their pension to be around 15%, which is then considered by applying an ‘offsetting factor’ to the pensions of 0.8500. The valuations of the parties’ pensions for offsetting purposes are therefore estimated as:
- Mr A: Valuation of £100,000 x offsetting factor of 0.850 = £85,000
- Mrs A: Valuation of £200,000 x offsetting factor of 0.850 = £170,000
These values can then be compared against the estimated values of the parties’ other assets, potentially after a further adjustment (to be agreed by the parties or, if they cannot reach agreement, to be ruled upon by the Court) to allow for the fact that these pensions will not be available until the parties are old enough to retire.