EXAMPLE - John & Jane SMITH
Actuarial Report on Pensions on Divorce
Geoffrey
Wilson, Partner, Excalibur Actuaries
40
The Avenue, Tadworth,
gwilson@excaliburactuaries.co.uk
Telephone:
01737-819808
1. INTRODUCTION
This report has been prepared on the joint instruction of XXX Solicitors and YYY Solicitors, and is intended for use by their clients Mrs Jane Smith (the wife, W) and Mr John Smith (the husband, H) in the matter of ancillary relief proceedings in connection with their potential divorce. This report is addressed the court, and is also intended to be disclosed to all parties involved in this matter. My declaration that I have complied with the obligations of an Expert as set out in Part 35 of the Civil Procedure Rules is contained in section 5 of this report.
The purpose of my report is to give my opinion on questions connected
with pension values and pension sharing set out in my instructions dated
The questions are, stated briefly:
Q1. to comment on CETVs and where appropriate advise on fair actuarial value of the pensions if different;
Q2. to calculate the pension sharing percentage needed to produce equality of income for the two parties on retirement at age 65 for Mr Smith and 63 for Mrs Smith;
Q3. to comment on alternative options for pension sharing, and on any other matters as appropriate.
I have carried out my calculations as at a date of
I am a Fellow of the
2.
SUMMARY OF FINDINGS
Q1.
I set out in Appendix A my calculation
of fair actuarial value of the pensions, with comments on the CETVs in relation
to those values.
Q2. I set out in section 4 my calculation that a
pension share of 55.16% on all of Mr Smith’s pensions is projected to give
equality of retirement income of £11,697 a year for both parties starting at
ages 65/63.
Q3. I comment in section 4 on pension sharing
issues, including a calculation of a more effective alternative of 100% sharing
on Mr Smith’s
3.
INFORMATION
I have been informed that Mr Smith was born on 6 November 1956, and is therefore 53 years and 7 months old, and that Mrs Smith was born on 15 November 1958, and is therefore 51 years and 7 months old, at the calculation date of this report. I have assumed they have normal life expectancy.
I set out a description in Appendix A of Mr & Mrs Smith’s pensions, including my calculations of fair actuarial value, with comments on the relation of the CETVs to those values. I comment that I have not been informed of (nor asked to provide any calculations or advice in connection with) any other pension benefits of the parties, and have been instructed not to take account of state pensions.
I summarise the pensions below, in a standardised format for clarity (the details of the calculations are set out in Appendix A):
Mr Smith
Acorn £164,562 £14,244
Civil Service £66,480 £4,154
Aegon £12,873 £827
Total £344,283 £26,086pa
Mrs Smith
Cabot £5,125 £369
Aegon £17,050 £933
Total £22,175 £1,302
Difference (before sharing) £322,108 £24,784pa
4.
PENSION SHARING CALCULATIONS
I have been asked to
calculate the pension sharing needed to provide equality of gross income in
retirement for the two parties after sharing Mr Smith’s pensions. As shown above,
if there is no pension sharing, Mr Smith has a pension of £24,784 a year more
than Mrs Smith.
The Acorn and
The Civil Service pension can only be shared internally, with Mrs Smith
becoming a member of the scheme with a defined pension credit calculated to be
actuarially equivalent to the pension debited from Mr Smith. There is an
administration charge of about £700 for implementing a
Pension sharing on
money-purchase plans like Aegon is implemented simply by transferring the
specified percentage of the
After pension sharing,
Mr Smith’s pensions from his various schemes would be reduced by the specified
percentage in the
I calculate that, in
order to produce equal retirement income after sharing, a
Mr Smith
Acorn £73,790 £6,387
Civil Service £29,810 £1,863
Aegon £5,772 £371
Total £154,377 £11,697
Mrs Smith
Cabot £5,125 £369
Aegon £17,050 £933
Sharing (money-purchase) £153,236 £8,388
Sharing (Civil Service) £36,670 £2,007
Total £212,082 £11,697
Difference (after sharing) -£57,705 £0
I comment that Mrs Smith’s
pensions have a higher
Alternative sharing options
I have been asked to
advise on which schemes to share. The main factor of relevance in this matter
is the relative generosity of the CETVs of Mr Smith’s various schemes – since
if a
* The
* The Acorn
* The Civil Service
offers sharing internally on reasonably fair actuarial terms;
* The Aegon
In my opinion,
therefore, it would be best to avoid sharing the Acorn pension as far as
possible, although since this is the largest value pension it is not possible
to avoid sharing this altogether. I have calculated that equality of retirement
income could be achieved by 100% sharing of the
I comment that I assume
that the parties will share charges for implementing pension sharing
appropriately.
5.
DECLARATIONS
I hereby confirm that:
(1) I am aware that my duty as an Expert is
to provide independent assistance to the court by way of objective, unbiased
opinion in relation to matters within my expertise and that my evidence, as an
Expert, presented to the Court must be, and must be seen to be, independently
produced by myself uninfluenced by the instructing parties.
(2) I have complied with my duty noted in
(1) above.
(3) I have considered whether there are any
conflicts of interest in giving the opinions expressed in this report, and I declare
that I do not believe that there are any such conflicts.
(4) insofar as the facts I have stated in
this report are within my own knowledge, I have made clear which they are and I
believe them to be true and that the opinions I have expressed represent my
true and complete professional opinion.
(5) I have not, without forming an
independent view, included or excluded anything which has been suggested to me
by others – in particular by my instructing solicitors.
(6) I will notify my instructing solicitors
immediately if, for any reason, my report requires correction or qualification.
(7) I have not entered into any arrangement
where either the amount or payment of my fees is in any way dependent on the
outcome of the case
Yours faithfully
Appendix A
PENSION BENEFITS
Mr Smith
(1) He has a pension from his current Acorn Laboratories employment as
a member of their final salary pension scheme since
I have projected the pension to the same amount in today’s money terms coming into payment at age 65, in other words not allowing for the effect of future salary increases above inflation nor for the effect of future service.
The
(2) He has a preserved pension from his employment with
The
(3) He also has a preserved pension from his employment in the Civil
Service from 1983 to1988, where the accrued pension in 1988 was £1,375 a year.
Converting the lump sum into a pension equivalent (the scheme offers members the option at retirement to do this), on the assumptions in Appendix B, the benefit is equivalent to a pension of £3,285 a year, in today’s money.
The PCSPS benefits are payable at age 60. For the purposes of this report, I have adjusted the benefits to a higher actuarial equivalent pension from age 65, using a factor (calculated on the assumptions in Appendix B) of 4.8% a year, so that the benefit is equivalent to a pension of £4,154 a year from age 65, in today’s money.
The
(4) He also has an Aegon Flexible Pension Plan, which is a money
purchase pension with a value as at
Mrs Smith
(1) She has a preserved pension from her employment with Cabot from
The
(2) She also has an Aegon Flexible Pension Plan, which is a money
purchase pension with a value as at
Appendix B
BASIS OF CALCULATIONS
In order to project pensions, and to estimate the pension from investments on money-purchase or personal pension plans, it is necessary to make assumptions for many years into the future about many variables – such as mortality, investment returns, inflation, interest rates and market annuity rates. A wide range of assumptions are possible, and can be justified in particular circumstances, and no one set of assumptions is definitely correct – since it is impossible to predict the future.
FAIR ACTUARIAL VALUE BASIS (FOS)
For the purposes of this report, I have come to an opinion on a set of assumptions which are reasonable in the circumstance of this matter, and which in particular strike a reasonable balance between the two parties in the matter. I have used the methods and assumptions first established by the Financial Services Authority (FSA) in its review of personal pension mis-selling, and now reviewed regularly and set by the Financial Ombudsman Service (FOS) who examine current complaints about transfers between final-salary pension schemes such as the Acorn scheme and money purchase personal pensions. These methods and assumptions are set out in detail on the website:
www.financial-ombudsman.org.uk/publications/guidance/pension_assumptions.htm
These assumptions are set for the year beginning
Interest rate in retirement: 5.0% a year
Investment return before retirement: 6.2% a year (less 1% charges = net 5.2%)
Limited inflation-proofing (LPI): 3.3% a year in retirement
Mortality Standard Actuarial Table PMA92 less 2 years
On this basis, the value of a single-life pension for a woman aged 63 of £1 a year with limited inflation-proofing is £22.230, and for a man aged 65 is £18.934.
PRESENT
MARKET ANNUITY
Information obtained from the Financial Services Authority (FSA) website
on present market annuity rates, obtained today, is that the annuity rate for a
63-year-old female is a cost of £25.253 for £1
a year initial pension with 3% a year increases. (The rate for a
fully-inflation-proofed annuity is much higher, at £29.343,
and the rate for an annuity with no increases is £17.007.)
For a 65-year-old man, the cost calculated similarly is £21.930 with
3% a year increases.
Thus annuities in the market today are more expensive (by 14% for a 63-year-old
woman, or by 32% for a fully-inflation-proofed annuity) than the FOS basis
assumptions for annuity rates in future as set out above, and reflects interest
rates on 20-year gilts (the FTSE Actuaries UK gilts tables) of 4.16% a year at
the same date, and on inflation-linked gilts of 0.74% a year (compared to the
FOS basis equivalents of 5.0% and 1.5% respectively). I calculate that present
market rates show that insurers use current long gilts yields in pricing fixed
and fixed increase annuities, but also that insurers allow for further
pessimism in pricing inflation-proofed annuities, in effect assuming they will
achieve a nil return above inflation.
INCOME
DRAWDOWN PLANS
I comment that for investors prepared to accept some investment risk
during retirement, it is possible to obtain a higher initial income on
retirement than is available from guaranteed annuities by using drawdown policies
or with-profits annuities, on the basis of a reasonable expectation that
long-term investment yields (after management charges) on such funds will
exceed the long gilts yields of about 4 - 4¼% a year which underlies current
annuity prices.
I have assumed that a money-purchase pension from an external pension share is used at retirement by Mrs Smith to provide an income from a drawdown arrangement (or with-profits annuity), with an initial income level allowing provision for future limited inflation proofing increases as calculated on my fair actuarial value basis above.
Appendix C
STATEMENT OF QUALIFICATIONS
- GEOFFREY WILSON
Personal
Date of birth:
Nationality: British
Education
& Training
Qualified as Fellow of the Institute of Actuaries (
Professional
career
1971 – 1979: Government Actuary’s Department (GAD),
actuarial advice to public sector pension schemes, demography, support to the
Occupational Pensions Board and public enquiries (including advising the
Pearson Commission on injury compensation, and advising the Scott and Clegg
Commissions about valuation of inflation-proofed pensions in public sector
pay).
1979 – 1987: HAY-
1987 – 1996: partner, Binder Hamlyn, accountants,
leading the Pensions & Actuarial Services unit providing support to the
firm’s corporate and individual clients.
1996 – to date: senior partner of Excalibur
Actuaries, actuarial and pension consultants.
Expert
Witness (Forensic) Experience
My work has included expert witness and related
“forensic” work – firstly alongside the large forensic accounting team whilst a
partner at Binder Hamlyn from 1987, and secondly independently since founding
Excalibur Actuaries in 1996. This has covered pensions and remuneration losses
in employment cases, compensation and future losses in personal injury cases,
as well as technical pensions and actuarial cases. I have been included in the
Law Society’s Directory of Expert Witnesses since the early 1990s.