Memorandum submitted by
the Faculty and Institute of Actuaries (PS 13)
THE PRINCIPAL CONCERNS OF THE FACULTY AND
INSTITUTE OF ACTUARIES
The points set out below highlight the principal
concerns of the Faculty and Institute of Actuaries after an initial
consideration of the draft Bill in the short timescale that has
been available. A more detailed response to the consultation paper
and the draft Bill will be prepared after more consideration has
been given to these documents by a wider membership of the profession.
Pensions in payment
It is not clear how these are to be valued or
how credits and debits are to be set up, particularly where the
pre-divorce benefits are being paid through an insured arrangement.
There is a possibility that a scheme member
in serious ill-health will be able to increase the benefits payable
to a spouse by divorcing before death. Would schemes be able to
use medical evidence in performing these calculations and so avoid
an artificial increase in the cost of benefit provision?
Unvested benefits
It is not clear how these are to be valued or
how credits and debits are to be set up. Any credit or debit would
be very small.
Treatment of discretionary benefits
Problems can arise due to the treatment of discretionary
benefits (commonly occurring in relation to early retirement terms,
increases to pensions in payment and deferment revaluation). The
inclusion of such benefits in the calculation of a Cash Equivalent
Transfer Value is at the Trustees' discretion.
In order to avoid some of the problems, it is
important that there is consistency in the treatment of discretionary
benefits in the calculation of debits and credits. However, in
situations where a cash equivalent transfer value would include
allowance for some expectation of discretionary revaluation, the
draft Bill appears to prevent consistency by making debits subject
only to statutory deferment revaluation.
Problems will also arise where an ex-spouse
is forced to take a transfer in which allowance is not made for
such benefits.
Administrative costs
It is not clear how the administration cost
will be calculated. There will be costs associated with each calculation
and also costs associated with the establishment of systems. Where
a scheme's trustees anticipate few divorces (perhaps due to a
small scheme membership), the costs will either be disproportionately
high for the divorcing couple or unfairly fall on the scheme.
Trustees may also need advice on the type of
benefits to offer as credit (money purchase or defined benefit).
How would the cost of this advice be funded?
The costs of splitting an insured annuity in
payment could be high.
The couple will need information on the costs
at an early stage in the proceedings.
Reduced cash equivalents (due to underfunding)
It is not clear that the procedures for dealing
with a reduced cash equivalent (due to underfunding) are appropriate.
The couple will need information on the likelihood
of a reduced cash equivalent at an early stage in the proceedings.
Debit exceeding member's own pension
It is possible that a debit, linked to deferment
revaluation, can grow at a faster rate than a member's pension
that is linked to personal salary growth. In cases where the pension
debit is large proportion of the accrued pension, the increasing
debit could start to bite into the pension accrued by the member
after divorce. In some cases this could result in a negative total
pension. Should some limit be placed on the amount of the debit
relative to the member's accrued pension?
Changes between the date of calculation and the
date of application
Where the order relates to an amount, this amount
may be a different percentage of the cash equivalent at the application
date to that on the date of calculation.
Rights following a second divorce
It is not clear how a pension credit will be
treated following a further marriage and divorce of either a member
or an ex-spouse.
Calculation of Cash Equivalent Transfer Value
In making this calculation there is currently
an assumption about the probability of a member being married
on death, and hence of a spouse's pension being paid. Should this
assumption be maintained at its current level or increased to
the extent that this probability included allowance for a divorce
being the reason a member is unmarried on death. This will increase
the cost to the scheme.
July 1998
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