APPENDIX 19
Letter to Department of Social Security
from Mr Brian Arrighi (PS 23)
PENSIONS ON
DIVORCE CONSULTATION
I am pleased to be a member of the Consultation
Panel set up to help the Department steer its way through the
potential difficulties of introducing pensions splitting. I happened
to be chair of the Occupational Pension Schemes Joint Working
Group when the ideas behind the Panel were first being formulated.
I have also recently given evidence on behalf of the Association
of British Insurers (ABI) to the House of Commons Social Security
Select Committee. Although this letter addresses an issue raised
by the Committee, it is as an individual that I am submitting
this response. I do, however, propose to copy it to the Chair
of the Committee (Archy Kirkwood), to Patricia Hewitt who raised
this particular issue, and to the ABI.
I will use the example raised by the Committee
to demonstrate the point, which also emphasises just how important
it will be to get financial advice before agreeing a split. The
issue relates to the use of cash equivalent transfer values (CETVs)
for valuing future pension benefits, and their use in a 50:50
split when the real value of those benefits is dependent on gender.
The problem is not so much the use of CETVs but the (possibly)
mechanical use of a 50:50 split. The solution is,
I believe, to adjust the 50:50 split: to use CETVs, but for women
to request CETVs on both a male and female basis, and for the
spilt to allocate the difference between those two values to the
female before splitting the rest 50:50. I hope that an example
will illustrate this more clearly.
If we assume that there is an identical couple
(a man and a woman) with identical amounts of future pension
benefit, and no other assets. It is actuarially accepted that
equivalent future pension benefits for men and women are of greater
value to women because of the differences in average life expectancy.
[The value of a pension is based on its amount and how long it
will last—since women live, on average, longer than men
do, the value of the same amount of pension is greater for a woman].
Assume, therefore, that the values of their benefits are
£100,000 and £110,000 respectively reflecting the assumed
longer life expectancy of the woman. Using a mechanical 50:50
split, they would both receive £105,000 thus increasing the
man's pension at the expense of the woman's. This is unfair.
The correct way to deal with this situation
would be to have the woman's pension valued on both a female and
male basis (i.e. £110,000 and £100,000), allocate the
difference (£10,000) to the woman, and split the remaining
£200,000 on the 50:50 basis. This maintains the values of
both pensions fairly.
It could be argued, (probably by men), that
this is an insignificant difference. Moreover, it could be said
to apply to any asset whose value depends on expectation of life:
hence, it could be argued that a house has different values for
a man and a woman given that, on average, a house will be used
for more years by a woman. However, I believe that pensions DO
introduce a separate issue, different from other assets and that
this difference needs to be brought to the attention of those
offering advice to the divorcing couple. I should repeat, however,
that I do not believe this issue invalidates the use of CETVs,
simply the danger of mechanically using a 50:50 split.
This approach is reflected in the answer that
I gave the Committee. I would be happy to discuss this with you
if you wish.
20 July 1998
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