Pension Valuations and Divorce

Divorce is a significant life event, and navigating the complexities of financial settlements, particularly concerning pensions, can be daunting.

A recent report produced by the BBC has highlighted a long standing but also growing issue associated with the sharing of all public sector pensions on divorce.

Read the full report here.

Understanding Cash Equivalent Transfer Values (CETV)

At the heart of this issue is the Cash Equivalent Transfer Value (CETV), a key figure that determines the value of a pension during divorce proceedings.

CETVs are usually straightforward to obtain from pension arrangements that are associated with occupational pensions or pensions generally classed as defined contribution pensions.

In basic terms, a defined contribution pension is a pension that you contribute towards and upon retirement, you are then able to draw down from the pot which has been built up as a form of income.

The other most commonly known pensions are those that can be classed as defined benefit sometimes referred to as career average or final salary pensions. These pensions are commonly provided by large corporations and public sector organisations like the military, police, and civil service.

Defined benefit pensions promise a guaranteed income for life, calculated based on years of service and final salary or career average. This makes them incredibly valuable assets in divorce settlements. But, as highlighted in the BBC report, delays in obtaining CETVs due to the complexities introduced by the McCloud Judgement have left many individuals in a frustrating and emotionally draining position.

The McCloud Judgement

The McCloud Judgement exposed age discrimination in pension schemes for younger public sector workers. Younger members had been placed into a scheme that calculated their pension contributions on their career average salary as opposed to their final salary. Older members were protected from this change and were able to receive whichever was the higher value of the benefits calculated by the career average and final salary schemes. Younger members were wrongly not afforded this protection.

The judgment resulted in the government making changes to public service pension schemes to remedy discrimination which had taken place, and mandated that necessary recalculations be completed by October 2023.

This ruling has created a ripple effect, causing significant delays as public sector pension departments work tirelessly to reassess and recalculate pension values for their members.

The government has given the promise that the results of calculations, to enable members to benefit from the remedy, will be available to members by 1st April 2025.

Read more about the McCloud Judgement here.

How the delay affects divorce and financial settlements

It is highly recommended to secure a financial settlement before finalising a divorce. Until the CETV is obtained, divorcing couples cannot accurately assess their financial positions and move towards a settlement. This delay not only complicates the divorce process but can also jeopardise spousal benefits if one party passes away before a Financial Order is finalised. This is especially important if the deceased was part of a defined benefit pension scheme, like those in the public sector, as the benefits for a spouse are guaranteed for life.

In order to reach a financial settlement following a divorce, each party must value all their assets and liabilities for accurate computation of the matrimonial pot. Therefore, the parties’ will need to know the value of their pensions and will need to obtain a CETV.

For any individual who was employed by the public sector and whose pension scheme was affected by the McCloud judgement, obtaining the CETV is taking a significantly long time for the reasons outlined above.

The BBC report describes the impact this delay is having on individuals around the country and provides an insight into the shared experience of all those affected.

Unfortunately, the backlog has still yet to be cleared as the BBC identifies, “the government, which described the calculations as "extremely complex" and requiring a specialised role to complete, said it aims to clear most of the current backlog by the end of February.” Hopefully this is the case given the government’s promised deadline of 1st April 2025.

How can Hegarty help?

At Hegarty, we understand the intricacies of divorce and the critical role that accurate pension information plays in achieving a fair financial settlement.

Our team of specialist lawyers will advise you on the importance of having accurate, up-to-date pension information in your case. We will advise on the implications of the McCloud Judgement on your situation and guide you through pension sharing negotiations and implementation.

If you’re facing the challenges of divorce and pension valuation, reach out to Hegarty today. Let us help you turn a complex situation into a manageable path toward resolution.