A pension's cash equivalent transfer value (CEV) is the value placed on the underlying benefits by the provider. It is the headline value looked at when considering how to address pension differences on divorce.
Public sector pension schemes (such as Police, Teachers and Armed Forces), are all defined benefit schemes with CEVs calculated using factors set by the Government Actuary's Department (GAD).
They are very different from defined contribution schemes, otherwise known as money purchase pension schemes. These are built up from contributions and drawn down at retirement, quite different from defined benefit schemes which in their simplest form are entitlements to retirement incomes.
The CEV can often be very different from a pension's fair actuarial value (FAV), which is sometimes most easily defined as the value of a defined benefit scheme in defined contribution terms.
CEVs of public sector schemes
Divorce solicitors have become used to the CEVs of public sector pension schemes being in the region of two-thirds of their fair actuarial value. That is to say, their "headline" CEV would undervalue the true benefits on the scheme by around a third.
This was reflected in the pension sharing reports we would commission, with pension experts often rebasing FAVs at a value much higher than the public sector CEVs schemes before then recommending the appropriate pension share, often to equalise incomes.
Were clients to ask us to explore a solution involving offsetting a public sector pension scheme (i.e. swapping out pension sharing entitlement for immediate non-pension capital) we would need to exercise great caution and be alive to this CEV undervaluation point.
Changes to public sector CEVs
During the middle part of 2023, the Government began undertaking a wholesale review of the CEVs attaching to public sector pensions.
Rather than undervaluing the pension benefits, actuaries are now reporting that the resultant CEVs being produced following the review are in fact tending to exceed fair actuarial valuation.
What does this mean for the use of CEVs by solicitors
Whilst we wait for the Government's review to complete, it is too early to draw reliable conclusions, however the early indications are that public sector defined benefit schemes are likely to have CEVs higher than those of defined contribution schemes. Put another way, it is quite possible that £100 of a DB pension could now be worth less than £100 of a DC pension.
When considering the treatment of pensions on divorce it is important that specialist advice is sought from an expert financial remedies solicitor to ensure the very best outcome is achieved. The Stephens Scown Family Law team is top ranked in the Chambers and Legal 500 industry guides.
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