Armed Forces Pension Scheme: Points to Consider…
Published: 30/03/2022 07:00
I am often instructed in cases involving military professionals which, in turn, encompass armed forces pensions. There are additional issues to consider in these cases which often add another level of complexity. Here, I flag up some issues which I often crop up.
It is, hopefully(!), common knowledge that in respect of armed forces pensions, the CE value is unreliable and is often (every time in my experience) an under-valuation. In my opinion (and I have seen, on 'Legal Twitter', that there are others that agree with me), for any case where a pension share is being considered the parties need to obtain an actuarial report, in order to ensure that the parties and the court are fully informed on all issues and fairness can be achieved.
The Pensions Advisory Group (PAG) Report should be a tool which all practitioners are using to remind themselves, in every case, of the intricacies of the Armed Forces Pension Scheme (AFPS). Something to be mindful of, and your PODE should hopefully highlight this, is what should happen if there are two – or even three – schemes at play (whether it be 1975, 2005 or 2015).
The judgment of The Lord Chancellor v McCloud & Ors  EWCA Civ 2844 ('McCloud') has a potential impact upon these schemes and pension sharing. The ruling in McCloud related to reforms made to public sector pension schemes and how members were transferred from typically pre-2015 schemes to new schemes which replaced them. It was found to be a breach of age discrimination legislation. At present there is no definitive answer to what might happen in respect of the schemes affected and so it is important to seek advice from a PODE and consider whether a pension sharing order should be made against each scheme to prevent any potential issues post-pension share. I summarise very briefly here, but this is because the schemes affected will be reassessed as to whether members would have been better off staying in the existing scheme or moving to the new scheme, as opposed to having been moved with no option. This may mean that the pensions affected will receive some sort of recompense. In my experience the recommended option is to have a separate PSO for each scheme. The costs of pension sharing are not particularly high for sharing AFPS schemes and so this is still likely to be cost effective. However, it is imperative that advice is sought from your PODE. In my experience, this is dealt with in helpful detail within actuarial reports, where the authors are AFPS experts. There was a time where the pension sharing order was usually made against the largest scheme, but this will not necessarily provide the fairest outcome post-McCloud.
Practitioners should ensure that the PODE is asked to provide calculations for the different dates of retirement. In addition to the ‘usual suspects’ of ages 55, 60 and the relevant state retirement age, I also ask actuaries to consider any other dates that the actuary would consider relevant in the context of a particular pension. I have seen a number of reports where the actuary has had to state a different date of draw down which they believe is the most applicable and this can assist the parties, which is likely to help your PODE best assist you in the context of this type of case.
Early departure payments (EDPs) are defined by the Forces Pension Society as:
'a form of compensation paid in recognition of a shortened career until the pension comes into payment. It is based on the value of the pension. Like the pension, it provides an annual income and a tax-free lump sum.'
Not everyone in the forces is entitled to EDPs, but they may be relevant to your case. So, how do you account for these? If you are dealing with a matter involving EDPs how these payments should be shared may be a relevant consideration. There is often a tax-free lump sum payment followed by monthly payments. Although linked to pensions they are not actually a pension asset, and as such cannot be shared through the mechanism of a PSO. An EDP could be shared by way of lump sum order(s) or through a periodical payments order to ensure it is taken into consideration, that is, assuming it is required to be taken into account, whether on the basis of need or simply because it is a matrimonial asset to which the sharing principal applies. It was suggested by the PODE in a recent case of mine, that these payments can be offset or subject to a periodical payments order. Again, this would be a key question to ask your actuary as part of their report, and ask them to consider the options available. Although offsetting is not currently recommended in the majority of cases as per the PAG report, remember that the EDP is not a pension.
A further and important consideration is the issue of tax-free lump sums and the impact upon a non-member spouse. If the member spouse has already taken their tax-free lump sum, after the PSO has been implemented then the shadow member spouse will not be entitled to draw- down a lump sum. This is likely to be relevant where the shadow-member spouse is younger, and the court may be considering the implications of them receiving a lump sum at age 55 (by way of example), to use for re-housing etc.
The importance every time is to ensure you use a PODE who knows their stuff and is up to date on the issues impacting AFPS. There are more people in the market, and there is often concern about delay. If you have a military case do not delay getting your report underway. Furthermore, getting the answer right is far better than getting your report sooner. Make sure you research your PODEs if they are not a familiar name, and look at their CVs in detail to see if they have experience of the AFPS.
These are just a few examples of issues which have appeared time and again in my practice, which I hope will provide some helpful pointers to others.