The Institute and Faculty of Actuaries (the IFoA) is looking for family lawyers to join a new working party looking at Pensions on Divorce.

It is critical that courts receive appropriate expert advice in relation to the often complex pension arrangements of divorcing parties. A small number of actuaries and other experts provide a valuable service preparing expert reports for the courts on how couples can treat their pensions on divorce. Actuaries, as members of the IFoA, benefit from extensive technical training and are subject to professional regulation, and are particularly well placed for this type of work.

All practitioners in the field will know that pensions on divorce have seen considerable development over the past few years through the work that the influential Pensions Advisory Group has done to identify and disseminate good practice.

Thematic review

Complementing this, at the IFoA we have recently carried out a thematic review looking at the quality of the expert reports prepared by actuaries and the way they carry out their work. The report focused on the position in England and Wales as reports are rarely needed in Scotland, where the approach is simpler. This forms part of a series of thematic reviews on areas of actuarial work ranging from climate-related risk to general insurance pricing.

We were delighted to find that the overall standard of the divorce reports we reviewed was good with sound levels of compliance with standards. Actuarial reports often need to quote figures on a range of scenarios in line with the instructions received from family lawyers. This typically leads to lengthy and complex reports. We saw good practices being followed by many actuaries using plain English and providing clear explanations: these could be adopted by others to help make reports more user friendly across the board.

Methods

There’s been much debate on how to allocate pensions on divorce. Should the capital values be used, or should it be based on the relative pensions income in retirement? And should the whole pension be shared, or should it only be the pension accrued over the period of the marriage? These are rightly matters for the courts. The situation has been assisted by the publication of the Pensions Advisory Group’s reports although there remains significant debate.

However, what seems less discussed in reports is the methodology to be used by the actuary in preparing the report. This can vary between actuaries and can have a material impact on how much pension each spouse receives after the divorce. What we found was that actuaries use a range of different methodologies. But what we also found was they used inconsistent terminology in describing these terms. On a simple level, the transfer value quoted by a pension scheme of the value of the pension rights can be described in a number of ways including: cash equivalent, fund value, or transfer value. Most readers of reports who are family lawyers will know that each of these is referring to the same figure. The actuary will also often calculate their own preferred valuation and refer to their approach in a number of ways. These methods will vary among actuaries preparing divorce reports. It is much harder for even the informed reader to tell these different methods apart. The Working Party will be looking at the methodologies followed and see if there can be more alignment in both the approach used and the way that actuaries describe them.

Data

As part of the exercise, we also heard from both actuaries and lawyers that the collection of data from pension schemes and providers is a major issue. There are often delays in obtaining pension information which can hold up the expert report and sometimes delay court hearings. The Working Party will also be looking at whether there are ways to simplify and speed up the process for both experts and pension schemes and providers.

Working Party

You can find out more about Working Party and how to volunteer here to volunteer for the Working Party. The full report can be read here.