IFoA Working Party for Pensions on Divorce: Full Resources Now Published

Building on the work of the Pensions Advisory Group and the IFoA thematic review of work by actuary PODEs, an IFoA working party has published essential new materials to further develop good practice in this area. Family lawyers should look for, and proactively request, PODE adoption of these materials.

The treatment of pensions on divorce has seen a profound improvement in good practice in recent years, thanks largely to guidance issued by the Pensions Advisory Group in PAG and PAG2.^[1] Following PAG2, the Institute and Faculty of Actuaries (IFoA) undertook a thematic review^[2] of the work done by its members acting as Pensions on Divorce Experts (PODEs). The IFoA review found that the overall standard of advice was good but set out a range of findings linked to consistency, complexity and understandability of PODE reports and the technical methodology underlying them.

Our IFoA working party was created to address these findings. Following on from our interim outputs published in September,^[3] this blog introduces our full outputs and recommendations.

Key outputs: what we recommend family lawyers do

Our principal outputs are:

1. (New) A Minimum Good Practice (MGP) guide and Defaults, consisting of:
   a. A 2-page statement of core principles (and terminology) for use by PODEs;
   b. A set of Defaults for PODE report methodology and content; and
   c. A user guide
2. (Published in September) Materials for PODE reporting, consisting of:
   a. A Template Executive Summary for inclusion by PODEs at the start of their reports;
   b. An example of the completed Template Executive Summary; and
   c. A user guide
3. (New) A detailed full report for readers interested in exploring our wider findings in depth.

We have had commitments from some of the largest PODE firms to begin reflecting these outputs in their reports by the new year. We hope that PODEs in general, and the users of their reports, will see the benefits of adopting these proposed consistent approaches.

We recommend that family lawyers:

1. Require in letters of instruction that the PODE uses the Template Executive Summary.
2. Confirm the PODE complies with the MGP and Defaults. Any PODE report that complies with MGP will state that it does. We encourage family lawyers to look for (and ask for) this statement of compliance.

Why we believe the MGP and Defaults are needed

The Pensions Advisory Group guide provides the foundational guide to good practice in this area. Despite its comprehensive scope and impact, the guide itself notes some limitations and ongoing challenges.

The IFoA thematic review and our working party’s own analysis are the closest that there has been to a systematic review of post-PAG practice among PODEs. Our working party’s findings – based on a limited sample of reports – support the anecdotal view we have often heard that PAG has been very successful in improving quality and consistency. We did not find evidence of the same wide extent of different methods and results that were seen in the pre-PAG paper ‘Apples or Pears’ (2015).^[4]

However, we did still find evidence of material variation in methods and results between PODEs. Even if PODEs wished to, they would have difficulty in making users aware of the range of expert opinion because there is no recent systematic survey available. While the PAG guide provides a standard ‘starting point’^[5] for actuarial technical assumptions, none of the PODE firms in our sample used it exactly. Those we spoke to said that they are PAG compliant, but that since it is a starting point, they chose to depart. This illustrates the degree of interpretation involved in what can be described as being compliant with PAG. The PAG guide is, by its nature, permissive in many respects.

We were also aware of isolated examples of pitfalls in communication or methodology that the working party felt could lead to meaningful errors or omissions in settlements. It is primarily this that the MGP addresses. The key principles in the MGP include:

1. If PODEs depart from a PAG recommendation, they should highlight this to the user.
2. Equalisation of income means equalisation from a date or age for life, not just at a single point in time. In effect, this means equalisation of average incomes (or, more accurately, notional comparable incomes – see below). Equalisation at a single point in time can be significantly misleading if pensions are paid for different time periods or increase at different rates.
3. Any retirement benefits excluded from the analysis must be highlighted to the user. It must be made clear that these will not be reflected in the settlement unless a separate allowance is made.
4. Calculations should be consistent with the cost of achieving the same pension^[6] through annuitisation or drawdown, i.e. the cost of securing that pension privately. The calculation must reflect market conditions at a recent date. We found that not keeping up with current market conditions could, in some circumstances, lead to unjustified swings in a PODE’s recommendations.
5. If following the letter of instruction would lead to a materially misleading report, the PODE must ensure the instruction is amended or must consider declining the instruction.

Our expectation is that most good PODEs will already follow the principles of the MGP or will need very little adjustment to do so. However, at present, there are exceptions and users have no way to identify those exceptions. Looking for a statement of compliance with the MGP will provide users with greater assurance of minimum quality levels being met. It will also reduce problems associated with users of multiple reports needing to grapple with subtle differences in approach.

The Defaults are less prescriptive than the MGP. They are intended to do two things:

1. Promote consistency of methodology, even where departures might sometimes be justified. This contrasts with the MGP where departures would generally be hard to justify.
2. Encourage greater simplicity and pragmatism where that is defensible.

We propose a departure test ‘Does the PODE have any strong reason to believe that using the Defaults would result in a materially unfair outcome?’ If not, the majority view of the working party is that it will normally be appropriate to proceed with the Defaults. In general, the Defaults seek to steer PODEs and users towards a simpler, more consistent choice from among the methods considered acceptable by PAG. They are also intended to discourage proliferation of alternative scenarios, except where these genuinely add insight.

Terminology

The MGP sets out new, consistent terminology which we encourage all practitioners to use:

1. Equalisation age (date): The starting age (date) for an equality of income calculation for life.
2. Notional comparable income: A single figure, per pension or per party, representing the annual income received from the equalisation age (or date) for life taking into account different escalation rates and different periods of payment. The figure used to enable consistent comparison between incomes for the purpose of an equality of income calculation.
3. Independent Expert Value (IEV): A capital value calculated by the expert for the purpose of equality of capital or offsetting.

While PODEs might take a more technical view, users can reasonably think of a notional comparable income as being the average real pension income from equalisation age onwards.

The term IEV is intended to replace a plethora of terms currently in use for capital values calculated by PODEs. There was no clear correspondence between differences in the terms used and differences in methods, which will reasonably lead to confusion among users. If PODEs consistently use the term IEV in future, this will help users to understand that the corresponding figure calculated by two different PODEs seeks to achieve the same thing.

Other findings and recommendations

Our working party also recommends:

1. Accreditation of Single Joint Expert (SJE) PODEs should be enhanced. A certificate or practice module should be developed jointly by the IFoA and Financial Conduct Authority for SJE PODEs to demonstrate competency. We propose that any enhanced accreditation should include periodic renewal and submission of a sample of work.
2. In addition to adopting the MGP, Defaults and Template Executive Summary, PODEs should:
   a. Leave out technical detail where it is defensible to do so. Some PODEs include technical detail in the belief that professional standards require it, but that is often not the case. Our full report discusses this in detail.
   b. Update their assumptions in respect of RPI-CPI gaps. These were out of date in some cases.

Our full report contains much more, including discussion of by how much PODEs’ methods currently differ and the advantages and disadvantages of further standardisation. I encourage interested readers to take a look.

Future plans

The working party made considerable efforts to identify ways to streamline provision of data for divorce cases. We will continue to work on this in collaboration with the Pensions Administration Standards Association. This provides a route to directly influence pension schemes and providers and would complement any updates to Form P, whilst not being dependent on it.

We (or our successors) will review the MGP, Defaults and Executive Summary Template in around 12 months’ time in light of experience. If you have any comments to feed into that review, please use this link: https://forms.cloud.microsoft/r/d3ZeD5Lv6F

If you have any questions, please feel free to contact me, or another member of the working party (listed below) directly.

Working Party Members

Ian Sharpe (Chair), Frances Bailey (Co-Chair), Elizabeth Bowden, Lindsay Davies, Richard Nobbs, Rahim Rashid, Aaron Segal, Evangeline So and Paul Windle.

Former Working Party Members: Suzanne Dossell and Anvita Jain.

Members of the Consultation Group

Paul Cobley, Michael Finnegan, Michael George, Sarah Hoskinson, Stephen Hyams, Richard Rigg, Rhys Taylor, Julian Whight, Clare Williams.

Organisations who submitted anonymised reports

Actuaries for Lawyers, Excalibur Actuaries, Expert Pension Solutions Ltd, Mathieson Consulting, Nigel Sloam & Co and WBR Group