The following questions and answers relate specifically to references in our actuaries’ pension sharing reports and should be read in that context.
12. What are the alternative offset numbers? (Report Sections 2 and 5)
We believe that the CETV for final salary schemes, and the CEB for pensions in payment, are not usually appropriate values for use in divorce. We can provide you with a factsheet on request.
We therefore recommend that you use the values shown in Section 5 of the report in any offset settlement.
The starting point is our “best-estimate” values. These are market-consistent values, with no allowance for tax.
You may also want to adjust this value to allow for tax and for the importance, or utility, of cash to the parties. This is sometimes called “discounting” by solicitors. We have developed a method for valuing the discount by combining utility theory and actuarial techniques. This needs some simple knowledge of the future financial wealth of the two parties.
We show in the report a discount to apply and the revised pension values for offsetting. Unless we have been told what assumptions to use we will have used our default assumptions of the future financial wealth of the two parties.
If you wish us to use different assumptions of the future financial wealth of the parties then you can instruct us to make such calculations at the same time as asking any other follow-up questions.
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13. Which numbers do I use for pension sharing? (Report Section 4)
Use the best-estimate figure in section 3 that meets the objective you want.
Do not use the range numbers, they are only there to meet the court expert witness requirement of showing how certain we are in the final result.
In Scotland the number will be the pounds of CETV or CEB that is required to be shared. In other jurisdictions the number is the percentage of the CETV or CEB required to be shared.
The report always shows which scheme or schemes are to be shared, and which schemes are left alone.
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14. Why do you think that CETVs and CEBs are inappropriate? (Report Section 5)
The report lists 6 reasons and these are also discussed in our factsheet which can be obtained on request from our Contact Us page.
It would be unusual for all six reasons to apply to one pension. Normally only between one to three reasons apply.
The most common reason is that the assumptions that the pension scheme makes as to future economic experience and likelihood of death are more conservative to our own. We update our assumptions monthly based on the latest market information.
Another issue with CETV and CEB assumptions is that they differ between each different pension scheme. Therefore comparing CETVs and CEBs from different pensions is like comparing apples and pears. When we value pensions in a report, or project future income and lump sums, we use the same assumptions for all pensions in the report.
For active members allowing for future salary increases on accrued benefits is based on the interpretation of accrued benefits being calculated on (length of period of service) x (final pensionable salary at end of service). This is the implicit assumption underlying the approach to division of pension accrual between different periods as laid down in Scottish Law.
There is another interpretation that accrued benefits in a period consist of two parts: benefits for the period calculated upon (length of period of service) x (pensionable salary at end of period), plus a second part of (pension accrued prior to the period) x (increase in salary over the period). This approach emphasizes the loyalty bonus effect of long-service in a final-salary pension scheme. We can produce figures on this basis if required.
We can if requested attempt to break down the differences between our valuation and a CETV or CEB valuation. This is helped where we can obtain details of the CETV or CEB basis from the scheme, although this information is not always made publicly available.
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15. How do you set future salary expectations? (Report Appendix A)
We use the future salary assumption to determine the final pensionable salary for active final-salary scheme member. Unlike CEVs we calculate accrued benefits based on the final pensionable salary of the member, rather than their salary at date of the CEV. The date at which the final salary is calculated in shown in the Pension Details later in section 5, often it is three years after the calculation date.
Salaries grow for two reasons:
- Increases in pay scales
- Promotional increases or extra salary for special duties
Therefore the rate of growth in an individual’s salary will over time be greater than the “pay increases” agreed between employers and their employees. So even if pay scales are frozen an individual might still earn increases in salary.
We generally set future salary increases for an individual near our assumption for the growth in National Average Earnings. Obviously individuals know far more about their potential salary potential and they may request figures on other assumptions of future salary growth, though we can not necessarily endorse them without documentary evidence for the alternative assumption.
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16. How do you set future economic assumptions? (Report Appendix B)
We update our economic assumptions on a monthly basis. We use market values for future interest rates on fixed and RPI-linked gilts as shown in the Financial Times on the first working day of each month to update the immediate interest rate and retail price inflation (RPI) assumptions.
We use 15+ year gilt values to reflect that our valuations are for income streams that will take place over many years in the future. Current interest or inflation values do feed into the long-term values being assumed by the market, but are only one of many factors. Our economic assumptions will therefore rarely reproduce the current headline interest or inflation rates.
We have a number of other factors on the relationship between RPI and the other inflation-linked assumptions such as the Consumer Price Index (CPI), and between RPI and National Average Earnings, that we review on at least an annual basis. We similarly review our long-term equity growth assumption that underlies our discount basis.
We also validate our annuity interest rate assumption by comparing our annuity rates against current insurer annuity rates on a regular basis.
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