Knowing that you have pensions to deal with in your divorce is one thing. However, knowing what those pensions are actually worth is another matter. But, without accurate valuations, you cannot negotiate a fair settlement because you cannot know whether what you're being offered is reasonable. Therefore, you cannot make informed decisions about your financial future.
This article outlines how pensions are valued in divorce, and what the different valuation methods mean. It also talks about why you shouldn't always trust the figures at face value, and when you should seek expert guidance to ensure you're not agreeing to an unfair settlement.
Why pension valuations matter
In the same way, you wouldn't divide your house without knowing what it is worth or split your savings without knowing how much is in the accounts. The same principle applies to pensions, except that valuing pensions is considerably more complex than valuing most other assets.
The valuation of a pension determines how it will be divided. If the valuation understates the pension's actual value, the person receiving a share gets less than they should. If the valuation overstates the worth, the pension holder gives up more than is fair. Getting the pension valuation wrong can result in one party being significantly disadvantaged, potentially facing financial hardship throughout their retirement.
Finding out about pensions
Before you can value any pensions, you need to know what pensions exist and where. This is called financial disclosure, and it is a crucial part of every divorce involving financial matters.
Both you and your spouse are required to provide a complete disclosure of all your financial circumstances, including all pensions. Failing to disclose a retirement or deliberately undervaluing it is very serious and can result in a financial agreement being set aside and reopened, even years later.
What information you need
For each pension, you need to obtain basic information, including the name of the pension provider, the type of pension (defined contribution or defined benefit), the policy or reference number, when the pension was started, and what benefits it will provide.
You also need valuation information. For defined contribution pensions, this means the current cash value. For defined benefit pensions, this means the Cash Equivalent Transfer Value. You also need details of any death benefits, the pension's retirement age, and the date the valuation was provided.
How to get pension information
To obtain your pension information, you should start by checking your pension annual statements. You can also look through paperwork and old email accounts to find these. However, annual statements may not be recent enough for divorce purposes, so you'll likely need to contact the pension providers directly.
You need to contact each pension provider and ask for a current valuation, a Cash Equivalent Transfer Value (for defined benefit pensions), details of the benefits the pension will provide, and information about any death benefits.
It is essential to start this process early during divorce proceedings, particularly for defined benefit pensions, as some pension providers can take several weeks or even months to provide the information you need. This is one of the most common causes of delay in financial settlements.
Use the Pension Tracing Service
If you've lost track of old pensions from previous jobs, the government's Pension Tracing Service at www.gov.uk/find-pension-contact-details can help you track them down using details of your past employers. This service is free and can locate pensions you might have forgotten about.
It's surprisingly common for people to have lost track of pensions from jobs they held years or decades ago. Don't assume you remember all your pensions. Use the tracing service to check.
Check for Additional Voluntary Contributions
If you or your spouse has a workplace pension, check whether any Additional Voluntary Contribution arrangements need to be valued separately. These are often overlooked but can be valuable, particularly if contributions have been made for many years.
Request information about all pensions
Even if a pension seems small, include it in your disclosure. Small pensions can add up to significant amounts when you have several of them. Don't make assumptions about what's worth disclosing. Disclose everything and let your solicitor advise on what needs to be dealt with in the settlement.
What if your spouse won't disclose?
Sometimes one party refuses or fails to provide full information about their pensions, or you may suspect they're not disclosing everything. If this happens, your solicitor can make a formal request for disclosure.
If informal requests don't work, you can apply to the court for an order requiring disclosure. The court takes non-disclosure very seriously and can draw adverse inferences (meaning the court assumes the hidden pension is more valuable than the person claims) or impose costs penalties.
Non-disclosure of pensions is not just unhelpful – it can be financially disastrous for the person hiding the pension if the court later discovers it and reopens the financial settlement.
Form E
If you're going through court proceedings, you'll need to complete Form E, which is a detailed financial statement. This includes sections for you to list all your pension arrangements with full details.
Both parties must complete Form E and exchange it as part of the court process. Form E is a lengthy, detailed document, and completing it properly requires gathering substantial financial information, but it's crucial to ensuring full disclosure.
Understanding Cash Equivalent Transfer Value
For defined benefit pensions, the pension provider will calculate a Cash Equivalent Transfer Value (CETV), usually abbreviated CETV.
What is a CETV?
A CETV is the lump sum that the pension scheme considers equivalent to the promise of future pension income. In other words, it's the amount of cash the scheme would pay you if you chose to transfer out of the defined benefit pension scheme and into a different pension arrangement.
The CETV is important because it is the figure the court uses when making Pension Sharing Orders. If the court orders that 40% of a pension should be shared, that 40% is applied to the CETV.
Why the CETV may not represent the true value
The CETV may not reflect the true value of a pension, particularly for public-sector pensions.
There are several reasons why a CETV might undervalue a defined benefit pension. The calculation may be based on assumptions that don't reflect the reality of what the pension will actually pay out. For example, the calculation might assume you'll live for an average lifespan, but if you're in good health, you might live considerably longer and therefore receive many more years of pension payments than the CETV calculation assumes.
Defined benefit pensions often include valuable features, such as guaranteed increases and spousal pensions, that aren't fully reflected in the CETV. For example, your pension might increase every year with inflation, which is extremely valuable over a 30-year retirement. The CETV calculation may not fully capture this value.
For younger members of defined benefit schemes, the CETV may significantly undervalue the benefits they'll receive at retirement. This is because the CETV calculation has to make assumptions about what will happen over the many years before you retire, and these assumptions may be conservative.
The problem this creates
If you accept the CETV as representing what the pension is worth, and you agree to divide it based on that figure, you might be agreeing to a settlement that leaves you significantly worse off than your spouse in retirement.
For example, let's say your spouse has a public sector defined benefit pension with a CETV of £300,000. You agree to a 50/50 split, so you receive £150,000 transferred into a defined contribution pension in your name. Your spouse keeps a reduced defined benefit pension.
In retirement, your £150,000 defined contribution pension might provide you with an income of £6,000 to £8,000 per year, depending on how the investments perform and what annuity rates are available when you retire. Meanwhile, your spouse's reduced defined benefit pension provides them with £20,000 per year, guaranteed, with inflation-linked increases.
On paper, you each received half the CETV. In reality, your spouse has pension income that's two or three times larger than yours. The settlement was not actually equal at all.
When do you need a Pension on Divorce Expert?
In many cases, particularly those involving defined benefit pensions or substantial pension assets, you should get advice from a pension specialist called a Pension On Divorce Expert, abbreviated to PODE. These are independent experts who specialise in valuing pensions for divorce purposes.
A PODE can explain what the pension will provide at retirement, compare the value of different types of pensions, advise on whether the CETV fairly represents the pension's true value, help you understand the tax implications, and model different settlement options so you can see what your retirement income would look like under different scenarios.
When you should consider instructing a Pension on Divorce Expert
You should consider getting advice from a Pension on Divorce Expert when the case involves defined benefit pensions, particularly public sector pensions. The risk of the CETV undervaluing these pensions is significant, and the potential financial impact of getting it wrong is substantial.
You should also consider a PODE when pension values are substantial (typically over £100,000), when there's a significant age difference between you and your spouse, when the pensions are complex (such as military pensions with multiple elements), or when you're considering offsetting a pension against other assets and need to understand whether the proposed offset is genuinely equivalent.
What a PODE report involves
A PODE will review all the pension information, including the CETVs and benefit statements. They will calculate what income each pension will actually provide at retirement. They will compare the real value of different pensions (for example, comparing a defined benefit pension with a CETV of £200,000 against a defined contribution pension worth £200,000).
The PODE will produce a report explaining their findings in plain language and will usually provide recommendations about how the pensions should be dealt with to achieve a fair outcome. This report can be used in negotiations or can be presented to the court if the case goes to a final hearing.
The cost of PODE advice
PODE reports cost money, typically several thousand pounds, depending on the complexity of the case. This might seem expensive when you're already facing legal costs and the emotional stress of divorce.
However, this expert advice can help you avoid very expensive mistakes. If accepting a CETV valuation of a defined benefit pension without getting expert advice means you agree to a settlement that leaves you £5,000 or £10,000 per year worse off in retirement, the cost of that mistake over a 30-year retirement is £150,000 to £300,000. Spending a few thousand pounds to avoid this outcome is money extremely well spent.
Joint expert or separate experts
Sometimes both parties agree to jointly instruct a PODE, meaning they share the cost and rely on the same expert report. This can be more cost-effective and is often appropriate when both parties are approaching the matter constructively.
In other cases, one party might instruct their own PODE, particularly if they're concerned that the other party's position is based on inaccurate valuations. Your solicitor can advise on the best approach for your situation.
The Pension Sharing Annex
When dealing with pensions in court proceedings, both parties should complete a Pension Sharing Annex, also known as Form P, for each pension. This form provides detailed information about the pension and its benefits.
The form asks for information such as the pension scheme name and reference number, the type of pension, the current value (CETV), details of the benefits the pension provides, information about death benefits, and the normal retirement age under the scheme.
The pension provider may charge a fee for completing this form, typically a few hundred pounds. This cost should be addressed in your overall settlement agreement as to who pays it.
Valuation dates
Pension values can change over time due to market movements (for defined contribution pensions), contributions continuing to be paid in, changes in actuarial assumptions (for defined benefit pensions), and other factors.
It is important to agree on a valuation date and to ensure all pensions are valued as close to that date as possible. This ensures you're comparing like with like when negotiating the settlement.
Usually, the valuation date is the date of the final hearing, if there is one. However, parties can agree to use an alternative date if that makes more sense for their situation, particularly if they're negotiating a settlement without going to a final hearing.
If there's a significant gap between the valuation date and the settlement implementation date, it may be necessary to obtain updated valuations to ensure the settlement remains fair based on current values.
Defined contribution pension valuations
Defined contribution pensions are generally more straightforward to value than defined benefit pensions. The valuation is simply the current value of the pension pot – the amount of money that's currently invested.
You can usually find this figure on your pension statement, but for divorce purposes, you should request a formal valuation from the pension provider. The provider will confirm the exact value as of a specific date.
The value of defined contribution pensions can fluctuate based on investment performance, so the value might be different if you check it on different dates. This is why agreeing on a valuation date is important.
What the value represents
For a defined contribution pension, the valuation tells you how much money is currently in the pot. It doesn't tell you what income that pot will provide in retirement, because that depends on future investment performance, what annuity rates are available when you retire, and how you choose to take your pension.
However, the current pot value remains a fair basis for division, as both parties are in the same position regarding future uncertainty. If you each receive half the pot value through pension sharing, you're both equally affected by future investment performance.
Defined benefit pension valuations
Defined benefit pensions are more complex to value because you're valuing a promise of future income rather than a pot of money. This is where CETVs come in, and where the potential for undervaluation exists.
How CETVs are calculated
Actuaries employed by the pension scheme calculate the CETV. They use various assumptions about factors such as how long you're expected to live, what investment returns can be achieved, what inflation will be, when you'll retire, and other variables.
These assumptions can significantly affect the CETV. Different assumptions would produce different figures. The assumptions used are usually conservative (cautious) rather than optimistic, which is one reason why CETVs may undervalue the benefits.
The benefit statement
In addition to the CETV, you should obtain a benefit statement showing the pension income you'll actually receive at retirement. For defined benefit pensions, this is often more illuminating than the CETV because it shows you the real-world outcome.
A benefit statement might show, for example, that the pension will pay £15,000 per year from age 65, increasing with inflation, and that a 50% spouse's pension will be payable on death. This gives you a much clearer picture of what the pension is actually worth than just seeing a CETV figure of £250,000.
Comparing the annual income the pension will provide with the CETV can help you assess whether the CETV seems reasonable or whether it might be significantly undervaluing the pension.
Comparing different types of pensions
One of the challenges in divorce is that you often need to compare different types of pensions. Your spouse might have a defined benefit pension with a CETV of £200,000, while you have a defined contribution pension worth £100,000. How do you compare them to work out what's fair?
This is where expert advice becomes particularly valuable. A PODE can model the income each pension will provide in retirement and compare the real value of each pension, not just its paper valuation.
In many cases, a defined benefit pension will provide significantly more income in retirement than a defined contribution pension with the same CETV. This needs to be taken into account when negotiating a fair settlement.
Red flags that suggest you need expert advice
Several warning signs should prompt you to seek expert pension advice:
Your spouse has a public sector pension (NHS, teachers, civil service, police, armed forces, local government, etc.). These pensions are very likely to be undervalued by their CETVs.
The CETV seems low compared to the annual income the pension will provide. If someone's pension has a CETV of £200,000 but will provide £25,000 per year in retirement, that suggests the CETV may not fully capture the value.
There's a large age gap between you and your spouse. Age differences can significantly affect the relative values of pensions.
The pension holder is young. CETVs for younger members of defined benefit schemes are particularly likely to undervalue the benefits.
You're being offered pension offsetting and the figures seem too good to be true. If your spouse is offering you a straightforward exchange of their £200,000 pension for your £200,000 share of the house, question whether this is genuinely equivalent value.
Your spouse is resisting obtaining proper valuations or is reluctant to involve pension experts. This might suggest they know or suspect their pension is worth more than the CETV suggests.
The cost of getting it wrong
The stakes are high in pension valuations. If you agree to a settlement based on inaccurate or misleading valuations, you cannot come back later and say you didn't understand. Pension Sharing Orders, once implemented, are final and cannot be varied.
If you accept a 50/50 split of CETVs without realising that your spouse's defined benefit pension is actually worth significantly more than the CETV suggests, you'll be locked into that unfair settlement for the rest of your life. Twenty or thirty years from now, when you're both retired and it becomes clear that your spouse has double or triple your pension income, there's nothing you can do about it.
This is why getting proper valuations and proper expert advice is not an optional extra. It's an essential investment in protecting your financial future.
What you should do
Make sure all pensions are properly disclosed. Don't accept verbal assurances that "there are no other pensions" or "it's only a small pension". Require written confirmation from pension providers.
Obtain formal valuations for all pensions, including CETVs for defined benefit pensions and current values for defined contribution pensions. Don't rely on old statements or estimates.
If any pension is a defined benefit pension, particularly a public sector pension, seriously consider instructing a PODE to advise on whether the CETV represents fair value.
Compare what different pensions will actually provide in retirement, not just the paper valuations. A pension that will pay £20,000 per year for life is not the same as a pension pot worth £200,000, even though they might look similar on paper.
Don't rush. Getting proper valuations and expert advice takes time, but it's time well spent. The cost of rushing and getting it wrong far exceeds the cost of taking the time to get it right.
This information is for guidance purposes only and does not constitute legal advice. We recommend you seek legal advice before acting on any information given.
