Pensions – When is an Internal Transfer not an Internal Transfer?

When it’s an External Transfer!

In a recent case, an actuary was instructed as a joint expert to give forecasts of pension splits required to equalise income at retirement. There was a large final salary scheme with a transfer value of over £970,000 and an AVC scheme with a transfer value of just over £680,000.

The Pension Fund Trustees responded to an enquiry, confirming the internal option was available on pension sharing. The actuary, solicitors, barristers and eventually the district judge, assumed an internal transfer meant just that, an internal transfer. Eventually, the district judge’s decision was made on that basis and he awarded the wife, who was a few years younger than the husband, 47.2% of both the final salary and AVC schemes, to give her equal income at age 60. As the Judgement was deferred, and issued in draft form, counsel were asked to draft the order between them, and return to court for the district judge to approve it. Fortunately, as it turned out. The draft order was served on the pension trustees – who eventually responded only 2 days before the adjourned hearing to finalise the order. They said the internal transfer would be into a money purchase scheme, as the final salary scheme had been closed for years! There had been no previous mention of this in any of the paperwork issued by them, of any description.

Red faces all around (anger rather than embarrassment, we had all be misled). The actuary pointed out this was effectively not an internal transfer, it was an external transfer. The actuary was asked to calculate the split of the final salary and AVC schemes now required to equalise income. Initially, she confirmed it was impossible to split the AVCs and final salary schemes in different percentages – but here the pension scheme trustees confirmed that in their case, this was not so. We therefore never discovered what there was (if anything) to stop the pension holder from transferring 100% of their AVCs to another scheme, external to the company, so that it could be shared 100% with the Wife. We will try that one another day.

The actual split required to equalise income on an external money purchase basis was 100% of the AVC scheme, as it could be separated from the final salary scheme, and 40.5% of the final salary scheme. That was the eventual deal. The husband was left with 59.5% of one scheme with a remaining transfer value of £579,000 and the wife got 66% of the total transfer values of the pension pot, with a transfer value of £1,121,000. That was what it took to equalise income at 60. Such is the value of a good, fully funded (albeit closed) final salary scheme.

The point of this article is to draw everyone’s attention to the internal/external transfer issue and to repeat the advice of Maggie Rae and David Salter (generously given to me in the course of telephone calls to them). If a final salary funded scheme offers an internal transfer – question it rigorously, does it really mean it? Does it mean the transferred share will stay in the final salary scheme? Also, we were very lucky the problem came to light before the final Order was made. It would have been a disaster if the Order had been made on the wrong basis. It shows that in all cases, it is essential the Pension Trustees have seen the draft Order before it is made, even though this is not a strict procedural requirement. It is only when they actually start to consider how they are going to implement it, that the truth may come out and very substantial last minute adjustments to the whole deal may be required.

The case also raises interesting issues about all those unfunded public sector pensions, such as the police, where pension shares always stay within the scheme – despite the cost for the tax payer eventually. It is interesting to compare the way private company pension schemes are protecting themselves on this issue, with the way the tax payer of the future is simply being required to underwrite the pensions of a small proportion of the population and their spouses for the future, what ever the cost, simply to avoid finding the money from the taxpayer now. However, that is another story . . . and a very contentious issue.

Mary Banham-Hall
Heald Family Law and Focus Family Mediation (Resolution Accredited Specialist – Pensions)

extract from the January 2008’s Family Law Journal

Filed: 21/01/2008 11:23:12