A pension is backed by real assets
As Lewis Marks QC states in 'An Alternative View of Duxbury
: A Reply'  Fam Law 614
, a Duxbury
calculation: '... is not, and never has been, intended to provide guaranteed spending power, let alone ... an income which is guaranteed.' If one party retains a pension asset that provides such a guaranteed income, Duxbury
is, by this definition, an inappropriate formula to use to offset it.
In the same article, it is stated that: '... the Duxbury
fund is intended to represent the current capital value ... of the right to the periodical payment stream it replaces ... [which] is not guaranteed and can be terminated.' A pension fund, however, is not an uncertain future income stream. It is an investment with real assets that has been accumulated as a result of diverting previous remuneration. Both parties suffered from less disposable income during the period of building up the pension pot in the same way that they did with any other savings.
Optimistic growth assumptions requiring aggressive investment returns may be acceptable when the periodical payments being replaced are subject to their own commensurate risks. However, the holder of a pension, particularly the defined benefit pension in payment owned by the wife, does not take the same risks. Her guaranteed lifetime income is underpinned by cautious, low-risk assets in the scheme with the sponsoring employer paying all costs and funding any investment shortfall. The real return required by Duxbury
is 3.75% per year, assuming inflation at 3%, no charges and after tax. At the time of writing, 30 year gilts yield 2.35% per year before tax and charges, and assuming inflation at Duxbury
's 3% represents a real return of minus 0.65% per year. While gilts may be expensive and poor value, the yields are the grim reality of the world that the Duxbury
offset recipient seeking a lifetime income has to survive in.
In an uncertain world, why should one party be forced to settle for a return pinned on hope when the other already owns the assets fully underpinned at the current market price? A pension expert could explain that, far from the cash equivalent being 'illusory' and 'artificial' as described in this case, the value represents the market cost of buying the stated income. The value is as illusory and artificial as the often-argued inflated prices of the London housing market, but surely no-one would argue equality was met if one party retains a London property and the other has cash that cannot buy a similar home? If the cash holder wants a London property they have to pay the London house price, and so too must a pension income seeker pay the market price whether they think the assets are expensive or not.
A sum based on Duxbury
will provide a matching income if the ambitious returns are realised and you live to normal life expectancy. Life expectancy is defined as the average period that a person may expect to live. This means that, if you spend your money in such a fashion that it runs out at your life expectancy, there is an approximately 50% chance that you will live to regret it.
If both the pension member and the recipient of the Duxbury
calculated offset die before the normal life expectancy, neither are financial winners; they are both dead having not made full use of their financial assets. However, the pension holder would have enjoyed a better standard of living because the holder of the offset cash would likely have managed their money to last their potential unknown lifetime which, for the sake of prudence, they might assume went into their 90s. And, for the 50% who live beyond normal life expectancy, the clear winner is the pension holder.
Given the theoretical choice of either being the person retaining the pension or the person accepting the Duxbury
offset, almost ever pension expert would take the pension. This should tell its own story.
The value of pensions in the hands of the holder has become more complex to evaluate since the introduction of Pension Freedoms. Not all pensions are unshackled (such as defined benefit pensions in payment, annuities and all public sector pensions), and the personal circumstances of the individual determine how the impact of income tax, capital gains tax, inheritance tax and Lifetime Allowance tax impact on the pension's relative value.
In WS v WS
a pension expert would have corrected the apparent Lifetime Allowance misconception and provided balanced offset calculations that more closely match the true value of the pension assets retained by the wife.
In short, the case for the involvement of pension experts in divorce cases has never been stronger.
The following pension experts agree that the opinions expressed in this article broadly reflect their own views:
Stephen Bridges (Bridges UK Actuarial Services Ltd);
Paul Cobley (Oak Barn Financial Planning);
Ian Conlon (IWC Actuarial Limited);
Peter Crowley (Windsor Actuarial Consultants);
Dani Glover and Julian Whight (Smith & Williamson Financial Services);
Miles Hendy (Fraser Heath Financial Management Ltd);
George Mathieson (Mathieson Consulting Ltd);
Peter Moore (Bradshaw, Dixon and Moore [BDM]);
Mark Penston (Bluesky Chartered Financial Planners);
Kate Routledge and Jim Sylvester (Collins Actuaries);
Clive Weir (Albert Goodman);
Geoffrey Wilson (Excalibur Actuarial); andPaul Windle (Actuaries for Lawyers)