Thousands of women lose out on pension benefits when they divorce, with Excalibur Actuaries warning that unfair sharing arrangements have “all the hallmarks of another pensions scandal in the making”.
Divorcing spouses could be losing an average of £33,000 because of the way many private sector defined benefit (DB) schemes calculate and transfer pension benefits, according to Excalibur Actuaries, which warns this “has all the hallmarks of another pension scandal in the making.”
The firm explained that thousands of people are affected by external pension sharing arrangements, under which a cash equivalent value is transferred out of a DB scheme and into a defined contribution (DC) pension held by the former spouse.
While the original scheme member retains their DB benefits, the recipient is exposed to the investment, inflation and annuity risks associated with a DC pension.
Excalibur estimates that more than four in five people disadvantaged by these arrangements are women, reflecting differences in earnings and pension accumulation during marriage, including the impact of career breaks.
By contrast, most public sector DB schemes offer internal pension sharing arrangements, allowing former spouses to receive benefits within the original scheme.
Regulatory blind spot
Pension sharing rules were introduced more than 25 years ago to allow courts to divide pension assets built up during a marriage, but Excalibur argues that the protections surrounding these arrangements have not kept pace with those governing voluntary DB transfers.
Richard Nobbs, director at Excalibur Actuaries, questioned why former spouses receiving pension assets through external sharing arrangements do not benefit from the same Financial Conduct Authority safeguards as members choosing to transfer their own DB pensions.
He said: “While DB transfers to personal pensions are protected… in cases of external sharing on divorce the spouse is forced to take a transfer. We believe this is a regulatory blind spot which has had significant costs to divorcing parties over many years.”
Excalibur also raised concerns about valuation charges for people who divorce after starting to draw their DB pensions.
While members more than a year from retirement are entitled to a free cash equivalent valuation, those already receiving their pensions can face charges of around £1,000 plus VAT.
Charges vary between providers, with insurers often providing valuations free of charge, while third-party pension administrators typically charge for the service.
“However well-intentioned the regulations around pension sharing on divorce, in practice thousands of women are getting a bad deal,” Nobbs said. “Too often, the pensions industry has delayed taking action to remove discrimination, while divorce lawyers don’t always understand pensions. As a result, this has all the hallmarks of another pensions scandal in the making.”
