(2 min read)
A recent Pensions Ombudsman determination in a pension sharing on divorce case has highlighted the potential for issues to arise in relation to DC schemes when there is a time lag between valuing benefits for the purpose of the pension sharing order and making the necessary disinvestment to give effect to the order. If a member's fund value falls between the two dates, the percentage of the fund that needs to be disinvested to give effect to the order may end up being higher than the percentage of benefits awarded to the ex-spouse and specified in the court order. Here we take a look at the implications of the Ombudsman's decision for trustees dealing with pension sharing orders.
In the case of Mr S (CAS-30342-Z1B0) the Ombudsman has dismissed a complaint by a member whose benefits were the subject of a pension sharing order on his divorce. Mr S was a member of a money purchase master trust. The pension sharing order had allocated 57.87% of the cash equivalent value of Mr S's benefits in the scheme to his ex-wife. Under the relevant legislation, the scheme trustees had four months to give effect to the pension sharing order after becoming subject to it (the "implementation period"). They were entitled to value the benefits on such day within the implementation period as they notified to the member. The scheme administrator picked 28 February 2018 (a date within the implementation period) as the valuation date. However, the disinvestment necessary to give effect to the order occurred two working days later. During this period, the value of the units held within Mr S's fund had fallen. In order to give effect to the order, the scheme administrator therefore disinvested units which represented more than 57.87% of the funds on the date of disinvestment in order to provide a cash value equal to 57.87% of Mr S's fund at the valuation date. This meant an extra £12,700 worth of units being disinvested compared to what would have been the case had disinvestment occurred on the valuation date itself. Mr S complained about this.
The Ombudsman dismissed the complaint. He noted that provided disinvestment occurred within the implementation period (as had happened in Mr S's case) the legislation did not address the possibility of divergence between the value of units in the member's fund on the valuation date and the value on the disinvestment date. In Mr S's case, the disinvestment had been completed within two working days. As the scheme's service level agreement for each action in respect of pension sharing activity was five working days, the Ombudsman was satisfied that the time taken to complete the disinvestment was reasonable.
Our thoughts
This case highlights the potential for perceived unfairness to occur where the value of investments held within a member's fund falls in the period between valuing the benefits for pension sharing purposes and effecting the disinvestment to give effect to the order. The complaint was not upheld in this case, but the case highlights that it is advisable to avoid long gaps between the valuation date and disinvestment. It is possible that the Ombudsman might have regarded a longer gap as constituting maladministration.
