March 17, 2020



Part 7.  OFFSETTING Apples & Pears

  1. The PAG report confirms:
    1. Most negligence claims concern pension offsetting;
    2. The CE is not usually a good way to look at offsetting – especially when there are DB pensions – lawyers should not attempt to ‘estimate’ (guess) the appropriate offsetting figures themselves – a PODE will usually be required. The report gives the following examples of why CE’s can be misleading:
      1. A has a DB pension with a CE of £300,000; B has a DB pension with a CE of £300,000. A’s DB pension will pay a lump sum of £38,400 plus £12,800pa.  B’s DC pension will pay £7,800pa with no lump sum or £6,809pa with a lump sum of £38,400.  They are not worth the same;
      2. A has a DB pension with a CE of £750,000; B has a different DB pension with a CE of £500,000. Both DB pensions will pay £20,000pa from age 65.  The pensions are almost identical but, the CE’s have been calculated in different ways.
    3. Calculation of the offsetting figure:
      1. There are many ways the offsetting figure can be calculated by PODE’s. To try to obtain consistency, the PAG report recommends instructing the PODE to use the value of the pension holder’s retained present or future benefits assuming no pension share has been implemented. This is because it is more reliable than the other possible measures.  It will not necessarily give the same value as the other possible measures partially because it will not be affected by any destruction in value caused by a suggested PSO (for example, the income to party A of pension A may be £30,000pa before sharing.  After sharing to achieve equality of income, the parties may each receive £12,000pa.  There may therefore be a perceived £6,000pa destruction of value – it should be remembered that this is gross however and the impact will be less after tax). The other possible measures are:
        1. the cost to the non-pension holder to acquire those benefits; or
        2. the value to the acquirer; or
  • a figure based on equality calculations.
  1. There are also different valuation methodologies which can be adopted by the PODE. PAG recommends specifying to the PODE to use two or three of the following (so that a range is given as suggested by FPR PD25B 9.1(g)):
    1. The Defined Contribution Fund Equivalent (“DCFE”) – basically the fair value of the pensions;
    2. The realisable value – which takes into account what capital would be available if the holder took the full tax-free lump sum at 55;
  • The actuarial value – which is similar to the DCFE but makes adjustments to reflect that an annuity is unlikely to be purchased.
  1. PAG does not recommend using a Duxbury calculation for pensions.
  2. Adjustments for tax and utility:
    1. Tax. PAG suggests an adjustment of between 15% and 30% depending on whether the pension holder will be a lower or higher rate taxpayer in retirement;
    2. Utility. The PODE should be instructed not to make any adjustment for utility because that is a matter for the court’s discretion not the PODE. The court might apply an adjustment between 0% and 25%.  The court might take into account:
      1. The ability to draw down lump sums (subject to tax or otherwise);
      2. Whether an adjustment is justified in a needs case;
      3. An adjustment may be more defensible where there are more assets than required to meet needs;
      4. If present capital is required to meet basic housing needs this would point against any utility adjustment;
      5. Conversely, if offset results in the loss of owner-occupied accommodation, this might justify the application of a utility adjustment;
      6. The closer the parties are to retirement age, the less justification there is for a utility adjustment;
      7. The recipient of an offset may be at a long-term disadvantage by not having the pension fund.
    3. When completing the D81, to minimise liability risk to the practitioner, make sure that the following are recorded on the D81 or in an annex to it:
      1. The justification for offsetting;
      2. The pre- and post-implementation positions of the parties.
    4. Terminology approved by the PAG report:
      1. Only use “discount” to reflect the investment assumptions;
      2. Use “adjustments” for tax and utility (to avoid confusion).
    5. Standard wording for the letter of instruction is included at Appendix E.


Victoria Holroyd

Commercial, Employment, Family, General Civil, Insolvency, Property and Planning, Will Disputes