This section provides for effect to be given to a pension debit by reducing a member’s pension rights by the percentage specified in the court order or agreement, or, if the order or agreement is in terms of a specified amount rather than a percentage, by the percentage which that amount represents of the current cash equivalent of the member’s pension rights. If that amount is greater than the current cash equivalent, the member’s rights will be reduced by 100%.
For a member of a money purchase scheme, the debit will normally take the form of a once and for all reduction of a percentage of the money in the pension “pot”.
Example: If the effect of the order or agreement is that the member’s pension rights are subject to a debit of 40% of the cash equivalent, and the cash equivalent is £100,000, then £40,000 will be taken from the pot.
In the case of a salary related scheme, the way in which the member’s benefit will be reduced is more complicated. The following example shows how the process is intended to work in practice. It is based on active member of a salary related occupational pension scheme with 20 years’ membership at the date of divorce who earns £30,000 a year at that date. The scheme provides 1/60th of final salary for each year of service. For simplicity, the example assumes that the whole of the pension debit will be subject to statutory revaluation although if the debit includes some GMP rights then that part of the debit will be subject to GMP revaluation in the normal way.
Deferred pension at the date of divorce: 20/60 x £30,000 = £10,000
Cash equivalent for pension sharing calculated by scheme actuary: £100,000
Pension debit ordered by the court (40% of the cash equivalent): £40,000
(The former spouse’s pension credit of £40,000 is invested separately for her).
This process is similar to that for a money purchase scheme, but, at retirement, the adjustment to the member’s salary related benefit will be as follows:
The member retires at age 60 after 30 years’ service with a salary of: £48,000
Full pension entitlement (ignoring the debit): 30/60 x £48,000 = £24,000
Using the statutory Revaluation Order in force at the date of retirement, the scheme actuary calculates that the deferred pension of £4,000 (40% of the deferred pension of £10,000) given up at the date of divorce is equivalent to a pension of £6,000 a year at retirement. This is known as the “negative deferred pension.”
The member’s actual pension will be: £24,000 - £6,000 = £18,000
This provision prevents a scheme actuary calculating the pension as if the member had given up 40% (8 years’ worth) of the rights to 20 years’ pensionable service at the time of the divorce. This is because on retirement, the member’s full pension would be reduced by 8 years of his pensionable service.
So, the member’s pension would be reduced by: 8/60 x £48,000 = £6,400
	and the final pension would be: £24,000 - £6,400 = £17,600
This would give the scheme a windfall gain at the member’s expense equivalent to payment of a pension of £400 a year for each year until the member dies. This kind of windfall would be particularly marked in schemes which have faster accrual rates in the final years of service.
In the case of a deferred member of a salary-related scheme, the method of revaluation will depend on the date of leaving and the type of benefit accrued. For example, in the case of an early leaver whose pensionable service terminated before 1 January 1986, whose deferred pension is “frozen” (ie not protected against inflation), then similarly there would be no requirement to revalue the pension debit either.
If the former spouse is given a pension before normal benefit age then the intention is that an actuarial adjustment broadly similar to that when a normal member takes early retirement should apply.
Subsection (1) provides for the reduction in benefit in respect of members of the scheme. The provision requires each qualifying benefit (defined in subsection (3)) to be reduced in the same proportion.
For example, if a deferred member of a contracted-out salary related (COSR) scheme had both GMP rights and excess of GMP rights, and 40% of the member’s cash equivalent was debited on the implementation of the order, then both the GMP rights and the excess of GMP rights would be reduced by 40%;
Subsection (2) deals with the case of an active member of an occupational pension scheme who is in pensionable service on the day the order or agreement takes effect. In this case, his benefit is not reduced by the appropriate percentage. Rather, it is reduced by an amount representing the appropriate percentage of the benefit that was taken for the purposes of calculating the cash equivalent. In this case, that calculation is done by reference to the hypothetical deferred pension to which he would have been entitled had he retired (section 26(4)). The benefits which are reduced are those which correspond to the benefits to which the member would have been entitled under the hypothetical pension. So, for example, death in service benefit is not reduced because such benefit does not form part of the hypothetical pension.
Subsection (3) defines a qualifying benefit for the purposes of subsections (1) and (2). In practice, most cash equivalents will be made up of several different benefits, particularly if the member’s scheme is contracted-out.
Commentary Pension debits Section 31: Reduction of benefit