AVC PRSA - Divorce Scenario

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Gordon Gekko

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One for some of the public sector pension expert here…

If someone in the public sector has an AVC PRSA and they’re getting divorced, can they hive-off some or all of the AVC PRSA to square-off the other person?
 
A Pensions Adjustment Order can form part of a divorce settlement. However perhaps a Financial Compensation Order might be put in place first (an agreement of a division of finances) before resorting to a POA.
 
Hi Liam,

When a couple gets divorced, must there be a POA for each plan or is it best practice?
 
The query is more along the following lines:

I’m a public servant. Using the 50% when we were married, my spouse might get €2k a year. Can I just lob €50k into an AVC PRSA and offer them that to make a clean break?
 
There are multiple permutations of an asset split.

I don’t see what’s wrong with the above once the judge is satisfied that it’s fair and neither party is using it to obscure their assets.
 
Gordon Gekko said:
The query is more along the following lines:

I’m a public servant. Using the 50% when we were married, my spouse might get €2k a year. Can I just lob €50k into an AVC PRSA and offer them that to make a clean break?
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As Coyote says, you'd need to convince the judge and the other side that your €50K is the equivalent of the €2K per year pension. The other side could argue about apples and oranges - the state guarantee of a public service pension vs the uncertainty of AVC fund values etc.

You'd also need to look at the tax efficiency of putting €50,000 into an AVC PRSA - annual limits, maximum funding etc.
 
Two questions on PAOs

1. Why are nil (in reality absurdly nominal) PAOs put in place?

2. In a DB scheme - say the divorcing couple is made up of a 50 year old male and a 40 year old female - if benefits are given from the male (under a PAO) to the female, at what age are the benefits allocated to the female payable?
 
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JimmyB99 said:
Two questions on PAOs

1. Why are nil (in reality absurdly nominal) PAOs put in place?

2. In a DB scheme - say the divorcing couple is made up of a 50 year old male and a 40 year old female - if benefits are given from the male (under a PAO) to the female, at what age are the benefits allocated to the female payable?
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1. To avoid a scenario whereby a spouse comes back for a second bite of the cherry. It demonstrates that the parties and the court have taken the pension asset into account already. Also, trustees tend to like the existence of PAOs when it comes to payout time. Eases their concerns that they might pay a benefit to the "wrong" party.

2. As the benefits allocated to the spouse are a subset of the benefits payable to the pension holder, they become payable at exactly the same time as the holder's benefit.
 
Thanks Right Winger,

So, a few follow ups......not necessarily just for you.....

1. The original question was to do with a public sector pension. PAOs are served on the trustees. Who are the Trustees of public sector schemes? How does this work?

2. In the example I gave, there was a 10 year age differential between the spouses so that the wife's portion becomes payable when she is 55. If we consider a privately funded DB plan, this must give rise to a higher liability for the scheme. It seems strange that the actions of a member (his divorce) causes an increased expense to the employer in a DB plan when no increase would occur in a DC plan?
 
JimmyB99 said:
1. The original question was to do with a public sector pension. PAOs are served on the trustees. Who are the Trustees of public sector schemes? How does this work?
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There are no trustees. It’s served on the relevant local or central government body.
JimmyB99 said:
2. In the example I gave, there was a 10 year age differential between the spouses so that the wife's portion becomes payable when she is 55. If we consider a privately funded DB plan, this must give rise to a higher liability for the scheme. It seems strange that the actions of a member (his divorce) causes an increased expense to the employer in
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I don’t think so. The wife simply receives the husband’s entitlement (or portion thereof) while he’s alive.

Circling back to the original question, for the same capitalised value a DB pension is probably worse than a DC pension for a spouse who benefits from a PAO. With a DC fund you can align it to your own lifespan, not that of your divorced spouse.
 
JimmyB99 said:
Thanks Right Winger,

So, a few follow ups......not necessarily just for you.....

2. In the example I gave, there was a 10 year age differential between the spouses so that the wife's portion becomes payable when she is 55. If we consider a privately funded DB plan, this must give rise to a higher liability for the scheme. It seems strange that the actions of a member (his divorce) causes an increased expense to the employer in a DB plan when no increase would occur in a DC plan?
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Does it really though? If the individuals remain married, a liability is also created on death in terms of a pension for the surviving spouse. Probably a bigger one.

e.g. a married person on €100k. A €50k pension is paid for the duration of his or her life and then that potentially drops to €25k, paid for the duration of a surviving spouse’s life.

Versus that person being divorced and a total of €50k, split €45k and €5k, being paid to both former spouses individually for the duration of their lives.

The second scenario is surely preferable for the trustees?
 
Gordon Gekko said:
Does it really though?

Versus that person being divorced and a total of €50k, split €45k and €5k, being paid to both former spouses individually for the duration of their lives.
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Firstly, I'm just trying to understand how it works.

Secondly, in cases where the pension plans liability is reduced, my point is equally valid - just the other way - in that the question becomes why should the employer benefit from the divorce in a DB scenario?

Thirdly, I don't agree with your hypothesis. You are just picking figures that may or may not support your point. I could explore further if required. The essential point is that I could easily pick a scenario where the liability is unambiguously greater when the pension is earmarked for the non-member spouse. Say, the member had left service so no future service and all the deferred pension is allocated to the younger spouse - there is no way that the immediate annuity cost of an inflation-linked single life pension payable to a 55 year old is less than the NPV of a 50% reversionary pension payable to a 65 year old. Do you accept?
 
Gordon Gekko said:
Versus that person being divorced and a total of €50k, split €45k and €5k, being paid to both former spouses individually for the duration of their lives.
Click to expand...
Is that how a PAO works with a DB scheme?

My understanding was that the NRA, lump sum and pension amounts are unchanged, simply that the payments are directed in full or in part to one of the divorced spouses. A PAO can also cover spouses' and children's payments.
 
JimmyB99 said:
Firstly, I'm just trying to understand how it works.

Secondly, in cases where the pension plans liability is reduced, my point is equally valid - just the other way - in that the question becomes why should the employer benefit from the divorce in a DB scenario?

Thirdly, I don't agree with your hypothesis. You are just picking figures that may or may not support your point. I could explore further if required. The essential point is that I could easily pick a scenario where the liability is unambiguously greater when the pension is earmarked for the non-member spouse. Say, the member had left service so no future service and all the deferred pension is allocated to the younger spouse - there is no way that the immediate annuity cost of an inflation-linked single life pension payable to a 55 year old is less than the NPV of a 50% reversionary pension payable to a 65 year old. Do you accept?
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I have no idea what point you’re trying to make.

My numbers were just an attempt to illustrate a principle.

The principle being that the ‘Trustees’ should prefer a divorce scenario.
 
Gordon Gekko said:
The principle being that the ‘Trustees’ should prefer a divorce scenario.
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What is clear is that there are loads of gaps in relation to our combined knowledge of PAOs.

What's clear is that the liability of the scheme changes following a PAO

What's clear is that this liability could increase following a PAO

What's clear is that your principle is flawed

I'm honestly struggling to understand what part of the above you are struggling with but I'll leave you at it!
 
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