PSI5.1.16 - Contributions by Employers: General – Pension Sharing on Divorce – pension credit benefits

(This archived guidance relates to HMRC discretionary practice before the 6th April 2006. For current guidance on Registered Pension Schemes see the Registered Pension Schemes Manual)

An employer should not need to make contributions in respect of a pension credit benefit (see PSI24.1.1) held in the scheme. At the time of the pension sharing on divorce order the benefit rights of the member, whose benefits are to be shared, are converted into a capital sum or “cash equivalent transfer value” and the pension credit is derived from a percentage amount of that cash equivalent transfer value.

The capital sum representing the pension credit might then be held in the scheme on a money purchase basis and the benefits ultimately paid from the pension credit would be dependent on the investment return on that capital sum. Alternatively, the scheme might promise to pay a defined benefit, either immediately or at some future date, based on the capital sum that represented the pension credit at the time of the pension sharing on divorce order.

As the benefits paid from the pension credit derive from a capital sum established at the time of the pension sharing on divorce order the employer should not need to make any further contributions in respect of the pension credit. There would be no objection to the employer making further contributions in respect of a pension credit benefit if there is a requirement to do so under the pension sharing on divorce provisions of the Welfare Reform and Pensions Act 1999 and associated regulations. For example, if a defined benefit scheme was underfunded at the time of the pension sharing on divorce order, the member’s cash equivalent transfer value might be less than it should actually be which would lead to the pension credit being less than it should be. An employer contribution might be needed after the pension credit has been established in the scheme to make up for the shortfall in the value of the scheme assets at the time of the pension sharing on divorce order.