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Pensions on Divorce | Extract from Dictionary of Financial Remedies 2020

  • The following chapter is taken from Dictionary of Financial Remedies 2020

    Pensions Advisory Group 

    Any practitioner or judge considering a pensions case should give consideration to the recommendations of the report published in July 2019 by the Pensions Advisory Group (PAG) [1] 

    The court's duty to consider pension rights 

    In exercising its powers in financial orders proceedings, the court is required to have regard to the pension rights held by each party (even if the benefits are not likely to be received in the foreseeable future) and the loss which will be suffered by the other party when decree absolute is ordered [2].  

    So that the court can be properly informed about what pension rights exist the rules make detailed provision for the obtaining and disclosure of certain prescribed information about rights held under any pension scheme [3]. Most importantly, an up to date Cash Equivalent (CE) figure will need to be obtained and included in Form E. The rules [4] require the valuation to be no more than one year prior to the First Appointment, but it is often desirable to obtain a more up to date figure than this. If more detailed is required then the court can direct the filing of a Form P (pension Inquiry Form) [5] or, as is more common in practice, the obtaining of a bespoke report from a pensions on divorce expert (known as a 'PODE'). The PAG have suggested a methodology for ensuring the competence of a given PODE [6]. If a solution based on a pension sharing order producing an equal level of income for the parties on retirement is thought to be a likely option than an expert's report will often be very important [7] and the PAG has suggested that 'it will often be fair...to implement a pension share that provides equal incomes from the pension asset' [8]. 

    Pension Sharing Orders 

    The most common type of pension-related order is the pension sharing order [9], where the court directs that a percentage of the CE value in one party's pension is debited from that pension and credited to a pension in the name of the other party. It must be a simple percentage, not a fixed capital amount or a formula such as 'the percentage which will produce £x per year in income' [10]. It must be a UK based pension [11]. Where a court decides there is to be a pension sharing order, the body of the order should state that there is to be provision in accordance with the pension sharing annex to the order and such annex (one annex per scheme affected) should be completed in the prescribed Form P1 [12]. Amongst details to be completed will be the apportionment of pension sharing charges, but failure to give this information will lead to the default position which is that the person with the pension rights will pay all the charges [13]. Transfers of credits under a pension sharing order can be internal (where the receiving party accrues independent rights in the same scheme) or external (where the rights are transferred to a different scheme), Typically, most pension sharing orders in public sector schemes are internal and most pension sharing orders in private sector schemes are external, but there are no exceptions to this and the impact of both options should be considered where available.  

    Pensions: Capital or income? 

    An orthodox view, encouraged by Martyin-Dye v Martin-Dye [2006] 2 FLR 901, has been that pensions (being a sui generis species of future income stream) should be dealt with separately and discretely from other capital assets and with one eye firmly on income production. It remains the case, however, that 'offsetting is the dominant practice' [14]. 

    In bigger money cases, particularly after the implementation of Taxation of Pensions Act 2014, as a result of which those aged 55 or above have the option of cashing in (subject to paying the relevant tax thereon) some categories of pension scheme, the trend may now be more favourable to the idea of treating pensions as disposable cash assets, thus disregarding their income producing qualities. In SJ v RA [2014] EWHC 4054 (Fam) Nicholas Francis QC, sitting as a Deputy High Court Judge, said: 

    'The recent well publicised changes to pension regulations will mean that pension investments are virtually to be treated as bank accounts to people over 55, as these parties are...In cases where distribution is being made on a basis which is not guided by need it is, in my judgment, incorrect to distribute a pension fund on the basis of equality of income and there is no need for actuarial reports in the overwhelming majority of such cases. I should expect courts to be most reluctant in the future, in bigger money cases, to provide permission for actuarial reports on the issue of how to effect quality of income.' 

    Similar sentiments can be found in JL v SL [2015] EWHC 555 (Fam) and M v M [2015] EWFC B63.  

    A different approach in small to medium money cases is suggested by the FJC's policy document 'Guidance on Financial Needs on Divorce' (published in April 2018): 

    'In small to medium money cases, however, where needs are very much in issue, a more careful examination of the income producing qualities of a pension may well be required in the context of assessing how a particular order can meet need. The need to avoid the possibly punitive tax consequences of cashing in a pension may be important in these cases and the mathematical consequences of making a pension sharing order (for example because of an external transfer from a defined benefit scheme to to a defined contribution scheme or the loss of a guaranteed annuity rate( can be unexpected and often justify expert actuarial assistance: see B v B [2012] 2 FLR 22. In cases where state pension income is an important component of meeting need, the complicated changes introduced in April 2016 provide additional justification for expert pension evidence'.  

    The PAG report has endorsed this view [15]. 

    Offsetting Pensions 

    In many instances a court may wish to deal with pensions assets by way of offsetting, in its simplest form by allowing one party to retain a pension while the other retains the family home. Courts sometimes have to grapple with the issue of how fairly to compare the value of a pension and non-pension assets [16]. Attempts to achieve a universally applicable formula for doing this have not been successful. In the words of the FJC's policy document 'Guidance on Financial Needs on Divorce': 

    'In cases where (for whatever reason) a court wishes to set off the value of a pension against the methodology to be utilised is uncertain. Where needs are the dominating factor, ensuring that the outcome of any offsetting capital provision is understood, in terms of what parties the will each receive in income terms, will be critical and the court may often be assisted by expert pension evidence...The authors of 'Apples or pears? Pension offsetting on divorce' were unable to suggest a reliable working formula to cover all cases and in JS v RS [20150 EWHC 2921 (Fam) the process was described as 'necessarily arbitrary'. In WS v WS [2015] EWHC 3941 (Fam), where the issue had to be addressed on its particular facts, the court utilised Duxbury tables in its calculations, but this may not be the right answer in all cases'. 

    The PAG report makes a number of detailed suggestions as to how an offset might be carried out fairly and expresses caution about placing too much reliance on CE figures [17].  

    Pension scheme in financial difficulty 

    The operation of pension sharing can become more complicated when an occupational pension scheme is in financial difficulty. Pension trustees may declare their scheme is to be underfunded, in which case they will declare commensurately 'reduced CEs' and any external pension sharing order will be of a percentage of the reduced CE. In this situation the transferee is entitled to insist on an internal transfer [18]. If the scheme becomes insolvent and is admitted to the Pension Protection Fund (PPF) that what were rights under the pension scheme become rights to 'pension compensation' which will be administered by the PPF [19] and these will be similar to the old rights, but subject to certain detailed statutory caps. Where these rights are held by one party in a divorce there exist mechanisms for valuation, disclosure and redistribution by way of pension compensation sharing orders which operate in a similar way to those discussed above in relation to pension sharing and any order will incorporate a pension compensation sharing annex (Form PPF1) [20].  

    Pension Attachment Orders 

    In the alternative the court can make a pension attachment order [21], where the court makes a direction to the pension trustees to the effect that a percentage of the benefits (including lump sum, but not income, death benefits [22]) to be received by one party under the pension scheme must, at the time of their receipt, be re-directed to the other party. Where the court decides there is to be a pension attachment order, the body of the order should state that there is to be provision in accordance with the pension attachment annex to the order and such annex (one annex per scheme affected) should be completed in the prescribed Form P2 [23]. The annex may include a direction requiring the party with the pension to exercise any rights to commute a particular portion of the pension when the benefits are taken [24] but cannot direct the benefits to be taken at any particular time. Pension attachment orders are uncommon in practice because the receipt of benefits under them is far less certain that the receipt of benefits under pension sharing orders. Pension attachment order are subject to future variation applications [25] and the receipt of benefits is dependent on matters beyond the control of the receiving party (such as the choice of retirement date or death of the party with the pension) and, as far as income-related benefits are concerned, remarriage by the receiving party or the death of either party will terminate the order. Where the pension concerned has been admitted to the PPF then pension compensation attachment orders can be made against the PPF [26] which are similar in operation to the pension attachment orders and any order will incorporate a pension compensation attachment annex {Form PPF2).  

    Pension sharing orders as a tool of enforcement 

    Some recent developments have tentatively identified the making of pension sharing orders as a potential tool for enforcement. In Amin V Amin [2017] EWCA Civ 1114 the Court of Appeal approved the approach of Moylan J (as he then was) in leaving open a pension sharing application to be activated if other orders were not complied with. A similar approach might find its way on to the statute book if the government's acceptance (in August 2018) of the Law Commission's December 2016 report on the reform of enforcement mechanisms.  

    [1] Available online at www.nuffieldfoundation.org/pen... 

    [2] MCA 1973, s 25B(1) 

    [3] FPR 2010, r 9.30 & Form E, para 2.13 

    [4] FPR 2010, r 9.3(1) 

    [5] FPR 2010, r 9.15(7)© 

    [6] PAG report, page 86 et seq 

    [7] B v B [2012] 2 FLR 22 

    [8] PAG report, page 31 

    [9] MCA 1973, s 24B 

    [10] H v H [2010] 2 FLR 173 

    [11] Goyal v Goyal [2016] EWFC 50 

    [12] FPR 2010, PD 5A 

    [13] WRPA 1999, s 41(3)(b) 

    [14] PAG report, page 22 

    [15] PAG report, page 34 

    [16] See the discussion in chapter 11 of 'Pensions on Divorce' (3rd edition, Family Law, Lexis Nexis), by Hay, Hess, Lockett & Taylor 

    [17] PAG report, page 20 

    [18] Welfare reform and Pensions Act 1999, schedule 5, para 8 and The Pensions Sharing (Implementation and Discharge of Liability) Regulations 2000 (SI 2000/1053), reg 16 

    [19] PA 2004 & PA 2008 

    [20] MCA 1973, s 24E & FPR 2010, rr 9.37 to 9.45 

    [21] MCA 1973, s 25B 

    [22] MCA 1973, s 25C 

    [23] FPR 2010, PD 5A 

    [24] MCA 1973, s 25B(7) 

    [25] MCA 1973, s 31, but variation will be appropriate in limited circumstances: see Westbury v Sampson [200] 1 FLR 166 

    [26] MCA 1973, s 25F 

Article, published: 28/08/2020


Published: 28/08/2020

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