Pensions and Divorce
Pensions in relation to divorce have become increasingly important as the law has recognised the significance of pension assets within a marriage. After the family home, pension assets are usually the next largest asset to form part of the matrimonial pot.
It is commonly believed that where a couple have married they automatically have a right to share the other party’s pension. This is not the case. When the Court considers how a married couples assets should be divided it will have regard to the section 25 checklist, which is a checklist of factors which assists the Court in deciding how the assets are to be divided fairly and reasonably. Although all of the factors within the checklist carry equal weight it is very often the ‘needs and resources’ of each party which becomes the most relevant factor to consider.
In order to deal with pension assets (for example for one spouse to have a share of the other’s pension) this must be dealt with by way of a Court order. It is not possible for a married couple or indeed civil partners to deal with this by way of a private agreement.
The law has therefore developed to allow Courts to deal with pensions in different ways so as to best meet the needs of the parties concerned.
Earmarking or Pension Attachment Orders
The Pensions Act 1995 gave Courts the power to make ‘ear-marking’ orders also known as attachment orders. This type of order “ear-marks” a percentage of the pension benefits due on retirement. The order tells the trustees of the Pension Scheme that the Wife (typically) should receive a percentage of the payments received by the Husband. The order can also apply to a percentage of any lump sum that the Husband is due under the pension scheme.
In reality these type of pension orders are fairly rare and that it because there are some distinct disadvantages. Firstly the order only takes effect once the pension is in payment. Accordingly the receiving party may have to wait many years before the payer reaches retirement and potentially as the Husband (for arguments sake) remains in control of the pension he could choose to increase the age of his retirement. Secondly if the Husband was to die before reaching the age of retirement the Wife would lose the benefit of the order. Thirdly the order is capable of being varied if there was a change to the Husband or indeed the Wife’s financial circumstances which means that the parties do not benefit from a clean break.
Understandably ‘ear-marking’ orders did not prove very popular or satisfactory in most cases. That being said there will inevitably be situations where an order of this type may prove to be appropriate and as such they should not be dismissed out of hand.
Pension Sharing Orders
In light of the disadvantages outlined above the law developed further with the Welfare Reform and Pensions Act 1999. This was the first time that pensions could be split between a Husband and Wife. Very simply this means that a percentage of the pension of one spouse is paid into a pension fund for the other. It is an independent pension fund and is in no way dependent upon the paying spouse’s retirement and indeed their death has no impact upon the new pension fund created. The percentage which is removed from say the Husband’s pension is known as a pension debit. The percentage which is paid into the new pension fund in known as a pension credit. The approach is to split pensions so that there is an equalisation of income derived from the pension assets at retirement. There are 2 options for dealing with the pension share;
- Internal Transfer – this is where the spouse receiving the pension credit becomes a shadow member of the original scheme. This is available for some schemes only but is the only option available for Public Sector pension schemes
- External Transfer – this is where the spouse receiving the pension share puts the pension credit into an entirely new scheme. In most case they will simply add the credit to an existing pension scheme which they held prior to or during the marriage.
Offsetting
Making any decision or requesting any financial orders from the Court must be done having had consideration to the s.25 checklist and of course therefore the needs of the parties. In some cases pensions are not one of the most significant assets within the financial pot and seeking orders, whether attachment orders or sharing orders, are not appropriate. This maybe because the pension assets are so modest that the cost of implementing a pension order would be disproportionate. Sometimes the need of one party is such that pension assets are not a priority. For example a young mother divorcing her husband may have greater need for money in her pocket rather than receiving a share of his pension. This maybe because she needs to rehouse or requires money for furnishing a new property, purchasing a car for herself and the children or simply to retain the property in which they are already living. The additional capital that she may receive to meet those needs is known as offsetting and is her compensation for losing out on the benefit of her Husband’s pension.
Offsetting is not appropriate where the pension assets are significant and make up the bulk of or indeed represent the largest of the matrimonial assets. Pensions are a different type of asset to money sitting in the bank. The value of a pension fund which is expressed in £’s is simply a figure which upon retirement allows the pension scheme to purchase an annuity – this is an asset which provides an income stream upon retirement. The pension value is merely an indication as to the size of the annuity that maybe purchased when you reach retirement. The pension fund therefore is not a sum of money that can be viewed like capital in a bank account. For that reason therefore the pension cannot be offset pound for pound.
This is where pensions experts become very important. In order to calculate what a reasonable offset might be they will undertake various actuarial calculations to advise about the figure which a spouse could agree to accept in compensation for the rights and benefits that will be lost by foregoing a pension share or attachment. This type of advice becomes essential when dealing with large pension funds.
Valuing a Pension and Pension Experts
The CETV is one of the valuations available for pensions. CETV stands for Cash Equivalent Transfer Value. Very basically if the pension fund were transferred to another pension provider at a given date it is the figure that the new provider would receive. There are different types of valuation but the CETV is the valuation which seems to be given the most weight in family proceedings. If you are asked to complete a Form E within family financial proceedings this is one of the pieces of information that you will need to provide. Most pension providers produce this information on request. In sending you that information pension providers very often include additional details about the cost and procedure for any pension share if the provider is made aware that the CETV has been requested for divorce proceedings.
The CETV can in fact be a very misleading valuation and the figure provided can be dramatically affected by the method of valuation employed by the scheme provider. It is also important to take note of the date when a CETV was produced. The rules in relation to pensions and their valuations are subject to regular changes. It is for this reason, amongst others, that where we are dealing with substantial pension assets or pension funds where we are unsure of the accuracy of the CETV that a pension expert is brought on board.
Pension experts can produce reports which not only consider the reliability of the CETV but provide various options and recommendations about the size of any pension share or offsetting. Pensions can be extremely complex and each pension scheme has rules peculiar to that particular product. Pension experts can produce a report, and failure to seek their advice could prove to be a costly mistake.