Pensions on divorce
Madeleine Young, a Senior Associate in the Family & Matrimonial team summarises the approach taken by the family court when dealing with dividing pensions on divorce
In July 2019 the Pension Advisory Group published a report entitled ‘A Guide to the Treatment of Pensions on Divorce’ which was endorsed in the Foreword by the President of the Family Division. The report had the professional sponsorship of the Family Justice Council, and the recommendations therein have been adopted by the judiciary and family law practitioners alike who nickname the report, the “PAG report”.
In 2021 a ‘Survival Guide’ to Pensions on Divorce was published as a “litigant in person”-friendly version of the PAG report.
In terms of family law in the UK, the ability to apportion pensions on divorce is relatively recent. Legislative changes in 1995/96 meant that pension “attachment” orders became available, whereas prior to that, pensions would just be taken into account in the round of a financial settlement, effectively creating an “offsetting” situation. Pension attachment orders are still available to divorcing couples, and in some circumstances are appropriate. However, for the vast majority of cases, pension sharing orders are the more fitting solution to dealing with pensions on divorce. Legislation allowing the sharing, or splitting, of pension funds became operative in 2000.
At the point that the PAG report was published in 2019, it was estimated that in only 36% of divorces where the parties had filed a financial remedy order had there been any kind of pension order. In reality therefore, the percentage will be considerably lower, as there will be many more cases where parties have divorced without any financial remedy order at all. At that stage it was assumed that indicated that “offsetting” was a preferred option for many couples.
The concern, however, was that although offsetting is a cheap, quick and apparently simple way of dealing with pensions on divorce, many couples were reaching agreements on the basis of offsetting using imperfect to downright flawed methodology.
Of those cases where a pension sharing order had been proposed, it is very likely that the parties will have also reached an agreement between themselves, without any specialist financial advice, based on assumptions in relation to the division proposed which may well have been inaccurate.
When considering how to deal with pensions on divorce, the starting point for your lawyer is to establish the Cash Equivalent Transfer Value, known as the “CETV”, or “CEV” for each relevant pension fund (and they are ALL relevant, even if ultimately some funds are to be excluded!).
However, simply comparing the CEV of one pension fund with that of another can be extremely misleading. As can attributing a capital value to the CEV (i.e. to determine an appropriate offset figure). Lawyers and Judges will often refer to comparing the value of a pension fund to liquid capital assets, as comparing “apples and pears”. The same can be said about comparing the CEVs of two different pension funds, as not all pension funds perform in the same way. Furthermore, some pension fund valuations are artificially low in relation to the benefits that they produce. This does not mean the pension fund trustee is being deliberately misleading, it is simply that different types of funds perform differently.
Therefore, even though two pension funds may look as though they are worth the same, in terms of the benefits they will produce on retirement, they can be poles apart.
From a family lawyer’s perspective, one of the most significant impacts of the PAG report is the acceptance by the court that in many cases it is necessary to commission a jointly instructed pension report from a pensions expert in order to be able to properly consider how pensions should be treated on divorce, and what impact that may have in terms of the capital settlement. As a rule of thumb, most cases with public sector and defined benefit schemes, or with combined CEV’s of over £100,000 should have a pensions expert or actuary prepare a report. Where the case is complex, including where the parties’ ages are quite different, or there are unusual elements to a pension, your lawyer will most likely recommend the early appointment of a joint expert. A pensions expert can also be asked to give recommendations based on different scenarios, such as excluding the proportion of pension funds accrued prior to the commencement of the marriage.
Therefore, you can expect your family lawyer to discuss with you obtaining a “pensions report” if pensions are a significant asset in your case. It will usually be desirable for both parties to instruct a pensions expert on a joint basis. There is nothing to stop parties taking their own independent financial advice, but if a report is to be relied upon in subsequent court proceedings, a jointly instructed report is more likely to be acceptable.
If you are already in court proceedings, it is very likely that the Judge will have no qualms directing that a pension sharing report be instructed if the criteria above is met.
Whilst the cost of a joint pension report is not insignificant, the risk of entering into a badly considered settlement in the absence of that specialist advice outweighs the cost. Furthermore, your solicitor cannot give you definitive advice about the appropriateness of the settlement without that independent advice.
Perhaps unsurprisingly since its publication, the PAG report has received a huge range of feedback, from very positive, to downright hostile. It has been concluded that a review of the original guide should be carried out taking into account feedback and any other relevant changes. The updated PAG report, to be known as “PAG2” is due to be completed by the end of October 2023 and will no doubt bring with it further changes and recommendations.
If you are considering divorce or separation, it is important to seek advice from a specialist family solicitor. If you would like any further information or advice relating to divorce or family matters, our Family & Matrimonial team would be delighted to assist.