How pensions and divorce are taken into account when assessing the financial positions of separating couples.

Cases have previously lacked consistency when it comes to pensions and divorce, especially in the approach taken by the courts.

Recent cases decided by the Family Court in 2020 have demonstrated that the Guidance on the Treatment of Pensions on Divorce Report, produced by the Pensions Advisory Group (‘PAG’) in 2019, will have an influential impact on the decisions reached. Three recent decisions in the family court concerned the treatment of pensions on divorce and each of them make direct reference to the PAG Report.  

In summary, the cases looked at three particular issues:

• Whether pensions should be divided as to capital value or income
• Ring-fencing pension acquired pre-marriage or during a long period of separation
• The off-setting of pensions
• Whether pensions should be divided as capital value or income
• The case of W v H (divorce financial remedies) [2020] EWFC B10 HHJ Hess (who was also the co-chair of the PAG) helpfully sets out very clearly the approach that courts and practitioners should take in relation to the distribution of pension assets.

In the financial remedy proceedings before the court, the husband argued that there should be equality of capital, whereas the wife argued that there should be equality of income on retirement.

The judge agreed with the wife and found that the pensions should be shared to produce equal income in retirement.  The judge acknowledged that when dealing with pensions on divorce, there is no ‘one size fits all’ answer and reached the following conclusions:

• In a ‘needs case’ where the parties are nearing retirement and Defined Benefit Pension Schemes are involved, equal sharing of pension income is more likely to be appropriate than equal sharing of pension capital.
• In contrast, where Cash Equivalent Values are relatively small and the parties are relatively young, dividing pensions by reference to capital value would be more appropriate.
• It may not be appropriate to exclude pension accrued prior to the marriage in needs cases

HHJ Hess made specific reference to the PAG report which states:

‘in a needs-based case, in particular where there is significant defined benefit pension involved, for the parties or court seeking to identify a fair outcome, the appropriate analysis will often be to divide the pensions separately from the other assets, based on an equalisation of incomes approach, such approach often requiring expert evidence from a PODE [pensions on divorce expert]’.

HHJ Hess also warned against the straight-line methodology of calculation. For example, defined benefit pensions will accrue much more in value in later years when the pension holder has reached a high salary level and therefore a straight-line methodology of apportionment may well not be fair.

One of the key messages that comes out of this judgment is that pensions are intended to provide income on retirement and should be treated with that principle in mind, particularly where the parties are approaching retirement, so as not to reduce the standard of living of the less well-off party.

The stance taken by the Court on ring-fencing pension contributions outside the period of the marriage

In the case of W v H the judge confirmed that ringfencing pensions accrued outside the marriage was inconsistent with the way in which non-matrimonial property is treated on divorce.

In addition, in needs cases, the focus will be on the needs of the parties rather than on arguments on who contributed what. The judge quoted the PAG Report on this point which states:

“it is important to appreciate in needs-based cases, just as is the case with non-pension assets, the timing and the source of the pension saving is not necessarily relevant… it is clear from authority that in a needs case, the court can have resort to any assets, whenever acquired, in order to ensure the parties’ needs are appropriately met”.

The case of KM v CV [2020] EWFC B22

The Family Court also considered these points in the case of KM v CV [2020] EWFC B22 (decided by HHJ Robinson). In this case the court considered the wife’s police pension under the PAG Report Guidance. The couple had entered into a long period of separation, since 2011, and the wife argued that the pension should be valued as at the date of separation, rather than the date of the trial which was some 9 years later.

This was a needs case, in which both parties were approaching retirement and as such the guidance from the PAG Report was that the fairest outcome was to base the Pension Sharing Order on equalisation of incomes on retirement, with the assistance of a Pensions on Divorce Expert (PODE), rather than simply dividing the pensions by equality of capital value.

HHJ Robinson held that the relevant date for assessing the value of the pension was clearly the date of trial and not 2011.

The approach taken in this case was that if the pensions are the only mechanism for meeting the needs of both parties on retirement then there will not be a ring fencing of any portion of the pension which falls outside the term of the marriage if to do so would fall short of meeting those retirement needs of both parties.

Is the involvement of a PODE likely to be needed in all pensions cases?
It is very likely now that when dealing with pensions on divorce, the parties will need to jointly instruct a PODE to provide a pension report and to calculate the Pension Sharing Order to equalise incomes.

When instructing a PODE, should they only base calculations on the entirety of the pension provision as a result of these decisions?

There is nothing to stop the parties from asking the PODE to make two calculations – one which ring fences pension contributions outside the marriage and the other which takes into account the whole of the pension. The clear message is that unless the pension fund can still adequately meet the needs of the parties with the ring fencing in place, the ring fencing will not be permitted.

The third case heard this year was RH v SV [2020] EWFC B23 which was again decided by HHJ Robinson. In both of the cases before HHJ Robinson, he quoted from the PAG report:

It is clear that in a needs case, the court can have resort to any assets, whenever acquired, in order to ensure that the parties’ needs are appropriately met. By contrast, in a sharing case, the treatment of a pension as non-matrimonial property is a live issue.

Broadly speaking, in needs cases, where the assets do not exceed the parties’ needs, apportionment is rarely appropriate.

It will often be fair to aim to provide the parties with similar incomes in retirement, but equality may not be the fair result depending on needs, contributions, health, ages, the length of the marriage or, in non-needs cases, the non-matrimonial nature of the asset.

Offsetting

The final issue that the court looked at was Offsetting, and in the case of W v H,  HHJ Hess referred to the long standing position regarding offsetting which is set out in the case of Martin-Dye v Martin-Dye [2006] 2 FLR 901.

In that case the Court of Appeal held that pensions should be dealt with separately and discreetly from other capital assets and this view has been retained in the PAG Report. HHJ Hess also went on to say that any blurring of this distinction is noted by as running the risk of unfairness.

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Legal disclaimer: The matters contained herein are intended for general information purposes only. This post does not constitute legal advice, nor is it a complete or authoritative statement of the law in England and Wales and should not be treated as such. While every effort is made to ensure that the information is correct, no warranty, express or implied, is given as to its accuracy, and no liability is accepted for any error or omission. Before acting on any information expert legal advice should always be sought.