Family Law Bulletin 2: Pensions on Divorce

Since the introduction of the Pensions Advisory Group (PAG) report, practitioners have used the report to assist them in how best to approach pensions upon divorce. After the matrimonial home, pensions are most often the second largest asset and it is imperative that it is dealt with appropriately.

Following the report, there has been an emphasis on parties to obtain pension reports prepared by suitable experts especially if there are a mixture of pension schemes i.e. defined contributions and defined benefits and if the pensions are relatively high (i.e. more than £100,000). Where one party has not necessarily worked or had the opportunity to contribute to their own pension, their capital needs upon retirement will need to be met and depending on the type of scheme, it is not a straightforward division.

Briefly, a defined contribution scheme is typically built up through the person’s own contributions such as workplace pensions or SIPPs.  Defined benefit schemes or final salary pensions are typically found with civil service pensions and our increasingly rare because the income received is based on an individual’s salary and the number of years they have worked with their employer. These schemes are becoming increasingly rare because of the costs involved as it is not dependent on the amount of money you have contributed to a pension.

As practitioners learn to get to grips with the report, 3 recent cases have further developed the Court’s approach to pensions on divorce:-

W v H [2020] EWFC B10

His Honour Judge Hess provided guidance on three issues the Courts faced when seeking to achieve equality upon retirement in proceedings. These issues are as follows; firstly, whether pensions should be apportioned according to its capital value or income.  As practitioners are aware, clients are requested to provide cash equivalent (CE Values) of their pensions.  The issue with CE values is that they do not provide a definitive calculation of income upon retirement.  However, in this case, the Judge adduced that CE values can be used to divide pensions where it would be fairer for the parties.  This would work if the pensions were relatively small, the parties are young and therefore it would be difficult to determine future income, where the pension is simple, and the sole pension is a defined benefit schemes that only offer internal transfers.  It would not be fair to divide CE values when the quantum in relation to the size of the assets still raise the issue of “needs” or where the parties are older and close to retirement.

Secondly, should Courts disregard pensions accrued prior to marriage or cohabitation?  It is arguable that these should be ringfenced in sharing cases however, in needs cases, it would be neither fair nor justified to ringfence the pensions.  If the pension is a major matrimonial asset, then the case would be needs based.

Thirdly, offsetting should be avoided due to the nature in which income is generated and pensions should be dealt with as a separate asset.  Interspersing pensions with other assets can potentially generate unfairness particularly as one party would bear the responsibility for a non-realisable asset while the other party has access to realisable assets.

KM v CV [2020] EWFC B22

This case was appealed before His Honour Judge Robinson, whereby he considered applying the PAG report to a police pension.  The Judge at first instance decided that a significant value of the pension was accrued post-separation and should therefore be ringfenced and retained by the Wife who was a police officer.  By illustration, when the parties separated in 2011, the CE Value of the Wife’s pension was £43,000 but had grown to £131,544 by December 2017.  The Wife wanted the Court to rely on the value at the point of separation.  In addition, she sought to rely on the fact that the Husband had caused the mortgage arrears on the former matrimonial home and thereby negating his share of the Wife’s pension.

On appeal, HHJ Robinson believed that ringfencing a “post-separation” defined benefit scheme was the wrong approach because it meant that Husband’s needs were not met.  Irrespective of the Husband’s behaviour, the correct pension valuations is the date of the trial and not the date of separation. 

RH v SV [2020] EWFC B23

This was another matter before HHJ Robinson.  The parties in this case were married for 13 years and the Husband and Wife were 58 and 53, respectively.  There was one child under 18 and therefore financially dependent.  The Wife had not worked for 15 years (albeit she still held her Practising Certificate as a Solicitor) and the Husband’s income was £6,235 per month.  The Judge at first instance ordered that the Wife retain the former matrimonial home with Husband having a 25% charge payable if Wife remarries, cohabits or when the party’s child reaches 21. 

Husband was ordered to pay £1,500 periodical payments (less CMS payments) until August 2020 and nominal maintenance until 1 July 2021.  The Judge also ordered a section 28(1A) bar preventing variation by the Wife.  Finally, he ordered a pension share of 25.8% for the Wife.  She appealed citing that the pension does not meet her needs and the bar should not come into force whilst the child is still at school.

HHJ Robinson refused Wife’s appeal affirming the trial judge used his discretion in respect of the section 28(1A) bar.  Furthermore, the Wife was educated and capable of maximising her earning capacity and being financially independent.  The pension share in this case was deemed to be fair.

These cases highlight the issues practitioners would need to be aware of when advising on how pensions would be treated upon divorce. It may appear unfair to a party who has built up a substantial pension pot to secure themselves in retirement but case law suggests that the running theme in many financial matters is that irrespective of the parties insistence that a pension should be ring fenced because it was accrued prior to marriage or post separation Is that “needs trump all.” 

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