Treatment of pensions on divorce

In July 2019, the Pensions Advisory Group (PAG) published its essential guide to the treatment of pensions on divorce. The report is available on the Nuffield Foundation website. The impact of the report can be seen in the weight attached to it in three recent decisions concerning the treatment of pensions on divorce. Those address issues which are commonly disputed:

1. Whether pensions should be divided as to capital value or income.

2. Ringfencing pension acquired pre-marriage or during a long period of separation.

3. The off-setting of pensions.

In W v H (divorce financial remedies) [2020] EWFC B10, HHJ Hess (who is the co-chair of PAG) considered a case in which the husband’s defined benefit pension was worth £2.1m, yet the equity in the family home was worth only approximately £240,000. Both parties had significant debts. Hess treated the matter as a needs case.

The second matter was heard by HHJ Robinson and reported as KM v CV [2020] EWFC B22. The matter concerned a police pension and a long period of separation: the parties had separated in 2011. The pension holder, in this case the wife, argued that the pension should be valued as at the date of separation, rather than the date of trial.

Finally, RH v SV [2020] EWFC B23 was also a judgment of HHJ Robinson. Similarly, with the other two cases, the pension was the largest asset: the husband’s pension had a cash equivalent value (CEV) of nearly £1.5m.

Dividing pensions as to capital or income

In W v H, HHJ Hess observed:

1. There is no ‘one-size-fits-all’ answer to this question. For example, where the CEVs are relatively small or where the parties are relatively young, dividing pensions by reference to capital values would be appropriate.

2. By contrast, there are scenarios where a simple split based on capital may well not achieve a fair solution, for example where the pensions are medium or large, but needs issues arise. This is particularly where one party has a pension within a defined benefits scheme, and where the parties are closer to retirement.

3. HHJ Hess makes 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]’.

Ringfencing pensions

This issue was addressed in all three judgments, with particular reference to the views of the PAG. In W v H, Hess acknowledged that although it was an established practice in some courts to make a straight line apportionment of pre-acquired pension, the approach carried with it ‘significant risks of unfairness’. Although it is sometimes said that the judgment of H v H [1993] 2 FLR 335 supports such an approach, Hess noted that when that judgment was delivered pension sharing did not exist, White v White had not been decided and the use of CEVs was not widespread.

In all three decisions, the treatment of pre-acquired or post-acquired pensions was largely considered in the context of needs. In both of his decisions HHJ Robinson quoted from the PAG’s report as follows:

1. 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.

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

3. 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.

In KM v CV, HHJ Robinson held that the relevant date for assessing the value of the pension was clearly the date of trial and not 2011. In W v N, HHJ Hess also warned against the straight-line methodology of calculation. In particular, defined benefit pensions will accrue much more in value in later years when the member spouse has reached a high salary level. Accordingly, where an apportionment is to be made, the straight line methodology of apportionment may well not be fair.

Offsetting

HHJ Hess notes the orthodox view encouraged by the Court of Appeal in Martin-Dye v Martin-Dye [2006] 2 FLR 901, that pensions should be dealt with separately and discretely from other capital assets. He also noted that the PAG report offers a similar view. He however notes that many litigants choose to blur the difference between the categories and engage in an offsetting exercise. He did note that such an approach runs the risk of unfairness.

Offsetting was not an issue addressed by HHJ Robinson, although in RH v SV he noted that there was nothing inherently wrong with aggregating the value of capital and pension assets for the purpose of comparison, provided that it is recognised that this is not a comparison of equal values. He stated that provided it is recognised that the orchard provides different types of fruit, it is wrong to look at the division of the total crop. The PAG report specifically addresses the practice of offsetting and addresses the risks which arise. It notes that where there have been claims of negligence made against family lawyers in a field of pensions, it has overwhelmingly been in cases where offsetting has been the chosen remedy and not pension sharing.

A final point to note is that the PAG report states that where the combined pensions are worth less than £100,000, a PODE report will rarely be justified.

Andrew Newbury is a partner at Hall Brown Family Law