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• Author: Ray Brownson

Pensions on Divorce: some guidance WvH (Divorce Financial Remedies) (2020) EWFC B10

In financial matters on divorce pensions are often important, sometimes critically so, but reported cases are very rare.  The publication of this recent case, decided on 24 February 2020, is helpful even though it was heard at Swindon Family Court and not in the High Court.

The trial Judge, His Honour Judge Hess, is the co-chair of the Pension Advisory Group (PAG), which is a multi-disciplinary group of professionals specialising in financial remedies and pensions on divorce, supported by the Family Justice Council and the President of the Family Division.  The group published a very detailed report on pensions and divorce in July 2019. In this case the Judge said that the PAG report “should be treated as being prima facie persuasive in the areas it has analysed”.

This was a “needs case”, which generally speaking means that the assets available are only sufficient to meet the parties’ needs.  The overwhelming majority of cases are needs cases. That remains so even where the pension valuations are in the low £millions. 

The wife was aged 50 and the husband 48.  They had three children who at the date of trial were aged 18, 16 and 10. The length of the marriage, including cohabitation, to separation was 17 years.

The capital assets were limited to the family home, which had a net value of £242,000.00.  Both parties had debts, including legal costs, the wife’s debts amounting to £64,000.00 and the husbands to £53,000.00.

The court had to decide how the family home was to be addressed, was it to be sold immediately or at a later date, and the level of maintenance both for the wife and the children because the husband had a good salary, around £144,000.00 per annum. 

The husband’s pensions had a stated value of £2.2m and the wife’s £153k.

For the rest of this note I will look at pensions rather than the other aspects of the case, insofar as pensions can be disengaged.  A critically important factor was that £2.1m of the husband’s pension was in a defined benefit (DB) pension plan.  A DB pension is one in which in which the employer provides a specified pension, usually monthly and often uprated annually, commonly combined with a lump sum. The pension is often a percentage of the member’s salary. The most common alternative is defined contribution (DC), where a fund is created with investments.

The court considered three key pension issues.

1. When dividing pensions to promote equality should the court look to achieve capital equality based on capital valuations of pensions or target giving equality of pension income?   There is no “one size fits all” answer to this particular question.  In many instances the capital values of the pensions will be sufficient and an appropriate means of calculation for the purpose of dividing pensions where those pension assets are small and where parties are relatively young and so projecting the income that a fund might generate in the future is simply too uncertain.  There will be many scenarios where a simple capital division will not represent a fair outcome, “for example where the pensions are medium to large, both in themselves and as a proportion of the assets overall, but needs issues still arise.  This is particularly the case where one or more of the pensions involved is a defined benefits scheme”.  The Judge went onto quote from the PAG report and express the opinion that equality of income will often be a fair result, “a division pays little or no attention to income yield may have the effect of reducing the standard of living of the less well off to the parties significantly”.  In this case the Judge was firmly of the view that the pension sharing orders should be made with a view to bringing about equal incomes at a specified time in the future. The Judge did make such orders.

2. The second question considered by the court was whether to exclude a proportion of a spouse’s pension where earned before the marriage/cohabitation.  In this case the husband argued that a part of his pension was pre-marital and so should be excluded leaving 58% to be included, which had a dramatic effect on the pension income available for division. The Judge did not agree saying, “in my view this approach carries with it significant risks of unfairness as the mathematics of the present case undoubtedly would illustrate”.  He went onto observe the main means of meeting post-retirement income for both parties came from the husband’s DB pension and “it is difficult to see that excluding any portion of the pension has justification” and he went onto refer to the House of Lords case of White -v- White (2000) UKHL54.

The court also referred to the Lifetime Allowance introduced to limit pension tax advantages; the allowance is currently £1,055,000. Effectively that means in overwhelming majority of cases the value of pension funds is likely place them in the category of needs cases.  The Judge’s final point was also a good one.  Excluding part of a pension is both difficult and unfair where it is a defined benefit pension scheme based on a final salary.  The pension will accrue significantly more value in later years when the pension member has reached a higher salary level

3.The third question was whether the court should treat a pension separately or look to offset the division of pensions against the division of other assets.  So, in many cases a wife, it is most often the wife, will look to offset her claim against the husband’s pensions against the husband’s claims for his share of the family home.  The orthodox view is a pension should be dealt with separately from other capital assets and the PAG report endorse this stating the parties should “if possible, deal with each asset class in isolation and avoid offsetting”.  HHJ Hess expressed his concern that, “it is undoubtedly the case, however, that many litigants choose to blur the difference between the categories and engage, to a greater or lesser extent, in an offsetting exercise.  It needs to be borne in mind, however, that mixing categories of assets runs the risk of unfairness in that the valuation issues become very difficult, and absent agreement, it may be unfair anyway to burden one party with non-realisable assets while the other party has access to realisable asset”  In this case the husband would receive his half share of the family home but it was deferred to enable the children to have a home as well as the wife.

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