Ringfencing – what you need to know, and the BlueSKY approach

man in suit separating two piles of coins

In this month’s article you can find lots of useful information about the thorny world of “ringfencing”.

Despite the Pensions Advisory Group (PAG) report suggesting that ringfencing would not usually be applied to “needs” cases, we have seen a rise in ringfencing requests.

Read on for some useful guidance.

“Ringfencing” sees divorcing parties exclude some assets from the division

In short, ringfencing is where divorcing parties look to exclude pensions that were accrued either before the relationship and/or after the relationship ended when calculating the fair division of their income-based assets.

We have noticed an increase in interest in ringfencing over the last couple of years. This increase may be due to increased awareness from clients who then wish to request it regardless of the appropriateness in their case.

Alternatively, the increased interest may be due to a shift in demographics where the current cohort of divorcees have married later in life than their parents and accrued more in the way of individual pensions.

Whatever the reason, it is worthwhile to have a firm grasp of the benefits and issues of paying for a ringfencing calculation.

Some examples of where ringfencing may be appropriate

There are several reasons why people may wish to look at ringfencing. Some arguments have greater merits than others. For example:

The marriage was only for a short period.
The couple separated a significant time ago and do not feel that it is right to share post-separation pension accrual.
The parties married late in life and wish to exclude pensions accrued from their single days.

The PAG opinion on ringfencing

The PAG report A Guide to the Treatment of Pensions on Divorce covers ringfencing in part 4.3.

It says:

“It is clear from authority that in a ‘needs’ divorce case the court can have resort to any assets, whenever acquired, to ensure that the parties’ needs are appropriately met.”

In short, the parties could spend a significant amount on a pension sharing report, excluding periods of their pension accrual, only for a judge to disregard the ringfencing calculations and order a share based on the full value of all the pensions.

In section 12.1 the report goes on to state:

“Whether pensions should be apportioned for a period of the relationship is a matter of judicial discretion in adjudicated cases, and a matter for the parties in uncontested cases.

“However, broadly speaking, in needs cases (where the assets do not exceed the parties’ needs) apportionment is rarely appropriate; in sharing cases (where the assets do exceed the parties’ needs) apportionment may be appropriate.”

How to ringfence a final salary (defined benefit) pension

Clearly, to try and reconstruct an individual’s exact accrual in a scheme would be almost impossible and so the consensus among most Pension on Divorce Experts (PODEs) is to use the “straight-line” method.

Using this method, it is assumed that each year’s contribution adds equally to the total benefit. For example, let us say that you had worked for BP for 10 years and built up a pension of £16,000 a year, due at the scheme’s normal retirement date.

If you had worked for four years before the marriage, and six years after the marriage, then 60% of the pension, or £9,600 a year, would be considered in the ringfencing calculation.

“Career average” pensions are a little more complex, but still follow a similar method.

How to ringfence a money purchase (defined contribution) pension

A money purchase pension is initially easier to understand, as it is a “pot” of funds that is invested and grown until retirement.

However, for ringfencing, it is frequently a much more difficult asset to apportion. In the earlier years of their career a client may have made smaller pension contributions while they were earning less and may have had greater demands on their earnings (mortgage, childcare, and so on).

The earlier, smaller contributions may have had 20+ years of investment growth whereas the later, larger contributions have had less investment growth.

In the first instance a PODE would look to use a straight-line assumption. For example, if you started paying into a particular pension 20 years ago and were married 16 years ago, we would say that 16/20 (or 80%) of the pension value was accrued within the marriage.

It is highly unlikely that the firm that you invested in 20+ years ago is the same firm as you are invested in today. It is equally unlikely that you are still working for the same employer. People tend to move their money purchase pensions around during their working life and this can create large difficulties when trying to attribute a proportion of a pension to within the period of marriage.

The big issue here arises with pensions that have been moved around – potentially creating a “daisy chain” of pension pots where pensions have been transferred into other pensions.

In many instances, the current pension started after the ringfence period, but most of its value was accrued during the ringfence period.

To track the pension history can take a lot of time, which equates to higher charges. In addition, when a pension provider has ceased trading, it may be impossible to obtain data.

The potential issues/shortfalls of ringfencing

One potential source of initial friction surrounds what dates to use for the ringfencing period.

One party may wish to consider from the date of cohabitation, the other from the date of marriage. There could be disagreements on when the separation occurred – is it when one of them left the family home, or at the point of decree nisi?

The temptation may be to use all the ringfencing periods that are being disputed and try to agree on the pension share afterwards. This approach rapidly increases the number of calculations in the report, and the cost and time required.

The perils of having a report with many potential answers on how to achieve equality of their pensions is that the parties tend to cherry-pick the solution that looks most attractive to them, and dig their heels in.

This can make it much harder to obtain an agreement as there is a perceived loss for what could have been (that is, against the individuals’ preferred options). It also increases the odds that a case will end up at court for adjudication.

If the parties can agree in advance on a scenario that feels fair to them in principle, then, when they receive a focused report providing the answer, it is much easier to accept the findings and to move on to resolving other issues in the divorce.

Where a client unilaterally insists on a ringfencing calculation in a “needs” case, the risk of the calculation being disregarded should the case go to court should be highlighted to them.

BlueSKY’s approach to ringfencing

Where appropriate, we will use a straight-line assumption for most pensions.

If pensions were built up from transfers that occurred more than six years ago, we will request that the relevant party provides us with information on the transferred scheme. In the absence of such evidence, we will assume that the transferred pension started at the beginning of the ringfencing period.

For ringfencing pension accrual post-separation, we will use our discretion whether to use a straight-line assumption or to exclude contributions based on the facts of the case.

In adopting a focused approach, we have been able to adjust our pricing and have reduced the cost of ringfencing in our quotes.

Ringfencing can add significant cost without necessarily improving the outcome

Ringfencing can add a lot of additional costs and complexity to a Pension Sharing Report without necessarily improving the outcome for a divorcing couple.

The best practise when obtaining a Pension Sharing Report is to have both parties agree in advance on what “fair” looks like in principle. This creates a more focused and lower cost report that can help reach a resolution with fewer disputes or requests for additional calculations.