Pensions have always been complex. Added to this, the arena of divorce can also be a legal and emotional minefield. When legislation changed to allowed ‘pension sharing’ on divorce, dealing with pensions on divorce became even more complicated.
To avoid confusion and to provide guidance to professionals working in the matrimonial legal profession, the Pensions Advisory Group (PAG) was established. The primary aims of the PAG are to:
- Create some technical understanding of the matters involved.
- Provide guidance on how pension sharing on divorce should be approached.
Recently, the PAG published a helpful guide which has been warmly received by practitioners in the matrimonial field. At 160 pages, it’s a heavy read, so we asked our expert Mark to summarise the main findings…
Pensions are complicated. Not only are there many types of pensions, but different legislation applies to the various types of pensions. One pension scheme trustee will often treat their scheme differently from another scheme trustee who administers exactly the same type of pension scheme.
To make things worse, pension legislation keeps changing. It is no wonder that those involved in guiding clients through the maze of how to deal with pensions during divorce proceedings are often confused and uncertain about how to deal with such matters.
Additionally, over the 20 or so years that I have been involved in the production of pension sharing reports, it has become evident that the approaches taken by pension experts when producing pension sharing reports are often very different. This can create even more confusion.
One area where most differences of opinion between pension experts exist is that of pension offsetting. In fact, this is probably where the journey started in trying to establish some uniformity in thinking.
A working party of pension experts led by Rhys Taylor (Barrister and Arbitrator) and Hilary Woodward (Honorary Research Associate at Cardiff University) produced a paper called Apples or Pears? Pension Offsetting on Divorce back in February 2015.
My main recollection of being involved in this group was the deviation in answers that we all produced to the various pension sharing and offsetting case studies that we were given. Evidently something had to be done.
Pensions Advisory Group established to provide guidance
To tackle the lack of uniformity in advice being given by financial professionals regarding pension sharing on divorce, the Pensions Advisory Group (PAG) was formed.
The PAG consists of a multidisciplinary group of professionals specialising in the field of financial remedies and pensions on divorce. The aim of the group is to:
- Improve the understanding of the complex area of pensions.
- Improve the understanding of how they should be treated on divorce.
- Enable fairer and more consistent outcomes.
As you can imagine, producing concise, agreed, practical output from a working party of multidisciplinary professionals was no mean feat. Credit should be given to those who have edited the 160-page Guide to the Treatment of Pensions on Divorce.
This is a fantastic guide to the complex topic of pensions on divorce and, in my opinion, should be read by all those involved in financial remedies. Although not overly prescriptive, the guide is a great step in:
- Enabling readers to become more familiar with the technical and legal issues that exist.
- Highlighting the pitfalls of pension sharing that exist along the way.
Avoiding potential litigation is, of course, an important factor in all of this.
There is no hiding from the fact that the report is a stiff read. I suspect that I might be one of the few who found the 160 pages of pension technical and legal information quite engaging! At BlueSKY we have spoken to many lawyers who I should commend for printing the document out, although I suspect that printing is as far as it might have got.
So, for those time-starved professionals who might need some motivation to get started or those who would like to know the headlines, this article endeavours to do just that.
Please bear in mind that this article cannot do full justice to, nor negate the necessity of, reading the full document. Only a limited number of topics are covered here.
At BlueSKY we run regular ‘Pensions on Divorce’ workshops for matrimonial teams and the headings below are derived from our experience of the most regularly asked questions and areas of interest.
Do I need a pension sharing report?
In general, the PAG view was that the de Minimis combined level of Cash Equivalents (CEs) where a report might not be needed was £100,000. There are, however, many caveats to this. Two key caveats are:
- Many Defined Benefit schemes (especially uniformed public sector schemes) report CEs that are much lower than the cost of replacing the benefits on the open market. So, the scheme may actually be much more valuable than the CE indicates.
- Some Defined Contribution schemes have guarantees that may make the ‘true worth’ of the scheme higher that the valuation given. (e.g. guaranteed annuity rates or guaranteed fund growth)
Additionally, the question posed is: ‘how do you know if the valuation and details you have been given are correct in the first place?’ Do you have the knowledge to ‘sense-check’ the figures? The suggestion is that a discussion with a pension expert who can triage the case for you might be helpful.
There will still be those clients who may refuse a recommendation to instruct any type of pension analysis, in which case it is strongly recommended that they sign a disclaimer which aims to protect you against any subsequent litigation.
If I need a report, where do I get one? Actuary or Financial Planner?
Many will be familiar with the process of instructing an ‘actuarial report’, necessarily produced by an actuary. As the pension marketplace has developed and Defined Contribution pensions continue to dominate retirement provision, the need for financial advice has increased, requiring the input from an FCA regulated Financial Planner who should be experienced in this field.
The PAG concluded that just being an actuary or financial planner wasn’t necessarily enough to be competent in this field. Suggested experience and qualifications are listed in the guide (Appendix D) enabling lawyers to check the credentials of a Pensions on Divorce Expert (PODE) and the PODE to self-certify.
What do I ask for in a report?
A sample letter of instruction is given in Appendix E of the guide.
The guide discusses the various methods of sharing pensions and highlights the differences between equalising capital and equalising income.
Both methods have their merits, although the guide reminds us of the Family Justice Council’s caution on the inherent limitations of using CEs alone as the basis for sharing pensions. Sharing pensions based on the CE alone can create very different incomes in retirement which may not have been the intention.
In our opinion, ‘standardised’ letters of instruction can lead to too many questions, calculations and permutations being requested. This can give rise to a pension sharing report with a bewildering array of figures and outcomes.
Objective led questions that have been negotiated and agreed with both sides will generally lead to a more focused pension sharing report and quicker agreements.
Part 4 of the guide seems to have raised some wider debate in discussing sharing cases that are ‘needs’ or ‘sharing’ based. It suggests that ‘needs’ cases cannot necessarily ring-fence assets (for example, excluding the consideration of assets accrued prior to the marriage) and that a court can have resort to any assets, whenever accrued, in order to ensure that parties’ needs are appropriately met.
Appendix 5 covers the apportionment of final salary pension cases. The validity of including pre and/or post marriage pensionable service in pension sharing reports can be a contentious matter and, at the end of the day, may depend on the needs of the case. For the PODE, identifying what pension assets were accrued prior to the marriage in order to exclude them from the report calculations can be a challenge when most pension trustees simply cannot provide this information.
What about pension offsetting? (Part 7)
Pension offsetting is one area of pension sharing where experts deviate the most in their approach. The trading of future pension benefit for capital now can help objectives to be reached in a financial settlement – for example, allowing a primary carer to afford suitable rehousing or retention of the family home – but the guide warns that offsetting pensions without properly considering their value forms the majority of the growing number of negligence claims.
This is largely because offsetting can be seen as a quick, simple and cheap way of dealing with pensions in financial settlements. However, while the ‘you have this and I’ll have that’ approach might seem quick, easy and cheap, appearances can be deceptive and unintended and unfair consequences can result. In this section ‘Case 1’ and ‘Case 2’ are good examples of why CEs can be misleading.
The challenge in establishing a fair pension offset is that it involves comparing pensions and cash which are two very different asset classes. The PODE should consider and apply the most relevant method depending on the facts of the case. The guide recommends that the methodology used should be detailed in the pension sharing report and that a range of offsetting figures might be helpful.
This section also comments on the use of Duxbury tables as an established way of capitalising a spouse’s income claim. As the tables contain various assumptions the end user should ensure that they are fully aware of these assumptions and their relevance in the matter being considered. Consultation with a PODE on this matter might be of benefit.
Taxation and the Lifetime Allowance (Part 9)
This section of the guide details some of the taxation matters that may need consideration when sharing pensions. The complex area of the Lifetime Allowance (LTA) will affect those with total pension benefits in excess of £1,055,000 in 2019/20 (see section 9.9 for the valuation methods).
The current LTA is set to increase with the CPI every year which, in historic terms, is less than pension fund growth. This means that more and more people are likely to be affected by LTA issues over time.
At BlueSKY, we have seen a marked increase in the number of cases with LTA issues. We are therefore in full agreement when the guide recommends that LTA issues are also detailed in pension sharing reports.
In many instances financial planning advice can add significant value by considering:
- how sharing should be approached
- actions that could be taken before or after the pension share is implemented that can help preserve pension value or any ‘protected’ LTA entitlements.
State Pensions (Part 11)
State Pensions often form one of the most valuable assets in a divorce and the guide reminds us that they should not be overlooked.
This section gives a good level of detail about how sharing the State Pension should be approached, although the important point is that they shouldn’t be overlooked. A good starting point is to ask clients to get their own State Pension online forecast. This is a quick process and also allows them to review their NI contribution history.
Topping up the State Pension can represent good value for money and can be part of a pension sharing report recommendation where the PODE is invited and regulated to be able to offer the relevant advice.
We are also reminded that the receipt of a pension share may result in the reduction of an individual’s means tested State benefits and thus lawyers need to be aware of this potential interaction in lower income cases.
International Issues (Part 14)
Limited options exist when dealing with overseas pensions other than considering alternative solutions (e.g. offsetting) that do not require pension sharing (or attachment).
It is not possible to make a Pension Sharing Order (or a Pension Attachment Order) against a foreign pension.
A pension sharing order made in a foreign court is not enforceable in this jurisdiction although if jurisdiction here can be established an application may be possible under Part III of the Matrimonial and Family Proceedings Act 1983.
Implementation of pension sharing orders
It may be felt that most of the hard work has been done in reaching an agreement as to how the pensions should be shared on divorce.
But the guide reminds us that there are still many ‘elephant traps’ post-agreement.
Even the completion of the pension sharing annex and ticking the internal or external transfer box (section F) may result in the lawyer unwittingly straying into the arena of providing financial advice unless suitable PODE advice has been obtained.
Clients can also feel that the matter is as good as concluded once the pension share has been agreed and the Decree Absolute sealed. Procrastination in implementing is common, although rarely in the interests of either party. As an example, we have seen cases where untimely deaths have caused issues that could have been avoided had implementation been actioned in a timely manner.
The guide recommends that files should not be closed until you are certain that the Order has been implemented. If the Order results from a financial hearing, then FPR 25.18 requires reporting of the outcome to the PODE within ten days of judgement.
Unless internal transfer is the only option when implementing an Order, it is likely that suitable financial advice from a regulated and suitably experienced adviser will be required to assist the recipient of the share in making decisions regarding where and how the pension credit should be transferred.
The guide represents a hugely valuable resource for those that want to enhance their knowledge on pensions on divorce matters. It’s a vital step towards universal understanding of pensions and how they should be approached on divorce.
Hopefully the wider understanding will lead to greater uniformity of approach in the preparation of pension sharing reports and the use of standard practices.
For many, the guide will hopefully encourage the wider use of PODEs to produce pension sharing reports and also to engage in dialogue with a PODE regarding how individual cases should be approached and pitfalls to avoid.
The outcome, of course, should be that divorcing couples get concise, accurate and fair outcomes.
If you would like to find out more about how BlueSKY can assist you and your team with pension on divorce matters, please get in touch.
Mark Penston BSc, AFPS
Partner, Chartered Financial Planner and PODE
BlueSKY Chartered Financial Planners