When considering assets following a divorce, the court historically dealt with a disparity in pension assets by making what was known as an “earmarking” or “pension attachment order”. This form of order meant that when the pension in question was drawn, the income would be apportioned between the spouses.
There were some difficulties with this approach. Firstly, a pension attachment order maintained a financial link between former spouses and thus prevented them from achieving a “clean break” – this meant that their financial claims against one another would remain open indefinitely. The tax-free lump sum pertaining to the pension would usually only be received by the party who’s name the scheme was in. Following the order, the party with the pension could cease contributions to the same in order to minimise the benefit to the receiving spouse.
The court now has the power to implement what is known as a pension sharing order following a divorce. This means that, where there is a disparity in the parties’ pension positions, the court can order that a proportion of one parties’ pension is transferred out of their scheme and into a separate pension in the other parties’ sole name.
Pension sharing is a vastly better option for both parties in comparison to pension attachment. It deals with the division of pension assets at the time of divorce, thus paving the way for a clean break. It also provides both parties with their own separate pensions, which will yield their own separate tax-free lump sums.
The only complication with pension sharing orders is that it can be very difficult to quantify the appropriate level of pension share. This is because pensions are complex assets, and the Cash Equivalent Transfer Value (“CETV”) allocated to them can be misleading. This is particularly so in the case of public sector and final salary scheme pensions.
When divorcing spouses have significant or complex pension assets, it is necessary to instruct an expert Actuary (that is a pension specialist) to prepare a report on how to address the disparity in the pension position. Actuaries will usually assess the percentage of pension share that would be required to achieve equality of either capital or income at various speculative retirement ages. This is a complex calculation in any event. There are a limited number of actuaries who are able to prepare pension sharing reports and most are experiencing significant backlogs due to the level of demand.
The position has been further complicated by the recent case of McCloud which dealt with reforms made to public sector pensions. Essentially, public sector pensions are reviewed on a regular basis and different schemes are set up as time goes on. The McCloud judgement confirmed that the reforms made to public sector schemes since 2015 were unlawful, on the basis that they were discriminatory to some members on the basis of age and gender as compared with previous schemes. The government is now required to roll back the reforms made to the schemes to ensure that the members are not prejudiced in any way.
The implication of this is that countless public sector schemes may now be more valuable (following the future changes to the law) than they currently appear to be. As of yet though, whilst the court has confirmed that the changes made to the pension schemes were unlawful, there is no legislation or indeed any fixed timescales for when the pension schemes will be remedied.
The current position naturally causes issues for pension actuaries, who are unable to ascertain the true value of the public service sector pensions which are due to be reformed; the reason being that many public sector pensions will receive a retrospective uplift when the schemes are revised. Most actuaries are highlighting the issue to their divorce clients but are otherwise simply working on the basis of the current pension valuations that are available, as opposed to attempting to second-guess any future changes in value.
Pensions were already a difficult asset to quantify and value and the McCloud judgement has further compounded this reality. It is therefore imperative to take legal advice if you are going through a divorce and either you or your spouse possess a significant pension – particularly if the pension is a public sector scheme.
If you have any questions about anything referenced in the above or would like further advice, please contact me or a member of our Family Team who will be able to assist you.
