Financial Remedy: Pension Overview, Off-Setting and Duxbury Re-Visited

The purpose of this article is to provide an overview of the Court’s approach to pensions in financial remedy proceedings generally and revisit specific issues such as pension off-setting and Duxbury calculations raised in my previous article published in July 2016 under the title, “Financial Remedy: Pension Values and Offsetting – Quo Vadimus”.

PENSION OVERVIEW

Generally the Court’s approach, as with all financial remedy proceedings, is to consider pension/s of each case on its/their own facts in the context of Court’s mandatory powers under section 25 of the Matrimonial Causes Act 1973 (“the Act”) read with sections 24C, 24D, 25B, 25C and 25D of the Act.

As a general rule of thumb, (a) the first consideration is whether the pension constitutes matrimonial property and (b) if so, whether there should be a pension share order or off-setting.

As indicated in my previous article, practitioners have to be very clear as to the nature of the pension and for example whether, the pension is a private or public law pension. Furthermore whether it is possible, following the changes to the Taxation and Pensions Act 2014 which came into force as from the 6th of April 2015, if or when either or both of the parties reach the age of 55, they are able to take the whole pension as a lump sum, subject to taxation or whether the pension scheme prohibits such conversion.

Interestingly, since the date of my previous article, the Supreme Court, in the case of Mills v Mills [2018] UKSC40 allowed the Husband’s appeal against the Court of Appeal’s decision for an order of an upward variation of a periodical payments order in favour of the Wife. Briefly, the facts were that the parties divorced in 2002 and by consent, the Wife received a lump sum to satisfy her capital needs (£230K) and a periodical payments order of £13,200 per annum. The matter originally came before Judge Everall QC on the 9th of June 2015 following cross applications by the parties: the Husband’s application for a discharge or reduction of the periodical payments and the Wife’s for an increase due to the fact that she had no capital left and she had insufficient to meet her basic needs including rent. The Court a quo refused both applications. The Court of Appeal granted the Wife’s appeal. The Husband then appealed to the Supreme Court and the Supreme Court set the Court of Appeal’s decision aside. The Supreme Court held that the original Judge was entitled to decline to vary the periodical payments Order requiring the Husband to pay all of the Wife’s rent even if he could afford to do so.

Although the Mills case clearly deals with periodical payments, the Supreme Court’s approach is a salutary warning in the context of pension provision: should a party deplete a pension award/provision and then later seek to remedy this by seeking increased periodical payments, they may not succeed.

OFFSETTING

Given the liberalisation of the pension rules following the enactment of the Taxation and Pension Act 2104 referred to above, in theory off-setting should be easier to implement.

Of fundamental importance, is being able to ascribe an exact value, or rather the most accurate value to the assets – whether they consist of capital and/or income.

Pensions of necessity are essentially of a hybrid nature in that they are deemed to be capital before being converted into an income stream whereupon they are then deemed income. Thorpe LJ stressed in the case of Martin-Dye v Martin-Dye [2006] EWCA Civ 681, [2006] 2 FLR 901 that a pension in payment is no more than a whole life income-stream akin to an annuity and that pensions in payment and cash equivalent benefits are to be characterised as ‘other financial resources’ within section 25(2)(a) of the Act.

As pointed out in my previous article in discussing the case of WS v WS [2015] EWHC 3941 (Fam), [2016] Fam Law 564, the Court pointed out the difficulty with offsetting was finding an appropriate methodology for calculating the offsetting sum because of the Court of Appeal decision’s in Martin-Dye to prefer pension sharing, meant there was no further guidance or discussion as to how to calculate the value of an offset payment when that might be appropriate.

Before reaching its decision, the Court in WS summarised the relevant case law and referred to two articles in the 2012 and 2105 editions of Family Law entitled “Apples or Pears” which dealt with the difficulty of finding a suitable method of calculation in respect of offsetting.

As indicated, the Court in WS was persuaded that the Duxbury calculation/approach was the correct one, which was strongly supported by Mostyn J in JL v JL (No 3) [2015] EWHC 555(Fam) who referred to the Court of Appeal case of H V H (Financial Remedies) [2014] EWCA Civ 1523, 2 FLR 447 and Ryder LJ’s comments in particular, regarding the rate of return. As indicated, Ryder LJ referred in turn to the warning given by Holman J in F v F (Duxbury Calculation) [1996] 1 FLR 833 849 where on the facts, rates of return above and below the Duxbury assumed rate were rejected.

DUXBURY

The Duxbury tables are to be found in At a Glance which is published annually, the editors of whom are Sir Peter Singer, Mr Justice Mostyn, Lewis Marks QC and Gavin Smith and copyright vesting in the Family Law Bar Association.

In the case of JL at para 12, it was pointed out that the Duxbury algorithm is underpinned by 10 underlying assumptions which include 3 key financial predictions.

As indicated in my previous article, the case law cumulatively indicates that the Duxbury calculation is merely a starting point or guide to one component of an overall lump sum award upon which all the section 25 considerations impact.

One challenging issue in respect using the Duxbury algorithm as a guide is the issue of the rate of return which is to be ascribed to investment. As pointed out in my previous article, Ryder LJ in H v H was very clear about the rate of return to be adopted and his rejection of an industry standard which he voiced as follows: “I am very firmly of the view that there is no ‘industry standard’ even less an acknowledgment by the Family Division judges that there should be such a rate”.

Mostyn J, in JL commented on the issue of an “industry standard” slightly differently in that he opined “Of course there is no ‘standard rate’ in the sense that the economic assumptions underpinning the formula are written in marble from which there can be no deviation. But the Duxbury tables are used in countless cases. Their underlying methodology and assumptions are widely accepted as the usual starting point, and where there is no countervailing evidence, the usual finishing point. In that sense they do represent an ‘industry standard’”.

Further challenging issues in respect of the Duxbury tables that arise are for example (a) where there is a disparity in the parties’ ages or (b) where one party is already drawing down on a private pension and receiving a state pension and the

other is not or (c) where one or both parties’ life expectancies are potentially curtailed by ill health and/or (d) where one or both parties have inheritance prospects.

CONCLUSIONS

Upon revisiting the conclusions in my previous article, I would suggest that those conclusions still remain apposite in that: (a) there has to be clarity and understanding about the nature of the pension fund/s in question and whether such a pension/s is a private or public law pension, (b) in cases where offsetting may be deemed appropriate, the appropriate methodology of calculating the value of that offsetting needs to be canvassed sooner rather than later, (c) whether the Court will be assisted by expert evidence will need to be considered and (d) in the absence of countervailing evidence, the Court will be inclined to use the Duxbury calculations, even if only as a starting point. As indicated however, the conclusions rest on the fundamental core concept, namely that any consideration of pension/s will of necessity be considered by the Court in accordance with its mandatory powers under Section 25 of the Act.