The issue of pensions in financial remedy proceedings is a complex area and has been subject to much change over the years. As many of you will be aware, the Pension Advisory Group (“PAG”) published a comprehensive report ‘A Guide to the Treatment of Pensions on Divorce’ in July 2019. It was a much-welcomed publication that provided definitive guidance on the approach to pensions in financial remedy proceedings.
The recent judgment of W v H (divorce financial remedies) [2020] EWFC B10 provides some further guidance, in addition to the PAG report, on pensions in a needs based context in financial remedy proceedings. HHJ Hess, who co-chaired the PAG, helpfully refers to specific sections of the PAG report throughout his judgment.
The wife, aged 50, and the husband, aged 48, had cohabited since 1999, married in 2005 and subsequently separated in 2016. The parties had three children, aged 10, 16 and 18, who remained living at the family home with the wife. The wife left employment when she became pregnant with the first child and the husband had been the breadwinner.
The parties’ only substantial assets were the family home and pensions. Both had debts. This article will focus on the distribution of the pensions. The wife’s pensions totalled £152,737 and the husband’s totalled £2,214,128.
The three relevant considerations for the court were:
(i) Whether it is right for the court, in dividing pensions with a view to promoting equality, to target capital equality (i.e. equal CE or other definitions of capital value) or to target the promotion of equal incomes;
(ii) Whether it is right for the court, in dividing pensions with a view to promoting equality, to exclude a portion of the member spouse’s pension if it was earned prior to the marriage (or seamless pre-marital cohabitation); and
(iii) The extent to which the court should disaggregate the pensions in the case and promote a discrete and equal division of the pensions as opposed to attempting to execute an offset against other assets.
The court observed that no ‘one size fits all’. In light of the age of the parties, the size and largely the defined benefit nature of the pension funds and the relative small nature the non-pension assets, as a starting point, the court considered that a fair and equal outcome would be to identify a pension sharing order that would bring about equal incomes, not capital.
The court considered potential scenarios whereby division of pensions by CE value would be fair and gave the following examples:
(i) where CEs are relatively small;
(ii) where the parties are relatively young;
(iii) where projections about the future income of the pensions is speculative/unreliable;
(iv) where all pensions are simple defined contribution funds, and therefore regarded as reasonably reliable; and
(v) where the sole pension involved is a non-uniformed public sector defined benefit scheme offering internal transfers only.
The husband sought to ‘ringfence’ a portion of his pensions and argued that only 58.3% of his pension pot should be included in the calculations as some of his pensions had been accrued prior to the marriage and as such is a non-marital asset.
The court considered whether the exclusion of a portion of the husband’s pensions would be appropriate and in doing so concluded that in a needs-based case the court needs to approach with caution:
“Where the pensions concerned represent the sole or main mechanism for meeting the post-retirement income needs of both parties, and where the income produced by the pension funds after division falls short of producing a surplus over needs, then it is difficult to see that excluding any portion of the pension has justification”.
When considering the timing and source of the pension the court directly referred to the PAG report:
“It is important to appreciate that in needs-based cases, just as is the case with non-pension assets, the timing and source of the pension saving is not necessarily relevant – that is to say, a pension-holder cannot necessarily ring-fence pension assets if, and to the extent that, those assets were accrued prior to the marriage or following the parties’ separation. It is clear from authority that in a needs case, the court can have resort to any assets, whenever acquired, in order to ensure that the parties’ needs are appropriately met.”
The court was wary of any unintended unfairness in calculating the pension distribution. One of the husband’s pensions was a defined benefit pension scheme based on final salary, this was the highest value pension. He had worked his way up in the company and his pension accrued alongside this and not on a straight-line basis. The pension accrued much more value in its later years which were firmly within the marriage. Therefore, a straight-line methodology of apportionment may not be fair.
The traditional view is that pensions should be dealt with separately from other capital assets. The PAG report offers a similar view: “try, if possible, to deal with each asset class in isolation and avoid offsetting…a discrete solution which equalises pensions by pension sharing orders and which equalises non-pension assets by lump sum or property adjustment orders”. The court warned that mixing categories of assets in an offsetting exercise runs the risk of unfairness by burdening “one party with non-realisable assets while the other party has access to realisable assets”.
The court reached the following conclusions:
(i) The pensions should be divided by pension sharing order to provide the parties with equal incomes at a specified time in the future;
(ii) In a needs-based case, following straight-line discounting, as advocated by the husband, was not appropriate as it would not provide the wife with enough income to meet her needs. The fair approach was to seek equalisation of incomes on an equal basis taking into account all pensions;
(iii) No offsetting exercise would be conducted (the judge being persuaded by the husband’s arguments regarding housing needs); and
(iv) It was ordered that 100% of the husband’s smaller defined contribution pension scheme and 51.7% of his larger defined benefit pensions scheme would be subject to a pension sharing order.
Together with the PAG report, this judgment provides clear and helpful guidance on pensions in needs-based cases which are inevitably a large portion of most practitioners’ workload.
If you require advice or assistance in connection with any financial remedy matter, please do not hesitate to contact our clerks on clerks@becket-chambers.co.uk or 01227 786331.
