Pension tension rises as sharing orders remain few and far between

Posted: 15/07/2014

Pension sharing orders have now been available to the matrimonial court for over 13 years. They allow for the redistribution of parties’ pension resources upon divorce (or nullity or civil partnership dissolution) by means of transferring a percentage of a pension fund’s cash equivalent (CE) value to a pension fund for the ex-spouse. In the present social and economic climate, with an ageing population and a political will to restrict the welfare budget, private pension provision has rarely been more important. However, the most recent Ministry of Justice figures available show that pension sharing orders, together with the far rarer pension attachment orders, feature in only around 8% of divorces reaching decree absolute (Judicial and Court Statistics - 2011 report).

In financial negotiations and proceedings upon divorce, pensions are generally, and rightly, treated by practitioners and the courts as being a distinct class of asset. Lord Justice Thorpe, in Maskell v Maskell [2001] EWCA Civ 858, [2001] 3 FCR 296 criticised an approach equating pension assets with ‘present capital’. A pension is somewhat akin to capital, albeit not instantly realisable, but it also represents a (future) income stream. The imminent liberalisation of access to pensions savings may have a significant effect on whether pensions are considered as a distinct asset class. Presently one of the most interesting points of unsettled law in matrimonial finance is what should be the court’s appropriate objective with redistribution of pensions: is fairness best met by focusing on the capital value of pension funds or by assessing the future income they will provide?

There is no binding authority from the courts as to which is the correct approach, and both are regularly argued by practitioners, depending on which is the more beneficial to their particular client. Cases in which pensions form the principal point in dispute are rare, and certainly there are comparatively few reported cases that focus on pensions at all. A recent academic study, however, Pensions on Divorce: an Empirical Study by Hilary Woodward and Mark Safton, analyses the current approach taken by the courts in the treatment of pensions and it makes for fascinating reading for practitioners in the field.

Pensions study

The study by Woodward and Safton is a review of the treatment of pensions upon divorce based on:

• a quantitative analysis of court files in divorce proceedings as to whether pensions were disclosed by the parties and whether, ultimately, a pension sharing order was made;
• a qualitative assessment of those files by a pensions expert as to the economic rationality of the court’s (and the parties’) treatment of pensions and an attempt to discern the rationales and objectives of the pension sharing orders made; and
• a series of one-to-one interviews with family solicitors and district judges as to their respective approaches to pensions in financial cases.

The study consisted of a review of 369 court files in randomly selected divorce proceedings across three courts and where a divorce petition had been issued on or after 1 April 2009 and a final financial order had been made by 31 December 2010. Those files were then analysed to assess the presence of disclosed pensions and their treatment in the final financial order. In 80% of cases reviewed, one or both parties disclosed pensions beyond entitlement to a basic state pension. However, in only 17% of those cases where a pension was actually disclosed was a pension sharing order ultimately made. In no case was there a pension attachment order, nor evidence that one was ever considered or sought. Clearly, therefore, the vast majority of ‘pensions cases’ do not result in a pension sharing order. This broadly reflects the overall figures produced by the Ministry of Justice, but serves as clear evidence that the relatively low take up of pension sharing orders is not simply a consequence of divorcing parties having no pension to share.

In those cases where it was possible to determine cash equivalents (CEs) for the disclosed pensions the median CE was £36,316 for wives and £72,889 for husbands. It is therefore unsurprising that the vast majority of pension sharing orders were in favour of wives, which certainly reflects experience in practice. What is even more interesting is that the combined (pension and non-pension) net capital wealth in those cases in which either party disclosed pensions were over three times higher than in those cases in which neither party disclosed a pension (the median being £145,750 versus £40,309).

It is perhaps intuitive, but the study also found that pension orders were actually made in cases with a higher, general, net capital base. In those cases that resulted in a pension order the average net value of non-pension assets was found to be £329,000 as opposed to £125,178 in cases in which no pension order was made. There is naturally a correlation between a couple who are generally able to accumulate capital wealth being able to save towards pensions, but such a disparity is still surprisingly high.

It was unclear in the majority of the files reviewed in the study why pensions that were disclosed were not shared. This stems from a lack of clear evidence within the court files themselves as to the specific rationale behind the financial orders made. 78% of financial orders in cases where pensions were disclosed simply featured dismissal clauses as to the pensions. It may have been that other assets were offset against (the capital value of) the pension in the final settlement, or that sufficient periodical payments were in place so as to meet income needs. There will also likely have been cases where both parties had sufficient, or at least broadly equivalent, pension provision or where, more bluntly, pensions were of such limited value such that a pension sharing order would be disproportionate. While pensions are always considered by lawyers in practice, the central disputes (and therefore the focus of legal time and costs) will more often be on realisable capital and the present-day income position. This is perhaps borne out by the fact that the study showed that, in over 80% of cases, orders were made in respect of the former matrimonial home and around half of the cases featured payment of a lump sum.

Age and gender

The significance of pensions upon divorce is affected by the age of the parties. The study reviewed the parties’ ages at the date of the final financial remedy order and out of the 369 cases reviewed only four featured pension sharing orders where either party was younger than 40; in three of those cases the relevant party was 39. What is not clear from the review, however, is whether this simply reflected a lack of any pensions held by younger divorcing parties, whether the disclosed pensions in those cases were, if not de minimis , at least not financially significant enough to warrant division, or whether offsetting was more favoured by younger spouses, decades away from retirement. Certainly the figures reinforce the common belief that the younger the client the less interested they are in securing pension provision.

There were, moreover, no pension sharing orders made in marriages of less than five years’ duration and only one in a marriage of ten years or less. This statistic is bolstered by the fact that the median length of marriages (measured, in the study, from date of marriage to date of financial order) was 11 years in cases where pensions were disclosed and no pension sharing order made, as opposed to 25 years in the pension sharing order cases. Clearly there is significant correlation between parties’ ages and their length of marriage, but in the interviews it is age which seemed to most influence the thinking of practitioners and district judges.

While in only two cases was it the husband who was the recipient of the pension share it is perhaps more interesting that there were only two pension orders made in favour of wives who were unrepresented at the date of the final financial remedy order. Practitioners are alert to assessing the presence and relevance of pension assets, but in these days of increasing numbers of litigants in person it is a worrying state that so few unrepresented parties appear to be obtaining pension sharing orders.

Capital or income

The analysis of the court files revealed that in the majority of those cases where it was possible to determine the rationale behind the treatment of the pension, it was a capital-based approach that was followed. As part of financial disclosure, CEs will of course generally be obtained and available but, without the instruction of an expert, solicitors and judges will rarely have reliable information as to the income that such pensions will generate. This point was stressed by David Salter sitting in B v B [2012] EWHC 314, [2012] 2 FLR 22 where he stated that actuarial advice was ‘particularly important’ when parties sought equalisation of pension income [at para 50]. A notable exception to the absence of income information is of course defined benefit schemes, but these throw up their own complexities as to valuation and CE. This lack of focus on income rather than capital is especially the case when parties are a long way from retirement where actuarial calculations will be essential. It is also the case that the younger the parties are, the greater will be the impact of the assumptions that the expert will need to make in their calculations. Such long-range assumptions would again be a factor in favour of a capital-based approach to pensions.

Some of the most interesting detail in the study stems from the interviews with the district judges. On the topic of a capital versus income approach the judges acknowledged that this could be a complex issue. Significantly, however, none had actually given judgment in a case on whether the objective as regards treatment of pensions was based on income or capital. Nor did any of them feel able to commit to their own preference.

Conclusion

This tension between income and capital in finance cases remains very much the focal point of pensions as a distinct asset class. One wonders whether the government’s change of approach in respect of pension drawdown, announced at the last Budget, will encourage judges to make more orders based on capital as opposed to income division. For if the government is ‘relaxed’ about pensioners exhausting their lifelong savings on Lamborghinis, why not the court? Certainly this would echo Mr Justice Mostyn’s comments in BJ v MJ (and Others) [2011] EWHC 2708, [2011] All ER (D) 213 (Nov) that ‘No-one nowadays seriously would think of buying an annuity. Rather, they would likely drawdown on the pension within the prescribed GAD limits’ [at para 75]. When pension holders are allowed to withdraw their entire pension as a lump sum at the age of 55, albeit subject to income tax, then this will surely make practitioners and judges more inclined to view pensions as a (liquid) capital asset; certainly when dealing with parties approaching 55. What is clear is that while practitioners regularly encounter pensions, pension sharing orders remain rarer than perhaps they should be. The study by Woodward and Safton offers practitioners further insight as to how these trends are actually playing out in the courts.

Published in the New Law Journal, June 2014

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