Will new pensions guide result in fairer divorce settlements?

Pensions are often a divorcing couple’s biggest financial asset, worth even more than the family home. But how they are dealt on divorce has been a source of confusion for lawyers and judges for many years. The recent publication of 'A Guide to the Treatment of Pensions on Divorce' by the Pension Advisory Group should demystify this area and, it is hoped, result in fairer financial settlements.

It is clear that there has been a wide variation across the UK in how pensions have been taken into account in financial settlements

Before December 2000, the court had no power to deal directly with pensions on divorce. They were an asset taken into consideration in the financial settlement, but judges could only deal with them by an 'offsetting' arrangement. This meant the spouse without the pension would receive a greater share of the couple's other assets to make up for not benefitting from the pension.

It is still possible to deal with pensions in this way, but this method is inflexible and can cause problems if the other assets are insufficient. Also, as there is no fixed calculation for offsetting there can be inconsistencies and some offsetting arrangements unfairly benefit one spouse over the other.

As a result, the law was changed in December 2000 to allow pension sharing or pension attachment (previously called 'earmarking').

Pension sharing

Pension sharing is where the pension assets are divided on divorce. The court calculates or the parties reach an agreement about each party's entitlement and the receiving party either becomes a member of the pension holder's scheme (an internal transfer) or the assets are transferred into a new scheme (an external transfer).

Not all pensions can be shared, including state pensions and pensions that are already the subject of a sharing order.

Pension sharing has a number of benefits, not least of which is that it can offer the parties a clean break. It allows a great deal of flexibility and can be particularly useful if one party has a large pension compared to the parties' other assets or if one party is thinking of remarrying (as the pension sharing order cannot be changed once it has been made).

Pension attachment

A pension attachment order directs all or part of a member's pension benefits to their spouse when it comes into payment. This means there is no clean break as there will be an ongoing link between the parties.

A few years ago, The Telegraph reported that despite this law nearly half of the 1.5m divorce settlements in the UK since December 2000 may have been undervalued. Whether this is correct or not is open to debate. But it is clear that there has been a wide variation across the UK in how pensions have been taken into account in financial settlements.

The Pension Advisory Group

As a result, a multidisciplinary group of professions called The Pension Advisory Group (PAG) came together in 2017 to produce a practice guide on how to treat pensions on divorce. Its long-awaited report has now been published and has been supported by the President of the Family Division.

At 176 pages and 24 appendices it is unlikely to be a page turner, but it is much needed.

The Honourable Mr Justice Nicholas Francis and His Honour Judge Edward Hess, who jointly chaired the project, said:

"It is our hope that this document will assist and clarify the often difficult process of incorporating pension considerations into financial remedies cases in a way which is procedurally and substantively fair to the parties. Time will tell whether our hope will be realised."

Hilary Woodward who led the project said: "The aim of this guide is to help judges and practitioners navigate their way with more confidence through the tricky field of pensions on divorce, and ultimately improve the fairness of outcomes for those going through divorce."

The guide is welcomed as it covers everything from how pension assets are calculated, dealing with them fairly on divorce, expert valuations and tax issues.

If you have any queries about pensions in relation to your financial settlement, please don't hesitate to contact me at [email protected].