When couples are divorcing, the court must consider all of the assets, including the parties’ pension provision. In many cases, apart from the home, the biggest asset is pension provision.

There are various types of pension available. Many occupational pensions may be final salary schemes, where the amount of the pension depends on the length of service and annual earnings at the time of retirement, although some occupational pensions may be money purchase schemes, where the employer and employee contribute to the pension, and the payout depends on the age of retirement and contributions made during employment. Private pensions are available for the self-employed or those whose employer does not have an occupational pension scheme, and again the payout depends on the amount of contributions made.

When couples are divorcing, one or both may have pension provision. In many cases, one party has greater pension provision than the other and the question then is how can that disparity be dealt with. The court has three main options:

• Offsetting
• Attachment orders
• Pensions sharing orders


Offsetting

The historical approach has been to give more of the other assets to the spouse who does not have as much pension provision, by way of compensation, such as more of the equity in the house or other investments. However, if there are no other available assets, this is not a viable option.

Attachment Orders

The Pensions Act 1995 enabled the court to 'earmark' a proportion of the existing pension for the other party. If such an order is made, the pension scheme is obliged to pay direct to the spouse with less or no pension provision a percentage of their former spouses monthly pension and/or any lump sum payment that can be taken on retirement. There are however numerous disadvantages with attachment orders. Firstly, the receiving party has to wait until their former spouse chooses to retire before they can benefit. Secondly, if the pension holder or the receiving party dies, an attachment order made in respect of monthly payments will automatically terminate, which will also be the case if the receiving party remarries. An attached lump sum will however survive the parties’ deaths and the recipient’s remarriage. Further, an attachment order is also subject to variation, that is, one of the parties can make an application to the court to increase or decrease the amount of the monthly payment or lump sum payment under an attachment order, or to discharge it altogether, which leads to uncertainty. Furthermore, the pension holder retains full control of the pension, and can, for example, delay taking their pension benefits, either for their own convenience, or to frustrate the attachment order.

Pension Sharing

With the introduction of the Welfare Reform and Pensions Act 1999, the courts were given a third option of pension sharing, although this only applies to divorce petitions issued on or after 1 December 2000. The pension fund is split, giving the receiving party their own distinct pension fund that they then have control over. Unlike an attachment order, this type of order survives the recipient's death or remarriage, and the pension holder's death. It is also not variable, and therefore a financial clean break can be imposed between the parties. This type of order gives the parties the certainty that does not come with an attachment order.

Valuing Pensions

A major problem in all three options can be how a pension is valued. Parties with pension provision must produce a cash equivalent transfer value (CETV) under the court rules. The Divorce (Pensions) Regulations 1996 state that the value of the pension is taken as though the member left the pension on the day that the calculation takes place. This can cause difficulties with the valuation of certain types of pension scheme and can result in the value of the pension fund not being fully reflected in the CETV.

Pensions by their very nature are difficult to value. A pension does not pay out until a date in the future, and many variables can affect the value, such as the stock market, the health or death of the pension holder, increases in salary or promotions, leaving the scheme, and in addition the structure of the pension scheme can itself change over the years. The calculation of the CETV is therefore necessarily based on a number of assumptions, and these assumptions may be inaccurate. Additionally, many schemes give discretionary benefits, such as inflationary increases. The scheme has discretion to include or omit these benefits when calculating the CETV, and this may therefore affect the true value of the pension fund. A scheme may also dictate that retirement should be at age 65, but in practice will allow a member to retire earlier, say at age 55 or 60. If the CETV presumes retirement at 65, it will be undervalued, perhaps considerably so.

The calculation of the value of a pension specifically for divorce purposes raises another problem. A value is placed on the share of the pension to be transferred, and then is relayed to the pension scheme as a percentage. There can be a significant lapse in time between the date a CETV is obtained, and the date when the pension sharing order is actually carried out. The pension company will recalculate the CETV on the date the share takes place, but in the interim a number of variables, such as those mentioned above, can change, giving a very different value to the pension.

The type of pension scheme can dictate how accurate the CETV will be. Difficulties can arise particularly in relation to public service pension schemes. The government presumes that pensions are taken between the ages of 60 and 65, when in reality a police officer or soldier, for example, can retire many years before this age. A pension that is taken earlier than the average retirement age can be worth a significant amount more. Additionally, the CETV is calculated on the basis that the member left the scheme on the day the CETV is calculated, but if for example a person leaves the armed forces or police force before they have worked a specific number of years, they will not be entitled to a full pension and as a result, the CETV may be drastically undervalued. In some cases, it may be necessary for there to be a revaluation of the CETV by a specialist actuary, in order to obtain a more accurate valuation of the available funds.

Lee & Priestley has an experienced and successful Family Law department which has an excellent reputation in financial disputes. To discuss any aspect of divorce or family law, please contact a member of our Family Law team.

This advice is intended to provide guidance and information. It is not a substitute for specific advice. Lee & Priestley do not accept responsibility to anyone who relies on this general advice unless also retained by them to advise about their particular circumstances.

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