As you may expect, our clients regularly ask us all sorts of questions about pensions and their valuation in divorce. Those about pensions and actuarial matters are easy enough, but life becomes much more difficult when lawyers query the legal basis for the use of one valuation rather than another.

We have a natural aversion to upsetting clients; which is why we do not attempt to tell anyone anything about divorce law. It is much better when we find someone to do the job for us! That is why we were so pleased to discover an excellent paper written by Mr John Buck, a member of the Family Law Bar Association. John is a barrister at Tanfield Chambers and he wrote his paper to accompany a “Pensions in Ancillary Relief” seminar last year. Even without the benefit of the seminar, we believe that the paper can help when wrestling with the challenges of dealing with pensions in divorce. For example:

“ … Bennett J rejected a submission on behalf of H that the value of his pension fund (which had not vested) should be the CETV less the 25% which can be withdrawn as a lump sum …”

In just nine pages, Mr Buck has succeeded in dealing with many of the issues that we regularly encounter. We are grateful to him for giving us permission to make his paper available here. The views expressed are of course those of the author and not necessarily those of our firm. Please click here to access and download the paper in pdf.

If you do not have a pdf reader installed on your computer, Adobe™ one of the world leaders in this technology, provide free downloads from their website.

Peter J Moore – Director, Bradshaw, Dixon & Moore Ltd.

© Bradshaw Dixon & Moore Ltd – March 2008

Henry Frankenstein : Look! It's moving. It's alive. It's alive... It's alive, it's moving, it's alive, it's alive, it's alive, it's alive, IT'S ALIVE!
Victor Moritz : Henry - In the name of God!
Henry Frankenstein : Oh, in the name of God! Now I know what it feels like to be God!

Frankenstein (1931) Director: James Whale

 
It sometimes seems that with each visit a wealthy divorcing family makes to the House of Lords a new concept is crudely sewn on to the 35 year old divorce law like an extra limb. There was ‘reasonable requirements’ in the 1970’s. ‘Equality’ in 2000. Now after the House of Lords has brutally tortured the wording of the 1973 Act like never before, there is ‘compensation.’ None of this is in the statute. The net result of all this industry is to make the law into an unpredictable lumbering Frankenstein’s monster that roams the land striking terror and confusion into the chambers of District Judges and driving up costs.

This sort of judicial ‘creativity’ can make it harder to advise divorcing parties because none of us know when a limb will fall off the monster or where a new incompatible body part might bolted on. Surely the law needs to be either applied as it is written, or better still it needs to be re-enacted taking into account such concepts as pre-nuptial contracts, equality and the concepts of matrimonial and non matrimonial property.

These days the courts will distinguish between matrimonial property and non matrimonial property. This means that assets built up within the duration of the marriage will be shared, but assets earned or acquired either before or after the period of co-habitation may not be.

Given the emphasis in recent case law Miller [2006] UKHL24 and Rossi [2006] EWCH 1482 – on sharing the ‘matrimonial acquest’ there seems to be no reason why the same principles should not be applied to pensions built up prior to the marriage, or post separation. Many actuaries are instructed in the case of a long marriage to say how a pension might be divided up to provide an equal income in retirement.

I have not yet seen an instruction to an actuary that aims to apply a distinction between matrimonial pension and non matrimonial pension but some readers might have done. In an appropriate case such an approach would be justified. Suppose a husband gained an inheritance 18 months after separation and put in into his existing pension fund. As long as the wife’s needs could be met with a fair share the matrimonial assets there might be no good reason why the husband should not retain the inheritance in the form of the increased pension. It would need to be carved out of the pension fund of course but that is what you use an actuary for.

But what will the wife say if confronted by the husband’s argument of post separation property ring fenced for his own use. She might draw on the ‘extra statutory’ Miller concept of compensation. She could say that but for this divorce she too would be enjoying the fruits of the husband’s inheritance in the form of extra pension.

And to bolster her compensation argument, could she not ask the court to blow the cobwebs and dust off MCA 1973 S:25(2)(h). This subsection is routinely ignored but is clearly still a part of the law. Its purpose is to ensure that the court takes account

‘…..of the value to each of the parties to the marriage of any benefit (for example a pension) which by reason of the dissolution or annulment of the marriage, that party will lose the chance of acquiring’

How long I wonder, will it be before the courts are confronted with the eerie spectacle of S:25(2)(h) as it rises smoking from it’s creaking coffin like a resurrected vampire, woken by the taste of blood on it’s lips that dripped from the alien concept of ‘Miller Compensation’.

Tom Tyler is a family law barrister at 4 Brick Court chambers

It would appear that the Government has shelved plans to extend the pension sharing and attachment legislation to cohabiting couples following separation or death.

Justice Minister Bridget Prentice MP issued a written statement on 6^th March, from which we learn that the Government have decided to consider the research findings on the Family Law (Scotland) Act 2006. The Act has provisions that are similar to those that the Law Commission proposed in their report on 31 July 2007.

The Scottish Executive intends to undertake research into the cost and efficacy of arrangements for cohabitees. The Government will await the outcome of this research and will for the time being take no further action.

Peter Moore is a Director of Bradshaw, Dixon & Moore Limited

© Bradshaw Dixon & Moore Ltd - March 2008

Hint: just about every time

In a normal world sharing a pension 50/50 would mean giving 50% to each party. However pensions are not part of the normal world. There is a great example given by the University’s pension scheme in their literature that demonstrates this.

The example assumes the divorcee has 15 years service and salary of £30,000. The pension is shared 50/50 and the example then moves on to retirement 20 years later. It assumes inflation of 50% between divorce and retirement, with the member’s salary growing above inflation by 100% to £60,000.

At retirement the member gets a pension of £22,031pa, of which £15,000pa is in respect of their post-marriage service (15/80x£60,000), and £7,031pa is in respect of married service. The ex-spouse gets a pension of £4,219pa.

Read that again. In respect of married service the member gets £7,031pa and the ex-spouse £4,219pa. That’s not 50/50, its 62.5/37.5.

So why does that happen? It’s because the University pension scheme only increases the ex-spouse’s pension by inflation, not by the increase in the member’s salary. And in the example salary increases are double inflation.

I’m not knocking the University scheme here. In fact there is a lot of merit in what it does. For a start the ex-spouse’s pension is totally separated from the future fortunes of the members: the clean break pension sharing is there to provide.

Second the sum of the pensions for the two parties is set to equal to what the pension would have been if there had been no sharing. Sharing does not reduce the total assets of the two parties. The same cannot be said for the way some other schemes implement sharing, where the split might be 50 to the member, 37.5 to the ex-spouse and 12.5 to the scheme.

So what does it prove? First that there are no simple answers with pensions, second that it is essential to understand how a scheme will implement a pension sharing order in practice to work out what the effect of sharing will be.

Are there cases out there which have been shared without finding out how it would be implemented in practice? Could they come back and bite you?

Nigel Bradshaw MA, FIA is Chairman and Design Director of Bradshaw, Dixon & Moore Ltd.

© Bradshaw Dixon & Moore 2008

Some of our readers may already be familiar with Wikivorce, an online divoce social network. We find the site very useful to follow what is happening at the "grass roots" of the profession (i.e. divorcees themselves) and Peter can often be found lurking in the Pensions section of the forum.

Wikivorce founder, Ian Rispin has recently circulated a press release announcing that membership of the site has now reached the 10,000 mark. Proof, if any is needed, that clients going through a divorce are increasingly arming themselves with information and advice from outside of conventional channels.

This might seem rather unnerving at first, but we see it as a great opportunity to see firsthand what really matters to end clients outside of the sometimes constrained professional/client relationship.

The original press release can be found here.