Updated pensions guidance provides greater clarity for divorcing couples

The turn of the year has been a busy time for family lawyers with an interest in pensions, the Pension and Lifetime Savings Association (PSLA) providing updated guidance on charges that can be levied for the implementation of a Pension Sharing Order (PSO) and the eagerly-anticipated publication of the Second Edition of the Pension Advisory Group’s report on A Guide to the Treatment of Pensions on Divorce (aka “PAG2”).

PLSA guidance

The updated guidance – which includes a range of suggested charges and a flowchart outlining the circumstances when charges can be made – is welcome and will give greater clarity for the costs involved in securing a PSO.

PSLA research uncovered that while the bulk of funds charge up to £250 to implement a PSO, 13 per cent of funds charged more than £3,000 when processing an internal transfer for a Defined Benefit scheme. This is a significant additional cost for parties who may have already spent a great deal on legal fees through their divorce and may be a factor that further dissuades spouses from pursuing claims in respect of pensions.

A recent report by Emma Hitchings, Professor of Family Law at the University of Bristol, interviewed 2,400 divorcees and found that only one in ten financial agreements included pension sharing, with more than a third of divorcees not knowing the value of their own pension let alone their spouse’s.

While there is a widespread awareness of the gender pay gap, less well known is the gender pensions gap that flows from that, with a 56 per cent difference in average pensions assets held by men and women at retirement age. Unfortunately, it is the woman, more often than not, who loses out in pension wealth in divorce. This is aggravated by the fact that women have a longer life expectancy than men, meaning that they need a larger capital fund in retirement to produce the same annual income. So, when financial settlements are being made, even if pensions are considered, women still tend to lose out.

Recent research from Scottish Widows reveals that at least 60 per cent of divorced women did not discuss pension assets during divorce, primarily because they did not know they should. Where they are discussed, many women will forego pension claims and instead pursue additional capital from the family home (a process known as “offsetting”) which has short term benefits but can lead to longer-term issues and a lack of financial protection in later life.

The same research revealed that 60 per cent of divorced women are not on track for even a minimum lifestyle. As a result, that seem research revealed that only 10 per cent were on track for a comfortable lifestyle in retirement. Greater clarity on PSO implementation charges and an encouragement for a reduction to those charges may play a small part in helping to redress that imbalance.

PAG2

On its publication in July 2019, the first PAG report was welcomed by family lawyers and the family judiciary from the President of the division, Sir Andrew McFarlane, downwards.

As McFarlane wrote in his foreword to the report: “For too long the division of pension assets, which may often be of significant value, has been confused by jargon, complicated structure and changing provisions; for too long, also, tales of divergent approaches to pension sharing in different court centres have brought the integrity of the system into question.”

“I endorse this report and, in doing so, commend it to all judges and practitioners as formal guidance to be applied when any issue regarding a pension falls to be determined in Financial Remedy proceedings,” McFarlane added.

The guidance has since become a staple feature of financial remedy cases, helping to narrow discussions and the range of outcomes where pensions are being considered by the court or through alternative dispute resolution (ADR).

PAG2 builds on the foundational work of PAG1, reflecting developments in caselaw – notably those judgments that have referred to the conclusions and guidance from PAG1 – and dealing with the impact on Brexit for overseas holders of pensions based in England and Wales, the changes to public sector pension valuations as a result of the McCloud judgment and abolition of the Lifetime Allowance.

There is an additional section on the impact that short marriages have on the correct approach to pension sharing, which was a notable absence from PAG1. The express recognition that any need for pension provision must be a relationship generated need and that there should be a nexus between the marriage and a financial need to be met may simply restate well-established caselaw from Miller, McFarlane [2006] UKHL onwards, but the explicit reference to that in PAG2 will likely prove advantageous to any practitioner attempting to limit a PSO on the basis of the length of the marriage.

One of the most heavily contested areas of pensions negotiations concerns the treatment of non-matrimonial pensions, particularly those that were acquired prior to the marriage; or, specifically, as the guidance notes, the start of seamless cohabitation prior to marriage. This section has been updated and amended, with a clear steer that there can be no “one size fits all” approach and that the usual principles as regards non-matrimonial assets should be applied to pensions when considering a needs v sharing approach.

Offsetting – trading a PSO for a greater share of non-pensions assets – remains the dominant approach to dealing with pensions. PAG2 helpfully includes the Galbraith Tables – think Ogden or Duxbury but for offsetting Defined Benefits schemes – with useful commentary on the uses and limitations of these.

The report expands on the possible solutions for dealing with age gap cases, where the granting of a PSO from an older to younger party will deprive the elder spouse of income without providing any benefit to the younger for a considerable period of time. This is a thorny issue and the new suggestions, particularly for consecutive orders transitioning from a Pension Attachment Order to a PSO and Judicial Separation, will be welcome, albeit risky, additional and creative tools in every practitioner’s arsenal.

PAG2 remains essential reading for all financial remedy practitioners and this updated edition will doubtless become just as relied upon as the original report has been.

A busy time for family lawyers, indeed, but some extremely important updates that must be utilised in order to better serve divorcing couples over the coming months and years.

Matthew Taylor is a Partner at Stowe Family Law