By Fiona Tait, Technical Director, Intelligent Pensions
Why do we need a guide?
Unlike other matrimonial assets, pensions are never jointly owned and there is often a huge disparity of provision between divorcing spouses. In over 50% of couples more than 90% of the pension assets are held by one party, usually but not always the husband.
As a result, some form of redistribution is usually necessary, either by transferring some of the funds from one partner to another (sharing) or by one party giving up ownership of another asset of equal value to in order to retain the pension (offsetting).
This has been the challenge faced by matrimonial solicitors since 1995 when it became a legal requirement to take pensions into account in financial settlements in England & Wales, it has been longer in Scotland, and yet many solicitors and judges lack confidence when dealing with them.
Financial advisers on the other hand know all about pensions, but often very little about how they can assist beyond recommending a home for any shared assets.
Recognising this, the Pensions Advisory Group resolved to provide guidance aimed at both legal and financial practitioners, resulting in the publication of their first report in 2019.
Pensions legislation rarely stays still however and since that time there have been a number of changes which led the group to revisit the original guidance.
Legal issues
The way in which pensions are treated by legal professionals has evolved considerably in the last 4 years, with a recognition that pensions should be treated differently in needs-based cases, where assets are just used to cover expenses, and sharing cases where the focus is on dividing up capital assets not needed to fund normal expenditure.
The issue of apportionment has also raised its head – is it reasonable that a spouse should be awarded a full share of their partner’s pension if it has been built up over many years and they have only been married for a small part of this time?
Valuation issues
In all situations getting an appropriate valuation of the pension assets is crucial, and the days of just accepting the CEV are gone. Solicitors are likely to look for more sophisticated analysis, depending on whether the aim is equality of income or capital.
If the pensions are to be shared the former is more likely, and the task is to compare projected income streams in the hands of each party. In offsetting cases, the comparison is between the pension and assets with a straightforward capital value. The latter situation may be addressed in some cases by the Galbraith tables designed by one of the report’s key contributors.
The good news for readers of this article is that this increased sophistication is more likely to require the services of an actuary or Pensions on Divorce Expert (PODE). The guide explains when this is most likely to be needed and gives examples of how they should be instructed. The reality is that there are still very few firms in the UK with the necessary experience and expertise to specialise in this field.
What about the smaller cases?
While there is no doubt that a PODE can add value to the divorce process, it is necessary to ensure that the costs do not outweigh the benefits that result. 63% of divorces involve total matrimonial assets of under £500, 000 and the guide suggests, as a broad brush, that a PODE is most likely to be necessary where pension assets exceed £100,000.
Other factors include whether there are defined benefits to be considered, especially public sector schemes, there is a whole section devoted to MacLeod, the disparity of pension provision and the relative ages of the couple.
Experienced PODEs should be able to recognise at an early stage whether they can add value or not, and at which key stages of the financial remedy procedure.
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