By Fiona Tait, Technical Director, Intelligent Pensions
MICRA’s research suggests there are 4 fundamental reasons for this situation, the ‘4 Cs’
• Complexity
• Cost
• Culture
• Conflict
Legal aspects
Family lawyers are naturally focused on getting an equitable deal for their client and they will also be looking to implement a ‘clean break’ solution. Pensions do not easily lend themselves to this scenario partly because they can only be held by one individual at a time and partly because in most cases they are intended to provide a future rather than a current income stream.
Courts and solicitors have long grappled with the conundrum of putting a value on future income, eventually settling on the Cash Equivalent Value (CEV) as the most suitable and consistent measure. In theory the CEV may be included in the overall value of the matrimonial assets and this total divided as appropriate between the divorcing couple.
In practice there are a number of drawbacks to this approach, particularly when it comes to final salary pensions. The CEV is based on a number of assumptions all of which relate to the member and not the spouse. Other valuations may be used to argue for a greater share of the CEV but this requires the input of a pension specialist at an early stage of the negotiations. More often than not a Pensions On Divorce Expert (PODE) only becomes involved when there is a pension share to implement and, as I started by saying, PSOs are relative rare.
Cultural issues
Like it or not, we live in a culture which is based around the idea of a family unit. Within this premise the marital partners take on different roles – one focusing on ‘breadwinning’ and the other on ‘homemaking’. The result is that ownership of any financial assets, including the pension, is usually skewed towards one partner. MICRA found that in over half of male/female couples 90% of the joint pension assets are held by the male.
This is not an issue so long as the partners stay together but it creates a problem when the partnership is broken up. Firstly, and fundamentally, it costs more to support two single people than one couple, so the same income has to go further. Secondly, many breadwinners think that the pension is theirs by right as they are the ones who have worked hard to build it up and will strongly oppose any suggestion that their ex-partner has any right to it. Indeed, there is evidence that some homemakers agree with this view as they have instructed their legal advisers not to take the pension into account.
The result is that while divorced men and women have less pension than those who remain married, divorced women are far more likely to end up in poverty when they retire.
Potential solutions
First and foremost, it would help if both parties to a divorce are clear that pension assets must be taken into consideration during a divorce and that it is fair to do so. In a breadwinner/homemaker situation any pensions should be seen as joint assets in the same way as the matrimonial home, even if it has been primarily funded by one partner. I would recommend that all pensions professionals make them selves familiar with MIRCA’s excellent short video and consider forwarding it to any members or clients going through a divorce.
Secondly, I would recommend that a pensions on divorce specialist is consulted at an early stage in the divorce proceedings. A PODE is not necessary in every situation, indeed the majority of divorces involve younger couples and relatively low pension entitlements which do not justify another set of fees. We do know however that the number of people getting divorced in their 50s and 60s is still rising. These couples are likely to have more substantial pension assets which are primarily held by one partner. In these situations, a PODE should not just be the executor when a PSO has been decided upon, they should be a fundamental part of the process which considers whether a PSO is likely to be suitable in the first place. It’s not just a case of ensuring the assets are split evenly, it’s also important to ensure that each party has the right assets to secure their financial future.
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