View more on these topics

Get the pension sharing mix right

I promised you even more discussion about sex and pensions last week but this time I will be detailing what happens when the sex has stopped (at least with one&#39s spouse) on divorce.

Pensions and divorce will become the hot topic for pension advisers from December 1, even, I predict, in front of stakeholder pensions.

Until the late 1990s, it was known most widely as pension splitting and was the method preferred by campaigners for reform over the last couple of decades.

The introduction of earmarking orders in the Pension Act 1995 was a compromise between a Government which wanted more time to discuss the various propositions and the reform pressure groups which considered that they had waited long enough.

Winning the availability of earmarking orders was, however, always equated in the minds of the reformists as winning a battle but not the war. They quickly understood the shortcomings of these orders.

So, even before the ink was dry on the act, pressure was mounting for further discussion towards pension sharing. A new Government pledged its support for the rapid introduction of legislation and regulations but these still suffered unforeseen delays until pension-sharing legislation was finally enacted as part of the Welfare Reform and Pensions Act 1999.

It is particularly important to note that the availability of a settlement involving pension sharing orders only applies to divorces petitioned for or after the December 1. Divorce proceedings commenced before that date may deal with a claim against the value of accrued pension rights only by set-off or earmarking orders.

It is equally important to remain aware that, where the pension-sharing solution is available, it is only one of the three possible methods of compensating the scheme member&#39s spouse. Set-off and earmarking orders remain available.

You should, therefore, understand the implications of having these three alternative methods available. The two parties must agree on the methodology and the numbers (the latter more properly called the quantum of the claim) to avoid the financial deal having to be referred to, and settled by, the court.

If the two sides cannot agree on either the methodology or the amounts of the claim, then the dispute will involve much greater expense for both divorcing spouses.

Do not forget that the most common “defence” by a pension scheme member to any attack on the value of their accrued benefits is, first of all, to attempt to deny completely that any value is to be passed on to the spouse.

As evidence of this extended range of settlement methods, it should be noted that the major part of the Welfare Reform and Pensions Act 1999, as it relates to pensions and divorce “simply” – although, again, this understates the ultimate complexity of its achievements – amends existing sections and adds new ones to the Matrimonial Causes Act 1973 (MCA73).

Apart from historical interest, core pension sharing legislation is still to be found under the terms MCA73, not the Welfare Reform and Pensions Act 1999.

The act was followed by a number of regulations filling in the details behind the principles outlined in the legislation. Readers who want to study or refer to the detailed rules of either earmarking orders should be forewarned – the legislation introducing these two developments gives little detail about their practical workings and so, for the most part, this detail is produced pursuant to the legislation – generally by statutory instruments.

This is particularly exemplified by the plethora of SIs produced for pension sharing as well as a number of updates from the Inland Revenue and Pension Schemes Office.

As a result, this series of articles concentrates on the practical effect of the overall impact of both legislation and the supporting documents rather than the detailed regulations (much of which, in any case, deals with court procedures which are not a concern of this article).

It is worth noting that, when earmarking orders were introduced, it was, and still is, possible for a claim against pension rights to be settled partly by set-off and partly by earmarking orders. So, for example, the couple could agree to transfer £20,000 of non-pension assets to the member&#39s spouse alongside an agreement of an earmarked periodic payment order and/or lump-sum order.

However, the introduction of pension-sharing orders, while permitting a mix with set-off does not permit a mix with earmarking. With a little thought, you can perhaps see why attempts at mixing these two types of order could not work in practice. To summarise simply, see the table below.

Quite simply, at least in concept, pension sharing divides a scheme member&#39s pension rights at the time of divorce from within the pension scheme itself. In theory, this could and should be the least technical and cleanest method of dividing the value of the pension claim. However, even with the best of intentions, legislators and other official bodies had to struggle hard to overcome innumerable hurdles. The following sections explain these problems, solutions and residual questions.

Where a pension-sharing order is made, it will award a certain proportion of the scheme member&#39s benefits to that person&#39s divorcing spouse.

Is the division of accrued pension rights always 50/50?

No. As with set-off and earmarking orders, it is up to the two sides to agree on a mutually acceptable percentage or proportionate split, even if they can agree on the methodology.

Ultimately, as always, if such agreement proves impossible, then it will be for the courts to determine what, in their view, is the equitable method of settling the claim and what is to be the proportionate pension share for the spouse if this method is preferred.

When is the pensionsharing deal done?

As with the other two methods of dealing with a claim against pension rights in divorce cases, with the possible exception of earmarking orders following a ground-breaking decision in the divorce case of T versus T (note that divorce cases, when reported, are often only referred to by the couple&#39s initials to preserve confidentiality), the pension-sharing order will be made at the time of the divorce settlement.

When does the “money” change hands?

This really does prompt the need for greater detail, elaboration and discussion, as the answer depends primarily on whether the pension scheme in question is funded or unfunded. In particular, note that the vast majority of pension schemes in the private sector are funded while most public sector schemes are unfunded.

Whatever type of pension scheme, though, the starting point for our consideration is that the two sides agree such an order should be made or, in the absence of such agreement, the court determines that a pension-sharing order should be made. This being settled, the order must be expressed as a percentage share of the member&#39s benefits which should be passed on to the spouse.

Example

Maureen has accrued pension benefits in a scheme. During divorce negotiations with Harold, she vehemently objects to any claim for part of the value to be passed to her husband. The financial settlement is ultimately decided by the court which, among other provisions, awards Harold a 30 per cent share of Maureen&#39s pension.

What does this award of a 30 per cent share mean? To explain, we will for the remainder of this series of articles use this Maureen and Harold example through the remainder of this briefing note to illustrate the main possible courses of action (having, you may note, so far been deliberately evasive about the type of scheme of which Maureen is a member).

We will also see over the next few weeks how the new rules could affect 50,000 or more divorces each year.

Recommended

Chase Fleming Asset Management – FF-US Strategic Value Fund

Wednesday, 15th November 2000.Type: Sicav.Aim: Growth by investing in a value style biased portfolio of US companies.Minimum investment: $5,000.Place of registration: Luxemburg.Investment split: Financial services 30.3 per cent, consumer cyclicals 0.8 per cent, consumer staples 10.7 per cent, communication services 10.4 per cent, energy 9.9 per cent, capital goods 9 per cent, utilities 7.3 per […]

Ex-Burns Anderson chiefs join Berkeley

Devon-based IFA network Berkeley Wodehouse Asso ciates has pulled off a coup with the rec ruitment of two former top directors of rival network Burns Anderson.They are former chief executive Philip Whitehead who retired from Burns Anderson in 1998. He will become chairman of Ber keley. Former associate commercial dir ector Mal colm Streatfield will […]

IFAs welcome five-year extension to Isa limit

IFAs and fund managers welcome Chancellor Gordon Brown&#39s decision to extend this year&#39s £7,000 Isa limit for the next five years.The move, announced in last week&#39s pre-Budget speech, will shelve original plans to reduce the limit to £5,000 for the tax year 2001/02, retaining the existing limits until April 2006. Investors can currently hold up […]

Advisers may be made to justify their commission

The FSA is to investigate how advice is paid for as part of a wide-ranging review into disclosure.The regulator&#39s consultation paper, expected in the next four weeks, aims to discuss increasing transparency and provide analysis into the merits of feebased and commission-based advice.Optimists say the move will help IFAs differentiate themselves from tied or multi-tied […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment