I will again continue my example of Harold and Maureen. You may recall that Harold is making a claim against the value of Maureen’s accumulated pension benefits within a final-salary scheme.
The value of Harold’s pension share, if taken as a transfer, will be 30 per cent of Maureen’s transfer value, as calculated and provided by the scheme. This transfer value was referred to in relation to pension earmarking orders as the cash-equivalent transfer value but in more recent regulations is referred to more simply as the cash equivalent. Anyhow, what it means is that the spouse will have secured a percentage of the transfer value, calculated by the scheme on the basis that Maureen had left service on the date of the sharing order.
The value of the pension credits awarded to Harold becomes 30 per cent of the cash equivalent and the value of the pension debits remains just as if Harold had left the benefits in Maureen’s scheme. She will fare no better or worse because of the transfer.
Whether Harold would be well advised to effect the transfer depends on a number of factors well known to pension transfer specialists but, due to the complex nature of this field, beyond the scope of non-specialists.
It may be useful to note three points in particular about the level of the transfer value:
- There is rarely any allowance for death in service benefit.
- There will almost invariably be an allowance for a spouse’s pension.
- The value will be based on the member’s age and term to retirement.
It may be advisable for a spouse who is awarded a share of the member’s pension to also seek an award in respect of the death in service benefit. Think on.
If the couple had remained married, it would be almost certain that, in the event of the death of the scheme member while in service, the spouse would have received a substantial lump-sum payment.
The Matrimonial Causes Act 1973 (and its equivalent legislation in Northern Ireland and, separately, in Scotland) requires divorce lawyers and the courts to consider the value of any benefits in arriving at a fair settlement at the time of divorce.
Now for something really contentious among divorce lawyers and thus always capable of being disputed between the two divorcing parties. Suppose the couple have been married for 10 years but the pension rights – whether money-purchase or final-salary-based – have built up over a much longer period.
Let us say Maureen’s fund of £100,000 has built up over 30 years. Should Harold be able to claim a share of 10 years of the fund (the period of marriage) or all 30 years? In simple terms, the question becomes one of period of marriage or period of service.
Ultimately the decision rests in the agreement between the two parties to the divorce or, failing this, the discretion of the court. There is an increasing trend towards the division of only those rights which accrued during the period of the marriage but this point can be argued convincingly either way. Harold’s solicitor and pension advisers would surely argue for period of service while Maureen’s advisers could argue in favour of period of marriage.
Legislation specifies the date on which the member’s scheme rights should be valued for pension sharing. This is: “…such day within the implementation period for the credit …. as the person responsible for the relevant arrangement may specify by notice in writing to the transferor and transferee”. Note that the person responsible for the arrangement refers to the administrators, managers or trustees of the pension scheme.
The implementation period is, broadly, a date within four months of the day on which the details of the sharing order are served on the pension scheme or within four months of the day on which the order is to take effect. It therefore follows that although the percentage sharing order is determined by the court, the exact value of that order may not be known at that stage.
This is an area where an experienced pension adviser can assist with the smooth running of financial negotiations between the divorcing parties.
Whichever way the agreement goes, this raises the issue of what happens if the scheme member dies when looking at the various methods of splitting pension rights – pension sharing, earmarking orders and set-off.
For pension sharing, as with set-off, the death of the person against whose benefits the order has been made – Maureen in our example – has no importance. The scheme member’s remaining benefits, after the sharing takes place, are irrelevant to the former spouse who, whether the scheme member dies or survives, has secured a pension share of his or her own.
But what happens if the person who benefits from the pension-sharing order – Harold in our example – dies? If they have accepted membership of the original scheme, then the death benefits payable on the spouse’s death follow the same principles as would have been the case on the death of the original scheme member. This applies to the availability of a lump sum and a surviving spouse’s pension.
Thus, for example, on the death of the spouse in whose favour a sharing order has been made in a salary-related scheme, a pension may become payable to a person who that spouse has married.
This follows the basic principle that the sharing order passes to a spouse a share of the same benefits which would have been due to the scheme member, not only as regards retirement benefits but also death benefits.
If, on the other hand, the spouse in whose favour a sharing order has been made has transferred that share away from the original scheme then, on that person’s subsequent death, the death benefits are determined by the rules of the new scheme, which is usually a personal pension.
In conclusion, how does the prospect of a pensionsharing order compare with the other possible methods of a claim?
As with any claim against pension rights, there are no real attractions to a scheme member of having a share of his or her accumulated pension rights transferred to a former spouse and so one must consider if this course of action amounts to “the best of the three evils” and suggests that the scheme member will lose less value than if set-off or earmarked orders had been agreed.
It appears highly unlikely that pension-sharing orders will, at least in the short term, be preferred by courts over set-off arrangements. I might boldly predict, however, that pension sharing will within the next decade become the accept strategy by which pension claims will be satisfied as solicitors and the courts realise that they should not be treated as a future source of income but as a current asset which should be considered capable and even desirable of sharing at the time of divorce.
This crucial question is the central topic of my next article in which I will also summarise the primary ways in which a financial adviser can prove extremely valuable in the divorce negotiations.