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Rights of passage

Over the last few weeks we have been talking about the various ways in which a claim may be made against a spouse&#39s accrued pension rights in divorce settlements.

What we have not yet done, however, is examine the chances that such claims might succeed. It is not automatic that a claim must or even should be successful and much depends, in reality, on the spirit of negotiation between the two sides or, failing this, the decision of the judge in contested cases.

A recent House of Lords decision – White v White – relating to a high-value divorce has potentially turned established principles relating to divorce settlements on their head. Although not directly connected to the issue of pension rights, the case has undoubtedly changed the whole face of pension claims in divorce settlements and enhances the role of the financial adviser in the negotiation procedure – especially when working under instruction from a divorce lawyer.

A little unexpectedly, therefore, in view of the huge importance of this decision, I am devoting the next two articles to explain the background and the implications of the White v White decision.

In the UK, the prevailing legislation relating to one spouse claiming against his or her lost rights in the other spouse&#39s pension benefits, at time of divorce, is the Matrimonial Causes Act 1973 (MCA73). Parallel (more or less) legislation in Scotland is the Family Law (Scotland) Act 1985. In these articles, I will be specifically quoting the law outside Scotland (which, therefore, covers England, Wales and Northern Ireland) although broadly similar considerations apply in Scotland.

Section 25(2) of MCA73 directs the courts on matters to
be taken into consideration in determining the financial settlements for divorcing couples. To quote directly from that subsection: “The court shall have regard to the following matters.” This sub-section then includes consideration of the relative income, expenditure, assets and liabilities of each party to the marriage. Of most interest to the claim in respect of pension rights, though, is s25(2)(h) which directs the court to have regard to “any benefit which, by reason of the dissolution or annulment of the marriage, that party will lose the chance of acquiring”.

It is clear that this sub-section was and is designed to include the loss of rights from pension schemes, but it should be remembered that this only directs the court to “have regard to” the loss of benefits and so the courts still have wide discretion as to just what order, if any, to make in regards to lost pension rights.

An actuarial valuation of all these lost benefits can be made which must, of course, take into account the mortality probabilities, including which spouse is likely to die first and when that death is most likely to occur statistically.

The courts&#39 discretion

No matter how mathematically precise the calculations or the claim to be made, it must always be remembered that this precision cannot bind the courts in deciding the level of any compensatory award to a spouse. The discretion of the courts was clearly shown in the case of T v T (1998). Note that, in reporting divorce cases, it is the usual practice to refer to the parties by their initial of their surname in the interests of confidentiality.

The T v T case

As regards the salient points of Mrs T&#39s claim in respect of her lost benefits in Mr T&#39s pension scheme, an actuarial valuation indicated the total value of her lost rights (including loss of share of member&#39s pension, loss of rights to spouse&#39s pension, and loss of lump-sum death in service benefit) to be £185,601 and it was proposed that this be settled by Mr T paying in cash or other assets that amount of money to Mrs T as a lump sum at time of divorce.

The petition for divorce was filed after July 1, 1996 and so the pension claim by Mrs T could have been settled, as an alternative to payment of the substantial lump sum, by earmarking orders under which she would receive no benefit until Mr T drew benefits from his pension scheme, at which time part of those benefits would instead be paid directly to Mrs T.

In the event, the two sides could not agree on either the nature or the value of Mrs T&#39s claim in this respect, nor on how any successful claim might be settled, and so this contested case was heard in the family division of the High Court on February 25, 1998.

The outcome of the case was that the judge made no award in respect of Mrs T&#39s lost share in her husband&#39s pension, nor any award in respect of her lost rights to a spouse&#39s pension and only made an award in respect of death in service benefits sufficient to provide a lump sum equal to 10 times the annual maintenance awarded to Mrs T.

Analysing the T v T judgment

What prompted the judge to arrive at a decision which almost entirely ignored Mrs T&#39s valid (at least actuarially) claim to lost rights in her husband&#39s pension scheme?

In particular, in respect of the loss of value in the member&#39s pension, the judge lists a number of pitfalls in awarding an earmarked periodic payment order and/or an earmarked lump-sum order. Primarily (it seems) that such an award made now might, by the time the award comes into payment, prove either substantially overgenerous or miserly to Mrs T. The judge therefore notes that the quantum (that is the level) of the claim might best be deferred until nearer Mr T&#39s eventual retirement age.

Highly instructive is the judge&#39s statement that the substantial sum the wife is to receive from the available matrimonial capital, including a half share in the couple&#39s joint account, plus the potentially openended maintenance for which the judge has provided, sufficiently takes into account the wife&#39s potential losses. In other words, the judge considers that the wife is already benefiting from such a generous settlement out of the accumulated matrim onial capital and the husband&#39s future income that there really is no need to make any award in the pension scheme benefits.

Such consideration has since been criticised by some pension law experts who consider that the division of matrimonial capital and the making of a maintenance order should be considered as a separate right to that spouse&#39s claim in the lost pension benefits. This contrary view is not least based on the belief that accumulative pension rights should be viewed as a capital asset of the couple and therefore should be considered for division in just the same way as any other accumulated matrimonial capital.

At the end of the day, it is the judge&#39s decision which matters in each case. He will use his discretion. It is hugely important for pension advisers to note that the T v T case “merely” confirmed an established principle in divorce settlements in recent years that matrimonial property and income, including pension rights, will be divided primarily on the basis of attempting to ensure the disadvantaged spouse is awarded what he or she needs to live off rather than compensating that spouse for (subsection 25(2)(h) again) “what she has lost the chance of acquiring”.

Claims against pension rights, which typically will not become payable for many years or decades into the future, have therefore suffered badly as, most notably in the T v T case, judges note that it is not certain whether the spouse will need to be financially maintained by the time the pension rights come into payment.

In the next issue, however, we will look at the remarkable settlement in the White v White case.

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