Alongside the family home, pensions are often one of the most valuable assets on divorce. It is important to know exactly what information is needed to properly consider them when trying to reach a financial settlement. In this blog, we explain everything you need to know about pensions on divorce and how we can help you.
What do you need to know?
Following a divorce, the first step is always about information gathering. This can be done voluntarily between you and your ex, but if court proceedings are issued then it will become mandatory. Both of you have a duty to provide full and frank disclosure about your financial circumstances, which includes the value of your pensions. This is usually documented in a ‘Form E’ which has a specific section dealing with pensions.
You can request details of your state pension entitlement by sending Forms BR19 and BR20 to the Department of Work and Pensions, and request details of non-state pensions by sending a Form P to each pension provider. It is good practice to send these forms as soon as possible as it can take some pension providers a while to provide the information. This is particularly so when the pension is a public sector one (e.g. NHS or teachers).
The pension providers are required to provide very specific pieces of information. A list of what they need to provide is set out in Regulations 2 of Divorce etc (Provision of Information) Regulations 2000 and includes a valuation of the pension rights and/or benefits accrued and any implementation charges that may be due if a court order is made.
It is also important to obtain and review the terms of the pensions as they may contain key pieces of information which may otherwise be missed. This may include spousal benefits that are available and details about when the member spouse can start drawing income. All this information will be relevant to considering how that pension should be treated on divorce.
A divorce lawyer will be able to guide you through the wealth of information that is received in respect of pensions and the parties’ wider financial circumstances. However, it may also be necessary to instruct an expert to assist you in understanding the pensions and what a fair pension share on divorce may look like.
Do I need a pensions on divorce expert?
At the start of the blog, we looked at the information needed to consider pensions following a divorce. This information gathering exercise is only the first step, and it may become necessary to instruct a Pensions on Divorce Expert (PODE) to assess what a fair outcome for the parties in respect of pensions may look like.
Pensions are complicated; there will be different types of pensions, different values and different terms and pension scheme rules. Further complicating factors include:
- differing retirement ages
- benefits that could be lost on pension sharing
- whether a person prioritises capital or income, charges, tax and implementation considerations
to name just a few. To help navigate this area of law, in July 2019, the Pensions Advisory Group released a Guide to the Treatment of Pensions on Divorce (the PAG report) which is the go-to guide for all things pensions on divorce.
What does the PAG report do?
The PAG report provides guidance on the cases where a PODE should be instructed. For example, some complicating factors that suggest the need for a PODE include:
- where the pensions are from uniformed service public sector defined benefit schemes
- where there is a substantial age gap between you and your ex,
- where the pension is of a lower value but where there are implicit guarantees which may mean it yields benefits as if it were worth more.
These are just a few of the many situations where a PODE would be valuable when considering pensions on divorce.
Divorce can be expensive and often parties do not want to incur the additional cost of a PODE report. But, as the PAG Report states, ‘the financial cost of making an uneducated guess about the pensions with a view to avoiding the relatively modest cost of a PODE report and so getting it wrong can be immense for either party’.
An experienced family lawyer will be able to advise you on whether a PODE is needed and proportionate in your case and what their report should address. They will be able to provide guidance on what questions should be asked in light of your own objectives within the wider financial settlement.
After choosing a PODE, we’ll now look at the different ways the Family Court can deal with pensions.
How does a court deal with pensions?
There are various options available to the Family Court to deal with pensions. Below, we’ll go through the most common methods used.
Pension Sharing Orders
Pension Sharing Orders (‘PSO’) were introduced in the Welfare Reform and Pensions Act 1995 and are by far the most popular way to deal with pensions. They divide the benefits under the member’s pension between you and your ex, so you each have your own separate and independent pension rights. The non-member party may keep the benefits within the same pension scheme or transfer them to a different one (the pension scheme rules will tell you what options are available). The percentage used to divide the pension is completely dependent on the circumstances of the case, and could be anything between 1% to 100%.
Pension Sharing Orders are popular because they allow a clean break. Once the order is implemented, you and your ex each have your own independent pension benefits that you can deal with as they wish. There is usually a fee from the pension provider to implement the order.
Pension Attachment Orders
Pension Attachment Orders (‘PAO’) (formerly known as ‘earmarking’) were introduced by the Pensions Act 1995, but are not very popular since the introduction of PSOs. A PAO redirects some or all of one party’s pension benefits to the other party when the benefits fall due. This could be in relation to the member party’s income on retirement, their tax-free lump sum drawdown or any lump sum payable on their death, or a combination of all three.
It is not very popular because it is not a clean break. You and your ex will still be financially connected until the benefits are fully redirected; in some cases this could be indefinitely if the non-member spouse is entitled to a share of the pension income, or until death if they are entitled to a payment on the member spouse’s death. There is likely to be a fee from the pension provider to implement the order.
Offsetting is not a court order; it is a method of factoring the value of the pensions into the case, without making a PSO or PAO. It means that both you and your ex keep your own pension benefits, but the value of those benefits will be offset against the value of other assets in the case. For example, if one of you has a larger pension and keeps that, then the other may receive a larger share of of the proceeds from a house sale to compensate.
Offsetting can seem like a simple solution because it often uses the capital equivalent value (‘CEV’) of the pension at face value, and simply balances it elsewhere on the asset sheet. The difficulty is that CEVs are only an estimated snapshot in time from the pension provider. The actual value of the pension could be much higher or lower than the CEV provided, which means the offsetting may be unfair. This is particularly relevant where there are defined benefit pensions involved, as their value is often much higher than the CEV provides.
What other options will the court consider?
It is also important to highlight that when the court uses the above options, they may also consider that ‘apportionment’ is appropriate. Apportionment is the process of adjusting the pension value within a case to account for benefits that may have accrued before or after a marriage. For example, a person may have contributed to their pension for 20 years before even meeting their spouse; they may argue that those 20 years’ worth of benefits should be excluded from the division of assets.
How pensions are dealt with in any particular case will depend on the facts and other assets in the case. The courts could use one of the above methods, or a combination of them all.
It is important to take legal advice on treatment of pensions in your particular case to ensure that you reach a fair settlement with your ex and it may be necessary to involve a pensions on divorce expert for further guidance.
Assuming the Family Court makes a PSO, what happens next?
How do I implement a pension sharing order?
Once a PSO has been made by the court, then you, your ex and the pension company need to implement it. By law, the PSO must be implemented within 4 months from the date that the order takes effect (this is called the ‘transfer day’) or 4 months from the date that the pension company is provided with the necessary information to implement it (i.e. the final divorce order, the pension sharing order and it’s annex), whichever is the latest.
The PSO will only apply to those benefits that exist the day before the transfer day. This means that if you get promoted before the transfer day and it affects your pension benefits, then those benefits will be subject to the PSO. If you are promoted on or after the transfer day, then your new pension benefits will not be factored in.
In order to implement an order, the pension company chooses a ‘valuation date’. This is a date within the 4-month implementation period that is chosen by the pension provider to value the pension benefits. The value of the benefits on that day may be different to the cash equivalent value (CEV) used within your financial remedy proceedings, but the provider is not bound by that CEV. Pension funds are based on investments. This means that their values change regularly; this is why a valuation date is necessary as it fixes the value for transfer.
The potential change in value between the CEV and the value of the pensions as at the valuation date is sometimes referred to as ‘moving target syndrome’. The difference can sometimes be minimal or it can be very significant (there have been cases where the difference has been hundreds of thousands of pounds). The courts have been unwilling to vary pension sharing orders, even where there has been a significant change in value because they see it as being the nature of the beast; they will expect you and your ex to have been advised about this. The value may increase or decrease, which could be to your advantage or your detriment.
How can I minimise the effect of moving target syndrome?
There are some ways that you can minimise the effect of moving target syndrome. One way is to seek full disclosure about your partner’s promotion prospects as this may affect the benefits available. You should also ensure that CEVs are as up to date as possible when a pension sharing order is agreed or made, and that you implement the order without delay.
To conclude, I’ll answer the most common questions we get asked about pensions on divorce
What is a CEV?
CEV stands for Cash Equivalent Value. Sometimes it may also be called a CETV which stands for Cash Equivalent Transfer Value. It is the figure provided by the pension company for the estimated value of that pension if those pension benefits were to be sold on the open market on a certain date. CEVs are used within financial remedy proceedings to understand the value of a pension within the context of the case. They are estimates only, subject to change and may not accurately represent the true value of the pension. A family lawyer can advise you on their relevance and utility within your case.
What orders can the court make in respect of pensions?
The most popular order used by the court is a pension sharing order which gives a percentage of the member spouse’s pension benefits to the non-member spouse. The court can also make a pension attachment order which sees a redirection of the member spouse’s benefits when they become due.
How is a pension sharing order calculated?
There are various ways to calculate what percentage should be used in a pension sharing order. The starting point is using the CEV but, as noted above, this may not always be accurate. It can help to get a pensions on divorce expert involved to advise on what a fair outcome may be.
How much does a pension sharing order cost?
There will be legal costs associated with either negotiating a pension sharing order as part of overall settlement with your spouse, or going to court to obtain a final order. Once an order is made, it will need to be implemented. Pension providers are entitled to charge a fee for the work they undertake to implement the order. These vary between providers. As part of negotiations, you should find out what implementation fee may apply, so that it can be considered in the settlement and who will pay it (e.g. will the fee be shared 50:50 between you?).
What does a family lawyer do?
A family lawyer deals with all legal matters relating to families and relationships including divorce, children, pre and post-nuptial agreements, cohabitation, and parentage. Pensions become involved in our work when we deal with financial settlements on divorce.
A family lawyer can advise you on how your or your ex’s pension will be considered within negotiations, and how it may be dealt with by the courts. Family lawyers are also able to identify when expert advice may be needed. We can draft instructions to the expert and help interpret the subsequent expert report. We can also assist with issues relating to implementation.
Getting a divorce can be stressful and there’s a lot to consider – particularly when it comes to pensions. If you would like further advice on how pensions are dealt with on divorce, please contact our team who would be happy to help you.