In 2019 the Pensions Advisory Group – a group of family justice and pensions specialists – published a long-awaited report that provided much-needed guidance to solicitors about pensions on divorce and warned about the practice of off-setting.
Firstly, the report pointed out that pension off-setting will only achieve a fair outcome if the pension is accurately valued. However, the cash-equivalent value provided by many schemes does not necessarily provide an accurate valuation.
Not only are defined benefit scheme CE values unreliable compared with defined contribution schemes, but they also cannot be reliably compared with other DB schemes.
A second issue is taxation. Pensions typically allow for a tax-free lump sum drawdown of a certain percentage, with the rest drawn as income and taxed. Simply taking the CE value as the value of the pension does not account for the potential tax implications.
Further, the party receiving the non-pension assets in lieu may be obtaining a tax advantage if the non-pension assets they retain are not subject to tax.
A third point to consider is whether to factor in a 'utility discount'. Receiving capital now as opposed to income/capital from a pension fund in the future is more valuable in economic terms.
Therefore, the capital sum retained by the spouse forgoing their right to share in the other’s pension might need to be reduced accordingly.
Pension attachment
The obvious limitations to pension off-setting precipitated the introduction of reforms in the shape of section 166 of the Pensions Act 1995, which inserted new sections into the Matrimonial Causes Act 1973 and permitted the court to make pension attachment orders.
These orders allow for all or part of any pension or lump sum arising at retirement to be earmarked for a former spouse rather than a member of the pension scheme. This means that once the pension is in payment, a proportion goes to the former spouse.
Although these amendments went some way towards addressing the harsh impact of the loss of pension rights on divorce, pension attachments also have disadvantages, namely that the other spouse has no control over the pension pot until retirement, and the pension holder could decide to retire early or late.
These orders also run contrary to the clean break principle. As a result, relatively few pension attachment orders have been made.
Pension sharing
The final step in reform came with the Welfare Reform and Pensions Act 1999, which gave the court the power to make pension sharing orders.
As such, the court can divide the rights under a pension scheme (or schemes) between separating parties, thus transferring the pension rights held by one party to the other.
