• April 20, 2024
 Navigating pension sharing in divorce | Legal precedents, guidance and implications

Navigating pension sharing in divorce | Legal precedents, guidance and implications

Introduction to pension sharing

Pension sharing is a common aspect of financial settlement on divorce. It is common for those who have not sought legal advice to misunderstand Financial Remedy guidance – and consider financial division as ‘capital’ only (such as a house sale, transfer of vehicles, or closure of joint bank accounts). However, the Court may exercise its right to interfere with income and pensions to achieve a fair division of assets across the whole picture if they consider this necessary.

The Court’s authority on pensions

The Court’s intervention often materialises as a Pension Sharing Order, allowing for a portion of one’s pension to be transferred to an ex-partner’s fund.

A prevalent misconception is the belief that pensions accrued outside the marriage are automatically protected or “ringfenced”. However, the Court’s gaze extends beyond the marriage timeline, considering factors like pre-marital cohabitation and the overarching need to address blatant disparities. Updated guidance now makes the obligation on the Court plain – in a case where there are blatant needs, the entirety of both pensions should be considered.

Pensions in divorce sharing guidance and precedents

The first guide that expanded upon the ‘treatment of pensions on divorce’ was released in July 2019 (known as ‘PAG’) and elaborated upon in W v H (2020) EWFC B10. W v H (divorce financial remedies) [2020] EWFC B10 – Pump Court Chambers – Barristers’ Chambers was a landmark case in respect of needs, and how they can interfere with pensions irrespective of a standard ringfencing argument.

This focused on a divorce whereby both parties had significant needs, which led to the Court’s decision to divide all pensions – including prior to the relationship.  In short, the Court’s rationale was that the ‘storage of pension capital’ on paper was not helpful to the realistic standard of living that the parties would have.

As the purpose of any pension is to provide income upon retirement, equality of a cumulative and whole pension pot is likely to ensure fairness by equalizing future standard of living. This is in circumstances where a lesser earner could be impacted significantly long-term, on the basis of disregarding a higher-earner’s previous accrual, noting that they will continue to make future investments post-settlement. In the judgement, the Court referred to ‘PAG’ as a persuasive precedent and was the first reported case to do so.

Case examples

The subsequent case, KM v CV (2020) EWFC B22 faced the same issue in respect of whether ringfencing was appropriate and fair to the party with a greater earning capacity, or whether non-matrimonial assets needed to be brought to the fore, as this was a needs case. However, there was no Pension Sharing Order made. The higher earning party maintained that active contributions, and not passive growth of pension capital, should be ringfenced. The lower earning party submitted that the pension in question existed at the time of the marriage and that there was limited ability for him to support himself upon retirement without this Order, raising concern for his standard of living upon retirement.

Upon appeal, reference was made to ‘PAG’, and an appeal was upheld. On this basis, the Court considered that the pension valuations at the time of trial, not separation, would be most beneficial to achieving parity (noting the Court do not seek to imply how much a party will hold in the future, as it is a continued effort to secure a clean break and sever financial ties between married couples at the earliest opportunity). Also, this was a needs case first and foremost – therefore, emphasis on contributions and non-matrimonial accrual was misplaced. The Court eventually agreed that equality of all pensions would be appropriate.

Furthermore, the case of RH v SV (2020) EWFC B23 concerned a pension value in surplus of £1.4m on the husband’s side. The original decision held that a 25.8% share should achieve equality of the cash equivalent values – during the marriage only. This decision was appealed – the wife considered that her needs had not been regarded highly enough considering the assets in the case, and the accrual period should have been widened to encompass the total pot. The issues that arose were focused primarily on how the wife could logistically support herself with only ringfenced capital that could be drawn down in the future. Submissions included that her standard of living would be unfairly hindered in comparison, as the husband had ample time to further increase and inflate his pension value. This led to her receipt of 34.9% of all assets, which was not concordant with the Court’s consideration of fairness and its relationship with equality. The wife argued that needs came to the forefront of this litigated case.

The wife’s appeal was dismissed, but the Court’s rationale focused on her ability to secure a reasonable income within the not-too-distant future, which would inflate her own prospects against that of the husband. It was accepted by HHJ Robinson that contribution arguments hold less weight in cases of need, and that non-matrimonial assets are at liberty to be considered, however this was not enough for the Court to consider it had erred in its judgment.

The crux of RH v SV lies in the Court’s recognition of its authority to address the entirety of accrued pensions when necessary. It is likely that the specific circumstances of this case, to include wife’s future earning capacity after the child concluded compulsory education, justified a departure from this decision.

Conclusion

As the legal landscape evolves, separating parties must brace for the possibility that the Court may overlook arguments centred on contributions or pre-marital financial standing, especially in cases of lengthy marriages or one party’s limited earning capacity.

The Court is entitled to consider individual facts of a Financial Remedy case and conclude that ringfencing pensions is appropriate, which can oust non-matrimonial pension from a settlement and safeguard pre-marital (or pre-cohabitation) contributions.

However, it is plain that the Court now relies heavily on the PAG guidance (with an updated version, predominantly echoing similar principles as to division of all pensions achieving parity, being released in December 2023). It is therefore still a considerable risk that the entirety of a pension pot will be available for distribution – regardless of when this came into fruition for contributions.

Separating parties should always be prepared for the Court to disregard arguments in respect of contributions or the pre-marital financial scope – particularly in cases whereby the marriage is longer in duration, or one party has limited earning capacity.

Hannah Newberry, Hugh James Family Law Team

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