Key Pension considerations in a needs-based context

When dealing with the treatment of pensions on divorce, there are a number of points to consider, and ensuring that both parties are sufficiently provided for in retirement can often be tricky.  This issue becomes even more prominent in cases where there is only sufficient money available to meet needs and nothing beyond.

On 24 February 2020, judgment was handed down by HHJ Hess in the case of W v H (divorce financial remedies) [2020] EWFC B10.  Notably, the judgement focused on the treatment of the most significant asset, the husband’s Defined Benefit pension fund, which had a cash equivalent figure of £2.1 million.  Consideration of this asset gave rise to three key issues, all of which are often faced by couples on divorce:-

1. Should the pension fund be divided according to capital value or income value?

Whilst there is no ‘one size fits all’ answer, the broader nature of a pension is to provide income upon retirement.  It would therefore seem contextually sensible to implement a pension share on divorce that provides broadly similar incomes from that asset for each of them upon retirement.  This is not always the case.  Often a judge will decide that there should be a division according to the capital value of the pension(s) instead, but this approach does not always represent a fair solution, particularly where there is a Defined Benefit pension, or where the parties are close to pension age.  It is important that attention is paid to income-yield on retirement, otherwise the standard of living of one party could be significantly less than the other, resulting in inequality.  

2. Should the pension asset acquired before the marriage be excluded

Some courts have an established practice to make a straight line deduction to exclude pre-marital contributions.  This can carry a significant risk of unfairness, particularly in a needs based context. Additional consideration must be given to Defined Benefit scheme pensions, which predominantly become more valuable towards the end of the period of contributions than at the beginning.  Therefore, to exclude on a straight line basis would fail to reflect the varying contributions made throughout the lifetime of the pension, resulting in unfairness.

In 2000 in the case of White v White [2000] UKHL 54, Lord Nicholls provided that where one party’s financial needs could not be met without recourse to non-matrimonial property, then the fact that the property was acquired outside of the marriage could expect to carry little weight, if any.  HHJ Hess adopted this principle.  In circumstances where the pension fund is the sole, or main, mechanism for meeting the post-retirement income needs of both parties, it will be difficult to justify an exclusion of any portion of the pension fund if the income produced by the whole fund after division falls short of producing a surplus to the parties’ needs.  Even if part of the pension fund accrued outside of the marriage, if the value of the whole pension fund only just generates sufficient income for both parties to meet their needs, then it would be wholly unfair to prejudice one party upon retirement. 

In any needs based case, pension assets should be treated in the same way as any other assets, i.e. where they are required to ensure the needs of the parties are appropriately met, then their timing and source become somewhat irrelevant. Therefore, the pension-holder should not assume that they can ring-fence any element of the pension that accrued outside of the marriage.  

3. Should the pensions be treated separately, or should they ‘offset’ the division of pension assets against the division of other assets.

Rather than sharing the pension fund, one party’s claim to the pension can be ‘offset’ against other matrimonial assets.  For example, one party may receive a larger share in the family home to offset their claim to the pension.  However, there is a risk that pension offsetting can result in unfairness.  Mixing different categories of assets can create complications when trying to compare their values to ensure equality between the parties.  The value of a pension fund will not have the same value on a £ for £ basis as that of, say, the family home.  In circumstances where offsetting is to be used, the parties will need to instruct a Pension on Divorce Expert who will be able to undertake suitable calculations for such purposes.  Moreover, pension offsetting can also unfairly burden one party by taking on all of the non-realisable assets, whereas the other party has the advantage of all, or at least the majority, of the realisable assets.

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