In the great majority of divorces, a key element of financial proceedings is the redistribution of assets between the parties. One party's pension pot can represent a substantial percentage of those assets. For many couples therefore, achieving a fair division of the family assets has to take account of pension assets.
This can be achieved by offsetting the pension against other assets. Alternatively, the court can make a 'pension sharing order'. This is where the court orders that part of one party's pension be extracted in order to create a pension pot for the other party.
In the recent case of Goyal v Goyal  EWFC 50 the courts looked at whether pension sharing orders can be made in relation to overseas pensions. With an increasingly mobile workforce, a substantial pension based in another country is becoming a more common occurrence in London divorces. The party concerned may work for an international company with a pension scheme based elsewhere. Alternatively, the party concerned may have moved their English pension into a foreign scheme.
If the courts are unable to make pension sharing orders against them, judges lose a useful tool when trying to achieve a fair settlement between divorcing spouses.
The facts of the case
In Goyal, a husband's addiction to spread betting led to him wasting the vast majority of the family's assets. He lost over half a million pounds over the course of about five years, and when the financial proceedings came to trial the court awarded all of the remaining assets to the wife. Sadly, these were of minimal value; the sole asset of value that survived the husband's addiction was an Indian pension annuity. The question of whether the court had the flexibility to make a pension sharing order against it was therefore crucial if the wife was to receive anything from the marriage.
The matter came before by Mr Justice Mostyn in November. The husband argued that the court could not make an order against an overseas pension. Mostyn J undertook a comprehensive review of the law and ultimately agreed with the husband. He determined that an order transferring a portion of a foreign pension to another would violate the presumption against the extra-territorial effect of statute. As a result, whether a pension has always been held offshore or has been moved offshore during the marriage, a pension sharing order is not available.
Unfortunately, this puts practitioners in a difficult position if a foreign pension is the key asset in a case and the parties do not agree on how to treat the pension. A husband and wife can agree to split an overseas pension, if the country in which it is based will give effect to this. That agreement can then be incorporated into a consent order, supported by undertakings from both parties. While this would be effective, it relies on the parties reaching an agreement and lacks the 'bite' of the court making an order directly.
If the parties do not agree, then a pension sharing order cannot be made, and the court can only fall back on the following unsatisfactory alternatives:
(1) The pension issue could be circumvented by a periodical payments order, obliging one party to make monthly payments to the other. The amount to be paid could be set by reference to the sums received from the pension. This means that the receiving party is reliant on the payer to keep up the payments. The entitlement will also end on the death of either party or on the recipient's remarriage.
(2) Similarly, if the party with the benefit of the pension is able to withdraw capital from the pension fund without restriction, a lump sum order could be made against that party. If the withdrawal of capital can only be made at a certain age, a deferred lump sum order could be made, with appropriate life insurance to cover the interim period.
(3) One party could, in theory, make an application for the variation of the foreign pension as if it were a trust. Until this happens in practice it is impossible to tell if this would be successful or whether it would fall foul of the same problem as the pension sharing order: would such an order violate the presumption against extra-territorial effect? Such an application would inevitably be expensive as the administrators of the pension scheme would most likely object.
Mr Justice Mostyn's judgment removes the possibility of the recipient gaining control of their own pension pot. Instead of receiving an asset which they hold in their own name, their rights simply 'piggyback' on those of their ex-spouse. This creates vulnerability for the financially weaker party and perpetuates an ongoing relationship between them that parties typically want to avoid.
If you require further information on anything covered in this briefing please contact Charlie Fikry([email protected] / 020 3375 7103) or your usual contact at the firm on 020 3375 7000. Further information can also be found on the Family page on our website.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, March 2017