Pension sharing on divorce

Insight

08.01.2025

Pensions on divorce is a huge and complex topic. In January 2024 the Pensions Advisory Group published their second report (PAG 2), which is essential reading for all financial practitioners, and which deals in detail with all of the issues that need to be considered. This article features a whistle-stop tour of the main trips and traps relating to pension sharing.

Essential procedural steps

If there are financial proceedings, and your client is applying for a pension sharing order, then Form A must be served on the pension provider (r 9.31). Of course, at the time of filing the Form A you may not know who the pension providers are, but once Forms E are exchanged, the pension providers must be served. Although it is often overlooked, this is a crucial step, as it alerts the pension provider to the existence of the proceedings and your client's claim.

If you are acting for the person with pension rights, then seven days after receiving notice of the First Appointment you must request that each pension company provide a valuation of the pension rights or benefits (r 9.30(2)). The rules do not require you to serve Form P (the pension inquiry form) on them, but it is good practice to do so. It can flush out potential problems with pension sharing and will reveal any existing pension sharing orders or pension attachment orders. It also requires the pension provider to state their charges for implementing the order. The implementation fees charged by schemes are very wide ranging. Providers can insist on charges being paid up front or they may deduct them from the pension rights. It is important to find out what these will be and how they will be paid early on so that you can deal with them as part of any final agreement.

Once an agreement has been reached in relation to a pension, the D81 will require the parties to certify that the pension company has provided the information required by reg 4 of the Pensions on Divorce etc (Provision of Information) Regulations 2000. This information is requested in Section C of Form P. Therefore, even where disclosure is on a voluntary basis, it is important to ask the pension company to complete Form P at an early stage to avoid delay.

Finally, do not forget to obtain valuations of your client's state pension entitlements by ensuring that they complete both Forms BR19 and BR20.

Expert evidence

Consider at an early stage whether you will need to instruct a pensions expert (PODE), pursuant to Part 25. The court will only order expert evidence if it is considered to be “necessary”. In Re H-L (Expert Evidence: Test for Permission) [2013] EWCA Civ 655, [2013] 2 FLR 1434 Sir James Munby P stated that in his judgment this meant “somewhere between 'indispensable' on the one hand and 'useful, 'reasonable' or 'desirable' on the other hand', having 'the connotation of the imperative, what is demanded rather than what is merely optional or reasonable or desirable.”

PAG 2 highlights when it may be necessary for an expert be instructed, for example, where equalisation of pension income is the appropriate outcome, or where the pension concerned is a defined benefit scheme where it may be that the cash equivalent (CE) is not a good reflection of the value of the pension rights. A helpful list of potential complicating factors likely to result in a PODE report being necessary is included at para 2.5 of PAG 2.

Non-matrimonial pensions

The recent decision of SP v AL (PL and another intervening) [2024] EWFC 72(b) considered when it might be appropriate to exclude a portion of a pension that had accrued before marriage when considering the overall division of pensions. HHJ Hess referred to PAG 2 which suggests that, generally, in a sharing case it may be appropriate to exclude the non-cohabitation/marriage element of the pension from the sharing claim, but where needs exceed any sharing claim, the timing of the pension contributions are less likely to be relevant.

However, all cases turn on their own facts, and of particular relevance to this issue is the duration of the marriage. The court will consider the length of the marriage in determining the extent to which it is fair and reasonable to divide the “non-matrimonial” element of any capital or pension. In needs-based cases, the timing and source of the pension saving is not necessarily relevant, but the court will nevertheless have regard to the length of the seamless cohabitation/marriage in determining the extent to which the needs of the claiming party will justify a division of the pre-cohabitation/marriage element of the pension. This reflects the requirement for a connection between the relationship and the financial need to be met.

Equalisation of income or capital

There is often an argument around whether the “right” outcome is equalisation of incomes in retirement or equalisation of capital. PAG 2 highlights that given that the object of a pension fund is usually to provide income in retirement, equalisation of incomes may be the right approach in a needs-based case (although it will be fact specific). A number of scenarios where equalisation of income is not appropriate are set out (para 6.10) and include (i) where the pensions are all defined contribution schemes and the parties are of a similar age, (ii) where the parties are younger, (iii) where a case is a sharing case but the pensions are of relatively modest value.

Should a letter of instruction seek advice on both alternatives? In SP v AL, HHJ Hess suggests that thought should be given at an early stage to the appropriate question before the report is commissioned, and if necessary the judge at the First Appointment should determine the issue. He notes that asking more questions than are necessary adds to the cost of the exercise and almost inevitably leads, down the line, to each party advocating the figure most helpful to themselves, thereby making compromise less likely.

Offsetting

Pensions should ideally be dealt with apart from the other assets (Martin-Dye v Martin-Dye [2006] EWCA Civ 681, [2006] 2 FLR 901. This is supported by PAG 2 which suggests that practitioners try to deal with each asset class in isolation and to avoid offsetting wherever possible.

Moving target syndrome

A pension sharing annex can only state the percentage of the member spouse's pension rights which are to be transferred to the non-member spouse as a pension credit. It cannot state a value to be transferred or be expressed as such percentage as may be required to transfer such value. Due to timing, inevitably the value of the pension against which the percentage will be applied as a result of a pension sharing order will not be the same value contemplated by the judge (or the parties) when deciding on the percentage.

A pension sharing order takes effect on the later of:

The date of decree absolute; or
28 days from the date of the order.

The date that the pension sharing order takes effect is called the transfer day.

The pension provider must implement the pension sharing order within four months from the transfer day or, if later, four months from the date that the pension provider receives the decree absolute and the pension sharing order and annex (s 34 of the Welfare Reform and Pensions Act 1999). Sometime within the implementation period the pension company recalculates the CE for the purpose of the pension sharing order, as at the transfer day. The benefits that exist on transfer day are revalued.

The percentage expressed in the pension sharing order is applied against the fresh CE valuation and the actual sum received by the applicant may be considerably different from the sum they were expecting (for example, see T v T [2021] EWFC B67).

Moving target syndrome therefore refers to this potential difference in value. It is important to make your client aware of this. Potential solutions include:

Ensuring that CE's are updated prior to final hearing/settlement discussions and the new figures are taken into account in any expert reports/calculations. This will reduce the time period between the CE that is being relied upon in negotiations and the valuation that the pension company will use.
Considering whether a client should stop making contributions after the CE until the order has taken effect so their spouse does not benefit from the resulting uplift in value.
Considering the use of cross-undertakings so that a cash adjustment is made to offset any adjustment in the pension.

Applying for Divorce Final Order and unexpected death

Death after Divorce Final Order but before transfer day

If the Divorce Final Order is obtained and the transferor dies before transfer day, the pension share will fail. There will therefore be no surviving spouse benefits, and no pension sharing order. For this reason it may be appropriate to consider with your client delaying the application for the Divorce Final Order so that (as far as possible) it coincides with transfer day. However, the Financial Remedies Final Order cannot take effect before the Divorce Final Order and so none of its provisions will be effective if one of the parties dies before the Divorce Final Order has been pronounced. The timing of the Divorce Final Order must therefore be considered on a case-by-case basis and will depend on the relative importance of other aspects of the order.

Death after transfer day but before implementation

If the recipient ex-spouse dies after transfer day, the pension provider should implement the pension sharing order in favour of their estate. It is possible to provide that implementation of the pension sharing order is conditional upon the non-member spouse being alive at the time of implementation. You can also consider including provision that the recipient's personal representatives will consent to a Barder appeal if this occurs (see the wording in the standard orders). If it is the member spouse who has died, the recipient's benefit under the pension sharing order is protected, and implementation should go ahead.

For clients for whom retirement is a long way in the future, pensions can seem to be the least interesting part of a potential financial settlement. This, combined with the ability for even the word “pension” to strike fear into the heart of many a family lawyer, can mean pensions are sometimes treated as rather an afterthought. Getting to grips with pensions early on in a case, and making PAG 2 your go to guide, will serve family lawyers and their clients well.