Important new guidance on treatment of pensions in divorce.
In February 2020 His Honour Judge Hess give some guidance about how about how courts will approach pensions in divorce.
It is a useful case* because, many previous cases have concerned couples who were 'super rich', so they been difficult to apply to people of more ordinary means. In this case the couple in this case were quite well off by most people’s standards, but neither of them appears in The Sunday Times Rich List and their situation is much closer to most of the population. The wife was 50, the husband was 48, they had three children ages 11 to 18, they both had quite good jobs and they owned their own home with quite a big mortgage, but they both had quite reasonable pension provision.
The case was heard in the Family Court at Swindon, and in many ways it is similar to the cases which ordinary judges have to decide every day. But His Honour Judge Hess is a senior judge and he is also something of an authority on pensions and divorce; he is co-chair of an important committee on the subject, and joint author of a textbook about pensions, aimed at family law solicitors. The case covers some basic questions which I am asked every day.
The first question is whether pension earned (lawyers say ‘accrued’) before the marriage should be disregarded, or whether it should be included in the sharing arrangement. Pensions, by their nature, are usually accrued by one party or the other – you can’t generally have a pension scheme in joint names, in the way that you can, own a house in joint names or have a joint savings account. So, it is often relatively easy to point to pension provision which was earned by one party before the couple got together, and that party may question why they have to share it, when it comes to a divorce.
His Honour Judge Hess commented that each case must be looked at on its own merits, but generally speaking he said all pension should be taken into account whether it was /accrued before or during the marriage. Or, by implication after separation but before the sharing order is put in place. This is, essentially, because even quite a good pension scheme gives a relatively limited retirement income, so that meeting the parties’ “reasonable needs” in terms of income in retirement is quite difficult, without bringing all the pension into account.
He also pointed out that the “straight line” method - often used to identify the part of the pension to be disregarded in that situation - is usually unfair. The straight line method is where, for example, you have someone who has 20 years qualifying service under a pension scheme, of which 5 years were before the marriage – it is tempting to say in that case that 25% (ie 5 twentieths) of the pension should be disregarded. Or to put it another way you assume that the pension was earned in equal slices of 5% in each of the 20 years of employment and ringfence the pre-marriage years. But that approach is unfair because most people earn most of their pensions in the later years of their marriage, when their incomes are higher, so the later years should carry proportionately more percentage points than the earlier years. So, if you are going to disregard some years of pension (which HHJ Hess would discourage) you will need to consult an actuary
The second question is whether the parties should simply add up the CE (“cash equivalent”) value given to each of the pensions and then divide by two, or whether they should go for the more complicated approach of trying to divide the pensions in such a way that each of them will have the same or similar income in retirement from the pension which has been earned to date.
His Honour Judge Hess said that generally speaking in a short marriage, or where the parties are both quite young, or where not much pension is available to share, it may be sensible just to split it down the middle. But where there is a reasonable amount of pension the second more complicated approach is more appropriate. That will almost need the services of an actuary. It will almost always result in the female party getting a few percentage points more than the male.
The third question is whether and how pensions should be “offset”. Offsetting is where one party is given more of the other assets (savings or the house) while the other keeps more pension. In other words “s/he can have more of the equity in the house if I can keep my pension”. Although it seems a simple idea, and quite appealing to most people, there have always been two basic problems with it. Firstly lawyers will never tell you what sum of money is “fair compensation” for a particular value of pension scheme – generally they start talking about apples and pears. Secondly in many cases there just is not enough money around after housing everyone and the children decently, to talk about compensation payments for lost pension.
His Honour Judge Hess drew attention to these problems with offsetting – he said that those thinking about this approach would need to instruct a “pensions on divorce expert” to advise on the correct amount, but in any event it is often unfair to one party or the other, and it is better to treat the pensions separately from other assets and savings.
Much of what His Honour Judge Hess said is uncontroversial and reinforces the advice most solicitors who specialising family law and pensions have been saying to our clients for many years. But it is good that he didn’t say anything to suggest we have been approaching this subject the wrong way. You will find an introduction to the subject on the website, or you can contact me if you have a question.
*W v H (divorce : financial remedies)  EWFC B10 (24 February 2020).
John Pratley is an expert divorce lawyer, who has more than 25 years experience advising clients purely about divorce and related family law issues, such as the financial consequences of separating and divorcing. After establishing the first niche family law practice in Bristol, and going on to senior management roles in a national firm, John set up Apple Tree Family Law in 2018. Apple tree family Law solicitors specialise in advice about divorce and financial issues.
We are based in Bristol and Exeter, but we have clients all over the UK and further afield. We offer, simply, clear and accurate advice about divorce and family law issues, and the very best client service, for a clear and reasonable price.