Thu 27 Aug 2015

Pensions on divorce

The main aim of the Family Law (Scotland) Act 1985 is to fairly divide assets built up by the couple during the period of their marriage and before the separation, called the "matrimonial property".  As most people will probably know, pensions are included as a matrimonial asset. 

The value of a spouse's pension is determined using an actuarial method called the Cash Equivalent Transfer Value (CETV) which determines the amount which one pension fund would have to pay another if the spouse were to transfer his or her pension between providers. The CETV is a rather rough and ready calculation of value, and it will be obvious that a pension fund with a CETV of £100,000 is not identical to £100,000 sitting in a bank account (even after the recent pension reforms). But the CETV is the valuation method that (most of the time) we are stuck with for the purposes of divorce, and that is what we have to work with. 

Another question is how much of a pension is held to be matrimonial property. The 1985 Act states that the part of a pension which is matrimonial property is that part which is referable to the period of the marriage. For example, if Mr Smith has been contributing to his pension for 20 years, and has been married for 10 of those years, one half of the value of his pension is "matrimonial property". 

But what if Mr Smith has not actually been contributing to his pension for the whole of that 20 year period? What if, a few months into the marriage, he stopped contributing and simply froze the pension scheme (sometimes called being a "deferred member" of the pension)? Or what if, very shortly into the marriage, he actually started drawing down on his pension (becoming a "pensioner member")? 

This is the tricky issue which has very recently been considered by the court in the case of McDonald v McDonald. In that case, Mr McDonald had been a member of an occupational pension scheme for a number of years. In March 1985, he married. Only five months later, in August 1985, he retired on the grounds of ill health and started receiving pension income. The couple separated in 2010. On that date, Mr McDonald's pension was worth about £172,000. 

Mrs McDonald argued that the vast bulk of Mr McDonald's pension was "matrimonial property" as he had been a "member" of the pension scheme for some 25 years between the marriage in 1985 and the separation in 2010. Mr McDonald, on the other hand, argued that only a very small percentage of his pension was matrimonial property - only that amount attributable to the period between March and August 1985, when he was still contributing to the pension scheme. Mr McDonald's position was that after he stopped contributing and became a pensioner member, that period should no longer be taken into account in apportioning the pension value. The decision for the court was the question of what constitutes "membership" of a pension scheme for the purpose of apportioning the pension to the period of the marriage. Is it only "active membership" (contributing to the pension) or could it include periods of deferred membership (where pension contributions are not being made) or even pensioner membership (where the pension is in fact paying out).

The Sheriff at first instance agreed with Mr McDonald, that only active membership should be taken into account.That decision has been appealed, and a Judgment was issued very recently from the highest civil court in Scotland, the Inner House of the Court of Session. 

Unusually, the judgment of the Inner House was divided. Of the three judges, two agreed with the original Sheriff's decision - that what is needed is active membership.  The majority judges were persuaded that this approach is best in line with the aim of the 1985 Act - to fairly divide the assets built up during the period of the marriage. In Lord Malcolm's words:

"Once payments into a pension cease, and the member becomes a deferred or pensioner member, I find it difficult to talk of the value of the pension as still being acquired.  I agree with the learned sheriff that the approach adopted by the appellant would create odd and surprising results, for example where, throughout the marriage, the member was a deferred member paying nothing towards his ultimate entitlement. How can it be said that the pension value was, to any extent, acquired during the marriage? Surely the value was already acquired before the marriage began. How much more so if throughout the marriage the couple are enjoying the financial benefits of the pension? … I prefer a purposive construction which avoids results going against the grain of the Act and the underlying legislative purpose." 

Lord Malcolm did, however, acknowledge that this approach could be more difficult to adopt in relation to a personal pension, as opposed to an occupational pension. If contributions are being made on a very ad hoc irregular basis to a personal pension, when have they actually ceased, and so when does membership cease? It is suggested that spouses and solicitors should consider whether there is "a positive decision to stop payment" to assess whether the relative period of membership for the purpose of the pension apportionment has ended. 

There is also of course no requirement on the court to split the value of the pension equally. One provision in the 1985 Act, Section 10(6), allows the court to take account of "special circumstances" to divide assets unequally. It is suggested by the Inner House that this provision could be used as a fall-back in a case where the suggested approach for pension apportionment still results in unfairness. 

Contrasting with the majority judgment is a lengthy and involved dissenting judgment from Lady Smith. She considered that all periods of pension membership (whether active, deferred or pensioner) should be included for the purpose of apportionment of matrimonial property, and Section 10(6) should then be relied upon if that approach caused unfairness.

In my view, the majority decision in this case is the correct one, being the approach which is most closely in line with the over-arching aims of the 1985 Act - to divide the assets which have built up over the period of marriage. However, given the dissent within the Inner House, it remains clear there is still scope for debate around this issue, and this may be a case which is taken all of the way to the Supreme Court for a final decision. In the meantime, there is plenty within the Judgment for both solicitors and separating spouses to consider, in particular where dealing with trickier, non-standard pension assets. 

If you have any questions in relation to pension or other matrimonial assets, please do not hesitate to contact the family law team.

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