Pension Sharing on Divorce

Maria Riccio
Paisner & Co

(From Issue 7,April 1999)

The current treatment of pensions on divorce is widely considered unacceptable.  The signifi­cant limitations of the current “earmarking” provisions led the Government last year to re­think the treatment of the pension rights on di­vorce and annulment to ensure flexibility and choice.  This resulted in June with the publica­tion of the Pension Sharing Bill with public consultation papers.

Not unsurprisingly, the detailed draft proposals for the pension sharing process were complicated and has different procedures for the different jurisdictions within the UK. Following the consultation, the Social Security Select Committee published its report on 28 October 1998 raising issues echoing those raised by the respondents to the exercise. In general the Committee and the respondents have been firmly in support of the principle of pension sharing but it has led to further changes. The Government have now consoli­dated the original proposals in the Welfare Reform and Pensions Bill introduced on 10 February 1999.

The Government’s main objectives are clear:-

  • Sharing should be available within financial settlements on divorces or annulments petitioned after the new arrangements come into force – still anticipated to be April 2000.
  • Sharing will not be compulsory, so earmarking or off-setting will still be allowable alternatives.
  • Wherever possible the arrangements made by schemes to accommodate sharing should be consistent with the existing scheme arrangements.
  • The costs of setting up each sharing case will be borne by the divorcing couple.
  • Schemes will be required where a pension share is envisaged to provide adequate information to the divorcing couple and the Court.

The main proposals are as follows.

 Stage 1

 England and Wales

The divorcing couple will obtain a valuation of pension rights from any pension scheme to which they belong or have belonged and information on the specific Rule introduced by the scheme to deal with pension sharing.  The scheme should be notified by the member as to whether or not a pension share is being considered.  Where the scheme considers that there could be problems with effecting a pension share eg where the assets of the scheme cannot be easily realised, the member must be told.

The scheme will value on request the accrued pension rights, on a cash equivalent transfer value (CETV) basis.

Scotland

A  financial settlement is required before the divorce can be granted.  Information is needed on all assets making up the matrimonial property (inclusive of pension rights) as at the “relevant date”.

Northern Ireland

Either before or after the petition for the divorce information may be sought on pension rights for the financial statement.

 Stage 2

England and Wales

A specific pension sharing element will be contained in the divorce order or agreement. The court will issue copies of the divorce order and the pension sharing order or agreement to the scheme

  • the order or agreement will not be effective before the date of divorce or, if later, the date of the order
  • the order will express either:-

a percentage value to be transferred, which is the cash equivalent of his benefit rights at the valuation date;

or

an amount to be transferred which is calculated as the lesser of the specified amount or the cash equivalent of his relevant benefits at the valuation date.

  • the pension share in terms of a percentage of the member’s CETV
  • the divorcing couple will need to provide information sheets to the scheme setting out particular details for identification purposes and, if the rights of the former spouse are being transferred out, the destination for the transfer.

Scotland

An “exact decree” of divorce will be issued to both parties.  The benefiting party must submit the following documents to the scheme within two months:-

  • the “exact decree” of divorce;
  • the pension sharing order or schedule to the minute of agreement; and
  • the information sheet (in the same format as England & Wales).

Northern Ireland

The court will issue copies of the pension sharing order to the scheme which will be expressed as a percentage of the member’s CETV.  The divorcing couple will each need to provide an information sheet in the same way as described for England & Wales.

 Stage 3

England and Wales

The scheme has four months from the date of receiving the documentation or the date the relevant order1 takes place to implement the share:

  • the rights accrued at the date on which the order or agreement2 came into effect will be valued;
  • the pension rights will be adjusted.  An amount equal to the percentage stated in the order or agreement will give rise to a debit in relation to the valuation of the member’s shareable rights and a credit of the same value in relation to the former spouse.  This reduces the member’s rights and creates rights for the former spouse;

 

  • trustees who do not discharge their liability in respect of a pension credit before the end of the implementation period must notify OPRA (the period for doing so is yet to be confirmed).OPRA has power to apply civil penalties for failure to do so.  Trustees can seek an extension from OPRA.
  • the scheme will transfer the credited rights to the destination chosen by the former spouse so long as the receiving scheme is willing to accept the transfer.Where a former spouse continually fails to notify the scheme of an appropriate destination, the scheme can apply a default option.

1Order                       the later of the date of divorce or, to allow time for appeal, 21 days after the order is made.

2Agreement             the date of divorce unless exceptionally the parties are unable to come to
an agreement about their financial affairs before the divorce

Scotland

Largely similar to England and Wales, except that the court prescribes a “specified amount” rather than a “specified percentage”.

Northern Ireland

Identical to England and Wales.

 Stage 4

England and Wales

The scheme should inform the member and the former spouse that the sharing has been implemented.  The scheme will need to establish a new category of membership for former spouses.  This will give a former spouse a broadly similar right to a deferred member including  recourse to dispute resolution procedures.  The scheme member will only be able to rebuild their rights within the existing limit rules although is has been indicated by the Government’s pension minister, Stephen Timms, that for members earning up to £22650 shared rights will not be taken into account to determine the maximum benefit limits.  The normal benefit age for the former spouse will be in the range of 60 to 65.

Scotland and Northern Ireland

Identical to England and Wales.