Family law: offsetting pensions

Topics: Family and children,Courts business

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The decision of HHJ Lord Meston QC (pictured) (sitting as a deputy High Court judge) in WS v WS [2015] EWHC 3941 (Fam) provides a considered overview of offsetting pensions in financial remedy orders. This is an area of family work where there is precious little guidance and a diversity of views.

Facts of the case

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The husband was 61. His pension comprised a defined contribution pension held in a self-invested personal pension as well as a small money purchase pension plan. He had taken the 25% tax-free element, leaving funds worth £970,696. In light of the recent pension reforms, he was able to take the remainder of his pension funds as cash, subject to tax.

By contrast, the wife was 56 and had a pension from her employment with a bank. It was a defined benefits scheme based upon her final salary. She had taken the 25% tax-free lump sum and the remainder of the pension was in payment, linked to the RPI. It provided a gross annual income of £92,086.

In February 2013 the wife produced a cash equivalent value for her pension of £2,433,969. In October 2015, she produced an updated cash equivalent statement giving a revised figure of £3,064,154. The pension administrator explained that the increase was due to the decline in the long bond yield.

A pension sharing order was not an option in the present case as such an order would take the husband well over the lifetime allowance with severe taxation consequences. The agreed approach was an offsetting lump sum, although the issue in dispute was the level of that lump sum.

Use of cash equivalents

On behalf of the wife it was understandably argued that the increase in her cash equivalent was perverse and illustrated the artificiality of using cash equivalent values. Despite the wife having received some of her pension entitlement, the cash equivalent had increased by £600,000.

Furthermore, as the wife’s pension was a defined benefit scheme, regardless of the cash equivalent value, the pension could never be equivalent to or converted to cash in her hands.  The cash equivalent value therefore represented no more than the rights accrued under a pension scheme and used to calculate the benefits only in the context of a transfer to another scheme. It was therefore argued on behalf of the wife that the cash equivalent value was of little or no use for calculating an offset payment.

Comparing the pensions of the husband and wife was like comparing apples and pears. The wife cannot encash her pension, but can only take income which ceases upon her death. By contrast, the husband can withdraw his funds in full whenever he chooses, subject to the payment of tax. The wife however will enjoy an index-linked income guaranteed for life from her pension, whereas the husband is subject to the vagaries of the stock market.

Relevant case law

HHJ Lord Meston QC summarised the relevant case law. In the leading case of Martin-Dye v Martin-Dye [2006] EWCA Civ 681 the Court of Appeal emphasised the intrinsic difference between pensions and other assets. Thorpe LJ stressed that a pension in payment was no more than a whole-life income stream. Pensions do not sit comfortably in the category of ‘property’ as they are unrealisable and non-transferable.

Likewise, they do not sit comfortably in the category of ‘income’ because the income does not derive from future endeavour, but from employment or contributions which usually will have been made during the marriage. Because the Court of Appeal in Martin-Dye preferred pension sharing, no further guidance was given on how to value an offset payment.

In SJ v RA [2014] EWHC 4054 (Fam) the wife argued for a pension sharing order to provide her and her husband with unequal income.  Given that she was younger and female, that would have provided her with a greater share of the combined fund values. Nicholas Francis QC (sitting as a deputy High Court judge) described the approach as unfair and anachronistic in a case where the assets exceed the parties’ needs. 

He went on to say that in cases where a distribution is being made which is not guided by need, it is incorrect to distribute a pension fund on the basis of equality of income and there is no need for actuarial reports in the overwhelming majority of such cases.  He expected that the court would be most reluctant in the future, in big money cases, to provide permission for actuarial reports on the basis of how to effect equality of income. He also said he suspected that annuities will, in the overwhelming majority of cases, become a thing of the past.

In JS v RS [2015] EWHC 2921 (Fam) Sir Peter Singer described the amount being used in offsetting as ‘arbitrary’.

Approach adopted by Meston

No expert’s report was available to the court to assist in carrying out the appropriate calculations. At an earlier hearing Parker J had recorded that neither party was seeking a pension sharing order and that they would invite the court to consider an offsetting approach. The judge refused an application by the husband for an expert’s report.

The Duxbury-based approach proposed by the wife found favour with the court. In support of the wife’s position, Nigel Dyer QC submitted that there were four fundamental points:

a) When considering offsetting, it is important to see the exercise in the context of section 25. The court is not concerned with needs because each party will have over £6m before pension provision is taken into account.

b) Offsetting in the present case involves ‘apples and pears’ as it does not involve comparing like with like. One party is being required to pay a large sum of money to reflect the other party’s loss in not receiving a future share of a pension in payment.

c) Any methodology is based upon factors and assumptions which almost certainly will not in fact arise as may be predicted.

d) Duxbury has stood the test of time for the capitalisation of future income requirements and should be used, particularly in a case where a cash equivalent valuation is ‘illusory’.

By contrast, the annuity-based approach proposed by the husband did not find favour with the court. His approach was, on various bases, to calculate the cost of purchasing certain annuities and calculating the adjusting lump sum payment accordingly.

Andrew Newbury, Slater and Gordon

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