Divorcing spouses and their lawyers have always found the problem of dealing with pensions difficult to understand.

In the past, there was not much that they or the courts could do about pensions, other than to take them into account when allocating the matrimonial property.

However, the recent divorce and pensions law reforms give a new range of options that are even more difficult to understand.

Previously, when a husband and wife divorced, there was usually no way in which the husband could compensate his wife for loss of expected pension rights, except by adjusting the matrimonial property.

The existence of Inland Revenue rules prohibiting the award of a members' pension rights (alienation) to a non-member, and the provision of a protective trust in almost all scheme rules, were designed to protect the member's pension against bankruptcy.The re-adjustment of matrimonial property was not always possible, especially where the husband was in a modestly paid job and had amassed little or no capital.

These cases emerged in the public sector and involved, for example, policemen and teachers.

If the parties wanted to get divorced, the wife usually had to forego compensation for loss of pension rights.There was considerable agitation for reform, especially among women's groups.

In 1993, the Pensions Management Institute (PMI)/Law Society working party reported.

Its conclusions were endorsed by Professor Goode's committee (see p.35).

It recommended that pension splitting should be introduced.

This involved allowing the court to award part or all of the cash equivalent to a spouse on divorce.

She could then leave her pension rights with the scheme, or move them to a personal pension.

However, the government is unenthusiastic about pension splittin g.

There are significant problems in practice, which have recently been set out in a green paper, 'Treatment of pension rights on divorce', published by the DSS in July.

The government agreed to a compromise when it was outnumbered during the passage of the Pensions Act 1995.

Lady Hollis had succeeded in getting a pension-splitting clause into the Bill but, in exchange for dropping it, she agreed to an earmarking provision.

Earmarking is an order given to the pension scheme trustees.

It stipulates that at retirement, part or all of any lump sum or pension payable to the member shall be paid instead to the ex-spouse.

These provisions appeared as s.166 of the Pensions Act 1995 (and are known to divorce lawyers as s.25B of the Matrimonial Causes Act).

They came into force on 1 August 1996, dated back to petitions issued after 1 July 1996.

Orders can be made against the pension scheme immediately for lump sum orders and from April 1997 for pension orders.

These regulations are quite complicated.Despite the pressure for pension splitting to replace earmarking, and government agreement that it was preferable because it met the clean- break objectives of modern divorce law, the government wanted to carry out more research into the practical issues first.

However, during the passage of the Family Law Bill, Lady Hollis managed to introduce a pension-splitting amendment that survived intact during the transition to the Act.

It is not effective as it stands, and it will need additional primary legislation as well as supporting regulations.

But, it may appear as an option in the next two or three years.

This means that divorcing couples will eventually have three choices:-- set-off (as before), under which there is a division of assets to take account of pension rights;-- earmarking, which has just come into force, allowing a division of pension payments at retirement; and-- pension splitting, which may come into force during the next few years, allowing a division of cash equivalents at divorce.The pros and cons of each option are being addressed by divorce lawyers and their clients, but they will add to the administrative burdens of pension schemes.

The oddity about this particular legislative process is that, instead of having either earmarking or pension splitting as an option, as was earnestly debated by the PMI working party all those years ago, we now have both.The green paper on pension splitting highlights many of the objections, including the fact that it would often be more tax efficient for couples who are living together amicably to divorce, split the pension and pay a lower tax rate on each part of the pension.Meanwhile, matrimonial and family lawyers are faced with the problem of explaining the new options to their clients -- and making sure that there is adequate documentation on file to ensure that, if their clients make the wrong choice, their files contain proof.