Sharing spoils of divorce

Deciding who gets what in the division of assets following divorce can be fraught with obstacles.

Now, as Roger Bamber reports, the Welfare Reform and Pensions Act 1999 has introduced the concept of pension sharing

The Welfare Reform and Pensions Act 1999 (WRPA) introduces a new financial remedy on divorce - pension sharing.

This will be available where a petition for divorce or nullity is filed on or after1 December 2000.

It is not available upon judicial separation and is only effective after a court order.

For the first time, the value of a pension scheme member's rights can be transferred to his or her spouse.

The transferee will then have an indefeasible pension in his or her own right.

An earmarking order - in which the partners agree to share the pension - may still leave the unpensioned partner with nothing if the pensioned partner dies before retirement.

This drawback is largely avoided under the new system, since the transferee's new pension benefits are entirely independent, and the transferee can make nominations or choose when to retire without reference to the other spouse.

As a concept, it appears straightforward on the surface.

But practitioners and their clients will soon be faced with difficult, practical choices and some complex legal concepts.

The help of independent financial advisers will be needed, both in working out the detailed needs of the parties involved, and advising on and arranging the new pension fund for the transferee.

A new s.21A, introduced into the Matrimonial Causes Act 1973 (MCA), states: 'A pension-sharing order is an order which provides that one party's shareable rights under a specified arrangement, or shareable state scheme rights, be subject to pension sharing for the benefit of the other party.'

The 'shareable rights' include benefits arising under occupational pension schemes, personal pension schemes, retirement annuity contracts or annuity or insurance policies purchased or transferred for the purpose of giving effect to rights under an occupation pension scheme or a personal pension scheme.

The State Earnings-Related Pension Scheme (SERPS) and any shared additional pension - rights derived from a pension share in respect of previous family proceedings - can also be subject to a pension-sharing order.

However, the basic state pension cannot.

Some limited public service pension schemes are excepted from the new law and certain benefits are excluded by regulation, such as survivors' benefits, injury benefits, compensation payments, and some incidental payments like travel concessions.

The court order must specify what percentage of the pension member's rights is to be transferred.

This will be expressed as a percentage of the cash equivalent transfer value (CETV) - the same method of valuation as has been used for earmarking orders (The Divorce etc (Pension) Regulations 2000, reg 3 and The Pensions on Divorce etc (Provision of Information) Regulations 2000, reg 3).

The transferor's shareable rights then become subject to a debit of the appropriate amount, and the transferee becomes entitled to a corresponding credit of that percentage value.

For example, a husband has an occupational pension scheme in which his benefits have a CETV of 100,000.

A pension-sharing order is made transferring 40% of his CETV to his wife.

His pension scheme is debited by 40,000.

The wife receives a credit, so that she gains a pension fund of 40,000 in her own name.

The new s.24B(1), MCA 1973 (inserted by sched 3, para 4 of WRPA) states that one or more pension-sharing orders in relation to the marriage may be made 'on granting a decree of divorce or nullity of marriage or at any time thereafter'.

It appears from this wording that a pension-sharing order can be made against different pension arrangements, or even against the same pension arrangement if the previous pension-sharing order related to a prior marriage.

For example, if a husband has an occupational pension scheme which is subjected to a pension-sharing order in favour of his first wife, his second wife on her divorce would also be able to obtain a pension-sharing order against the same scheme.

Importantly, it will be possible to apply for a pension-sharing order when maintenance is varied.

S.31(7B), MCA 1973 has also been amended, though as with the rest of the new law, this provision will not be retrospective.

A pension-sharing order cannot take effect unless the decree has been made absolute (MCA s.24B(2)).

Furthermore, a pension-sharing order may not take effect earlier than seven days after the end of the period for filing a notice of appeal against the order.

If a notice of appeal is filed, the order may not take effect before the appeal has been dealt with.

In contrast to earmarking orders, pension-sharing orders cannot themselves be varied if the decree nisi has been made absolute or if the order has taken effect.

This may be a material consideration when choosing which remedy is appropriate.

For example, a solicitor acting for a pensioner who anticipates that his spouse may receive a substantial inheritance or remarry prior to retirement may prefer to offer an earmarking order against the commutable lump sum, which could be varied in those circumstances rather than a pension share which could not.

Turning to internal and external transfers.

The transferee who receives the pension credit may either become a member of the relevant scheme ('internal transfer') or the pension credit may be transferred to another scheme or policy ('external transfer'.) Different rules apply to different schemes, as to which of these options is followed.

If the scheme against which a pension-sharing order is made is a funded occupational scheme, the transferee can demand an external transfer; although the pension providers can offer an internal transfer in such schemes, the likelihood is that they will only offer an external transfer.

Where the pension-sharing order relates to a personal pension policy, again the transferee can demand an external transfer.

However, only an internal transfer is possible if an unfunded public service scheme is involved, unless the scheme is closed to new members.

Take a pension-sharing order made against a husband's funded occupational pension scheme for 30% of the CETV.

His wife is not a member of an alternative scheme.

With the help of an independent financial adviser (IFA), she chooses a personal pension policy, which is then credited with the 30% CETV by way of an external transfer.

What about the cost? Although pension schemes have to bear their own costs in setting up internal computer systems to deal with the administration, the parties themselves have to bear the cost involved in the specific application for a pension-sharing order.

The Pensions on Divorce etc (Charging) Regulations 2000 (reg 2(6)) state that the person responsible for a pension arrangement may only recover those sums which represent the reasonable administrative expenses which he has incurred or is likely to incur.

The pension provider has to be clear about what those charges are going to be.

The likely range of charges is expected to be between 750 and 1,000.

These charges, and the associated costs of instructing an IFA to say nothing of the increased legal costs, may make the choice of pension sharing unviable in certain cases.

If the value of the pension is below, say, 10,000, the charges involved may be disproportionately high.

Clients will need clear advice about this when considering what remedies to pursue at the outset of their case.

Concerning other changes, as from 1 December, earmarking orders must also be expressed in percentage terms.

Orders made against commutable lump sums, for example, should express the percentage that is to be earmarked.

In cases where ongoing maintenance is payable, it may be helpful to specify that a zero per cent commutable lump sum should be paid, if keeping the pension income high is a priority.

An earmarking order may not be made in relation to a pension arrangement which is already the subject of a pension-sharing order.

As noted above, because of the wording of the statute, this restriction only applies to a pension-sharing order relating to the marriage in question.

Similarly, a pension-sharing order may not be made where there is in force an earmarking order in relation to a particular pension arrangement (whether or not the earmarking order relates to this or any previous marriage).

It is important to note therefore, in cases where there is an ongoing maintenance liability, if the payee chooses to have an earmarking order against the death in service lump sum (s.25C MCA), then it will not be possible on varying the maintenance to ask for a pension-sharing order under s.31(7B) MCA.

Other changes include:l a spouse who applies for a pension-sharing order may also apply for an order under s.37 MCA;l unless proceedings were begun before 1 December 2000, it will no longer be possible to apply for a Brooks order;l it will be possible to apply for both pension-sharing and earmarking orders under pt 3 Matrimonial & Family Proceedings Act 1984, and;l the WRPA contains changes in relation to pensions and bankruptcy, in particular rights under an approved pension arrangement are excluded from the bankrupt's estate (s.11 WRPA 1999).

The remedy of pension sharing will need to be considered with ongoing maintenance, lump sum, and property-adjustment orders.

It will not be appropriate in a great many cases, for example when the divorcing couple are young and after short marriages.

Clearly, the cost involved will be an important factor in deciding whether it is appropriate in any particular case.

But for many couples, pension sharing will enable them to become independent at the time of divorce.

For them, the additional resources that can be reallocated may make a clean break possible on divorce.

The complications of earmarking pension lump sums and income, such as the uncertainty of the retirement date or the risk of the pensioner dying, are avoided.

In many cases, where wives take out new personal pension policies for themselves, they will have benefits which are under their own control.

Pension-sharing - key featuresl Available where petition for divorce/nullity filed on/after 1 December 2000;l Not available after judicial separation;l Only available after court order;l Orders can be made against pensions in payment;l Pension sharing and earmarking mutually exclusive in most cases;l Not retrospective.

Roger Bamber is a partner at Mills & Reeve and joint author of Pension and Insurance on Family Breakdown published by Jordans.

For more information, see www.divorce.co.uk