The quantification of a lump sum to offset pension disparity on divorce

Practitioners have an array of authorities on the issue of how to calculate the entitlement of spouses to a pension sharing order or the calculation of a capital sum to compensate a party for the loss of pension rights. The problem is that the approach of the courts is not uniform. There are now two further authorities on this matter to add to the debate.

Before looking at the more recent authorities it may be helpful to remind ourselves of the treatment of pensions in the leading case of Martin-Dye v Martin-Dye [2006] EWCA Civ 681, In that case both parties had pensions in payment by the time of the hearing at first instance before the district judge who decided that a fair division of the assets would be provision of 57% to the wife and 43% to the husband. The pensions in payment had been put before the court as assets with a combined CETV of £1,040,807. On appeal the husband challenged the district judge’s treatment of pensions and rejection of a pension sharing order. The appeal was dismissed. On the husband’s second appeal to the Court of Appeal Thorpe LJ (at para [54]) found that the judgment of the district judge was flawed on two grounds. First, in ignoring the essential differences between saleable property and an income stream derived from an inalienable pension in payment, the district judge having been hindered by the presentation of the husband’s case and by the unquestioned use of CETV labels. Secondly, in rejecting the husband’s application for a pension sharing order without sufficient reasons.

Thorpe LJ stressed (at para [48]) that a pension in payment is no more than a whole life income-stream akin to an annuity:
“It cannot be sold, commuted for cash or offered as security for borrowings. It has no capacity for capital appreciation. The benefit does not survive the death of the scheme member and thus cannot form part of his estate. Thus there are obvious distinctions between a technical value ascribed to a pension in payment and a market value ascribed to a realisable asset …”.
He went on (at para [61] to say that pensions in payment and cash equivalent benefits were to be characterised as ‘other financial resources’ within section 25(2)(a):

“For they do not sit comfortably in the category of ‘property’, since they are unrealisable and non-transferable.Nor do they sit comfortably in the category of ‘income’ because, although purely an income stream, the income does not derive from future endeavour but from past employment or contribution which will generally have been effected during the years of marriage.”

Thorpe LJ said (at para [63]) that in a case in which a clean break order was inevitable the court had two alternative ways of treating the pensions: either they could be left undisturbed, compensating the wife (in that case) for disparity by offsetting, alternatively the judge could have made a pension sharing order. Thorpe LJ held that in the case then under consideration a pension sharing approach should have been adopted so that the husband’s pension rights should be shared to give the wife 57% of the value of their combined pension rights.

Dyson LJ agreed (at para [88]) that in a case such as that before the Court of Appeal the better course was to take pensions out of the assets altogether and to make a pension sharing order:

“This reflects the reality that the pensions are in truth non-transferable income streams and are quite different in kind from the other assets owned by the parties.”

In reaching that conclusion Dyson LJ had rejected (at para [87]) a submission that it might have been possible for the district judge to have borne in mind the different nature of pensions when conducting his or her appraisal of the parties resources and to have made an adjustment to reflect that. He considered that it was difficult to see how the adjustment would be calculated and that such an approach was unsatisfactory as it lacked transparency.

Because of the decision by the Court of Appeal in Martin-Dye v. Martin-Dye to prefer pension sharing there was no further guidance or discussion as how to calculate the value of an offset payment when that might be appropriate. If a pension in payment is not to be treated as a capital, but rather classified as “other financial resources” (per Thorpe LJ) or as income (per Dyson LJ), and if (as submitted on behalf the wife in this case) it is incorrect and artificial to use the CE value, the court is left to find some other principled basis for calculation. Obviously there is considerable scope for debate about the relevance of factors such as life expectancy, future taxation and fund investment policy and the various assumptions to be made.

Of course, since the decision in Martin-Dye we have had the new pensions legislation allowing greater flexibility for the over 55’s in accessing their pensions. This was considered by Mr.Nicholas Francis QC (sitting as a deputy High Court judge) in SJ v RA [2014] EWHC 4054 (Fam):

.. in the case of The recent well-publicised changes to pension regulations will mean that pension investments are virtually to be treated as bank accounts to people over 55, as these parties are… In cases where distribution is being made on a basis which is not guided by need it is, in my judgment, 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.

In JS v RS 2015 EWHC 2921 (Fam) Singer J had the advantage of an actuarial report relied on by the Husband. The report provided an estimate of the lump sum required to compensate the Husband for the loss of additional income the Wife would receive from her pension in retirement at age 63. The estimate was £248,067. The learned judge declined to follow this recommendation and substituted his own figure of £60,000. In the course of his judgement the judge conceded that the award was somewhat arbitrary but he justified the calculation on the following basis (at paragraph 73):

..I shrink from the suggestion that a payment in excess of £200,000 should pass from W to H to compensate him for the potential loss in 20+ years of a lifetime income stream of (at today’s value) £5300 annually subject to such tax consequences as may prevail at that time and for that uncertain term.

The above authority was considered in WS v WS [2015] EWHC 3941 (Fam) by His Honour Judge Lord Meston QC sitting as a deputy High Court judge. In this case, the court was asked to choose between the Wife’s preferred choice of a Duxbury calculation for the lump sum required to compensate the Wife and the Husband’s, which was either a CE based calculation or the amount required to purchase an annuity for the Wife.

In preferring the Wife’s case for a Duxbury calculation the learned judge stated (at

…It is quite apparent when looking again at the rival arguments and different figures suggested that there is no obviously right figure or correct calculation. However I consider that Mr Dyer’s argument for a conventional Duxbury approach is correct, and that it is certainly preferable to an annuity based calculation.

If judges choose to use their own heavily discounted lump sums over the carefully calculated lump sums in actuarial reports there is considerable scope for argument as to the appropriate sums needed to compensate for loss of pension income in retirement. Practitioners should approach this area with some caution.