Jack Rundall considers the case of W v H (divorce financial remedies) [2020] EWFC B10 in relation to the treatment of pensions on divorce, a case which he suggests is being under-reported amongst the concerns surrounding Covid 19.  

Amongst the flurry of guidance, and guidance on guidance, bouncing about between the courts and practitioners, W v H (divorce financial remedies) [2020] EWFC B10 is a case which is not necessarily getting the attention it deserves. The judgement is welcome because it sets out, with admirable clarity, the approach the courts and practitioners should (and very frequently don’t) take in relation to the distribution of pensions on divorce in needs cases.

In short, whilst acknowledging that there is no “one size fits all” approach HHJ Hess concluded that:

• In a needs case, where the parties are nearing retirement and defined benefit schemes are involved, equal sharing of pension income is more likely to be appropriate than equal sharing of pension capital;
• It may not be appropriate to exclude pension accrued prior to the marriage in needs cases;
• Offsetting should be avoided where possible.

The pensions under consideration consisted of two schemes held by the husband (one defined benefit plan worth £2,155,475 and another defined contribution plan worth £58,653) and two schemes held by the wife (one defined benefit plan worth £138,939 and a defined contribution plan worth £13,798).  The judgement considers the following three key issues in relation to these pensions, all of which arise frequently in practice:

• Should the pensions be divided so as to produce equality of income or of capital values?
• In dividing pensions with a view to promoting equality, should the court exclude a proportion of the pensions if they were earned prior to the parties’ marriage (including seamless pre-marital cohabitation)?
• Should the court offset some the wife’s pension claims against an enhanced share of the proceeds of sale of the former matrimonial home?

The judgment quotes extensively from the 2019 report of the Pension Advisory Group (‘PAG’) which, in the words of McFarlane P, represents “formal guidance to be applied when any issue regarding a pension falls to be determined in Financial Remedy proceedings”.

Equality of income or capital?

The wife sought an order providing for equality of income, the husband argued for equality of capital. HHJ Hess found that the pensions should be shared so as to produce equal income in retirement. In reaching this conclusion the court noted that, whilst there are a number of scenarios where the fair solution is to divide pensions by capital value (including where they are relatively small as a proportion of the overall assets and/or where the parties are young and projections about future pension income are meaningless), there are a number of common situations where doing so will not provide a fair outcome. These include cases where the pensions are significant within the overall assets but where considerations of needs still predominate, where one or more of the pensions involved is a defined benefit scheme and/or cases where retirement is “on the horizon”.

The judgement quotes a particularly persuasive passage of the PAG report (from page 31)

Given that the object of the pension fund is usually to provide income in retirement, it will often be fair (where the pension asset is accrued during the marriage) to implement a pension share that provides equal incomes from that pension asset. This is particularly the case where the parties are closer to retirement. Where they are further from retirement, it is arguable that the number of assumptions made in an “equal income” calculation will render a calculation less reliable…. A division that pays little or no attention to income-yield may have the effect of reducing the standard of living of the less well-off party significantly.

Whilst each case turns on its own facts there must be merit in the argument that, given that the purpose of a pension is to provide income in retirement rather than to store capital, and given that the search for fairness most often begins and ends with the consideration of need, an order for equality of income is likely to be the fair outcome in a significant number of cases.

Should the court exclude the pre-marital elements of the pensions

The judgment (correctly) notes that there is “an established practice in some courts” to make a straight-line deduction from the CE of a relevant pension to reflect the fact that some element of it was accrued outside the marriage. In finding that such an approach is inconsistent with the authorities dealing with non-matrimonial property, the judge again quoted the PAG repot; “it is important to appreciate in needs-based cases, just as is the case with non-pension assets, the timing and the source of the pension saving is not necessarily relevant…it is clear from authority that in a needs case, the court can have resort to any assets, whenever acquired, in order to ensure the parties’ needs are appropriately met”.

The court also noted the potential for unfairness in using a straight-line discount giving the example of a defined benefit scheme where the member spouse starts work in a particular business at a junior level and is promoted over time meaning that more (potentially much more) value will be accrued in the pension in later years.

Again, it is suggested that the judge’s approach here must be correct; how can it be fair to treat pensions differently to other property, particularly after the “pension freedoms” introduced by the Taxation of Pensions Act 2014.

Offsetting

Whilst accepting that many litigants choose to engage in offsetting, the judge noted the potential for unfairness where one party is left with non-realisable assets and the other with the liquid capital. He also referred himself to “the orthodox view” encouraged by Thorpe LJ in Martin-Dye v Martin-Dye [2006] 2 FLR 901 that pensions should be dealt with discretely to other capital. The PAG reached a similar conclusion that parties and courts should “try if possible, to deal with each asset class in isolation and avoid offsetting”. The court did not therefore find favour with the wife’s argument that she should forgo some of her claim on the husband’s pensions in return for receiving all of the net proceeds of sale of the former matrimonial home.

As an aside, the PAG report’s comments in relation to offsetting are particularly significant not least because it notes that the “overwhelming majority” of negligence claims made against family lawyers in relation to pensions involve offsetting. In short, an expert’s (or PODE as they are now known) report should be a prerequisite in any case where offsetting is to be carried out.

Conclusions

This judgment is rare in that the facts it deals with apply in many “everyday” needs cases. As such it rewards careful reading, if only to provide a welcome break from yet another round of guidance on remote working.

This article on W v H (divorce financial remedies) was written by Jack Rundall, for further information on his practice or please contact our clerks.