Pension sharing – the good, the bad and the uncertain
Despite often being overlooked, pensions are an important but complex part of a separation. This complexity is particularly true in regards to pension sharing.
During a divorce the law allows one pension to be split to provide additional pension provision to the other spouse. This is known as a pension sharing order.
Whilst this is a very useful provision, there are a number of issues which make sharing orders somewhat unpredictable.
In a pension share the original pension is reduced by a percentage specified in the order. This figure can be anything from 100% downwards.
You may wonder why it would be as high as 100% however, if someone has several pensions, then it can often be more appropriate to “share” 100% of one pension rather than divide several. This simplifies the process and saves on admin fees that each scheme may charge.
At this stage, the outcome for the original pension holder can be clearly identified: their pension goes down by a certain percentage.
The situation for the recipient however can be far less certain – and this is where it gets complicated! Pensions are complex assets and come in various forms: money purchase schemes, employee defined benefit schemes or defined contribution schemes, through to the SSAS (small self-administered scheme) or SIPP (self-invested personal pension). Whilst these are all valid pensions, the rules governing them can vary considerably.
Also, even if a pension is divided 50/50, it is still very unlikely that the pension benefits received by each spouse would be the same. This is for a number of reasons, but predominantly because the “shared” part creates an entirely new pension for the other spouse. The benefits they receive will therefore depend, for example, on their age and other relevant circumstances (which may include health, gender, etc.).
To determine the percentage to be shared the pension’s CETV (cash equivalent transfer value) is used. And so the uncertainty continues… The CETV calculation is carried out by the individual pension scheme and it has a degree of autonomy as to how it does this. As pension schemes exist to benefit their original members rather than to fund payments to others, it is often the case that shares are not valued any higher than the scheme considers necessary to comply with regulations.
This is particularly true if the spouse receiving the share wishes to draw the pension and invest elsewhere, or if the scheme will not permit them to remain. The pension scheme will therefore value the share it is losing at no more than is necessary.
Further issues arise from the way in which pension sharing orders work in practice. Once an order is made, the court directs the pension scheme to divide the pension in the agreed percentages. However, these percentages are frequently based on an expert’s report which is prepared, inevitably, some months before the order is made.
Various economic and other issues may arise in between to affect the assumptions on which the calculation was prepared. So, even where a report indicates a likely level of outcome, they may not be entirely the same by the time the order is implemented. As the costs of preparing the figures are high (typically around £1,500) it is rarely feasible or cost-effective to keep updating these as the case unfolds.
In conclusion, pension sharing orders are a highly valuable resource in divorce proceedings, but it must be appreciated that they can only achieve a certain degree of accuracy, and that they are subject to factors over which the court, their lawyers and the pension expert preparing a report may have no control over – which of course may affect the eventual outcome.