The Pension Advisory Group (PAG) was established to write a report to provide guidance on pension sharing in divorce. The PAG consists of solicitors, barristers, mediators, financial advisors, academics and of course, pension experts. Whilst this report is not enshrined in law, the advice is highly regarded and is now used to assist the Judge in reaching a decision as to how pensions should be divided. It is therefore now widely used by solicitors when advising their clients about pensions.
It is estimated that around 80% of married couples have at least one pension, yet prior to this report, if a couple divorced, they were faced with irregularity and uncertainty on how pensions should be divided.
During financial proceedings in a divorce, both parties are required to put their assets ‘on the table’ – and provide evidence in support of their properties, savings and pensions. The evidence required for a pension, is the most recent cash equivalent value or ‘CEV’. This is how a pension is quantified.
Before this report was published, it was common for the CEV of a pension to be ‘offset’ against another asset. For example, a wife could provide evidence that the CEV of her pension is £100,000. If their family home holds £100,000 equity, then she may suggest that she keeps her pension and her husband can keep the £100,000 equity in the family home.
On the face of it, ‘offsetting’ seems fair, however the value of the pension can be misleading. If the pension is from a defined benefit scheme, such as a government pension, then the income upon retirement is potentially much more valuable than the CEV valuation.
Before the PAG report, the circumstances of the parties were not necessarily considered when decided how a pension should be divided. The report specifies that the spouses ages, health and earning potential are all relevant factors.
The PAG recommends that pensions should be dealt with separately to other assets. Rather than including pension as an asset in the matrimonial pot – consider the pension as future income. Their advice is to divide pensions with an aim for equality of income upon retirement. How is income from pensions calculated? Pension on divorce experts (PODEs), can produce reports that calculate the pension’s payment upon retirement. The Expert provides figures showing the potential income of the individual at retirement.
Whilst instructing an expert to write a report seems like a simple solution, these reports are quite expensive and can take months to prepare. How can you be sure that the cost of the report is justified? The PAG have given an indication that a pensions report should be obtained in cases where the value of the pension CEV is £100,000 or above. This guidance should be approached with caution however, as a CEV less than £100,000 does not necessarily reflect the income that the pension will produce. Courts usually require a pensions report.
The Court have shown how seriously they are taking PAG’s advice in the case of KM v CV. In this case, a couple had separated in 2011. They did not divorce and settle their finances at trial until February 2019 (prior to the report). The wife’s police pension had grown significantly in this separation period. The wife requested that the Court only consider the value of her pension up to 2011 as a matrimonial asset. The Court initially agreed to use the 2011 pension value.
The husband appealed and the appeal was heard in February 2020 (after the report). The appeal Judge followed the PAG guidance and found that the initial decision was not in line with this advice. The pension was a police pension valued at more than £100,000 so a PODE should have been instructed. The parties’ needs, ages and contributions had also not been considered. The husband was 59 and suffered from health difficulties which meant he could not work. He was unlikely to have a sufficient income upon retirement without a share of this pension. The Court’s priority will always be meeting the needs of the parties. The appeal Judge listed the matter for a further hearing to re-evaluate what steps should be taken in line with the guidance.
If you have any queries or concerns about pension sharing, it is always best to consult an expert. Our Family Team are happy to help.