T v T: the interplay between pensions and divorce

The recent case of T v T [2021] EWFC B67 highlights the importance of getting expert advice when it comes to dealing with your pension pot in a divorce. Had the parties in this case sought such advice, nearly £300,000 in legal fees could have been spared. In this article, we will take a look at the basis of pension entitlements in divorce – the jargon, the logistics, and how we can help - as well as having a look at the deeper impact of T v T.

What orders can the court make about pensions?

The court has two types of order it can make specifically in relation to pensions. Under s24B and 25B Matrimonial Causes Act 1973 the court can make a:

1. Pension sharing order; or
2. Pension attachment order.

Alternatively, the court might make an order which awards a greater than 50% proportion of the non-pension assets to one party, in lieu of the other party retaining their pension(s) untouched.

What’s the difference between pension sharing and pension attachment orders?

A pension sharing order provides for some of the cash equivalent transfer value ('CETV'), i.e. the cash value available to be transferred out of the fund, to be separated from the pension and moved into another pension account belonging to the other party. The CETV is a slightly artificial valuation because it may not be directly linked to how much you have paid into your scheme. A transfer might be an ‘internal’ transfer (to a second account with the same pension provider) or ‘external’ (to a provider’s competitor). This way, each party has their own separate pension fund(s) that they can top up (if they choose) in the usual way until they reach retirement age, and throughout their lives they deal directly with the pension company as an account holder in their own right. Whether and how this is actually possible will depend on the pension fund; some will have rules against these types of transfers, and some may simply not be able to make such a transfer because the scheme is not underpinned by an asset fund (an ‘unfunded’ pension). It’s important to ask for, and understand, all this information when going through the process of financial disclosure. This makes it easier for the parties (or the court) to work out what financial arrangements it is possible to achieve if agreed (or ordered by the court).

By contrast, a pension attachment order is essentially a form of maintenance order. It entails placing a pension company under instructions to send a portion of the account holder’s monthly income to the other party once the account holder is retired and the pension is being drawn down. A pension attachment order means that the parties can’t achieve a clean break upon divorce (and in fact must remain financially tied for a long period – assuming they divorce before retirement age) and for this reason they are not frequently used.

How do you obtain a pension sharing order?

A pension sharing order is just one of the many possibilities open to the court when financial remedy proceedings are initiated using ‘Form A’.  Your solicitor should indicate on that form that a pension sharing order is one of the things you would like to apply for (even if at this early stage you don’t have a full idea of what you would like to ask the court to award you) and copies of the court documents should be served on the relevant pension providers early on. During the process of providing financial disclosure in Forms E (either within the court process, or voluntarily) you should ask your pension provider to send you an up-to-date CETV and other information relevant to a divorcing account holder (most will have a stock FAQ document which outlines what the provider is and isn’t willing to do in relation to your pension entitlements and dealing with your ex-spouse).

When a court order is made (either at the end of proceedings, or in the form of a consent order as part of an agreed settlement) a ‘pension sharing annex’ will be attached to it. This is a standard form document which essentially provides the pension company with everything they need to authorise them to make the transfer to the other person, and will be sent to the pension provider once the order has been sealed by the court. Pension sharing orders only come into effect upon:

1. Decree absolute; or, if later
2. Seven days after the time limit for appealing the financial remedy order has passed (in order to allow for a judge’s order to be challenged in the appropriate appeal court before a pension provider sets the gears turning).

Pension policies will usually entitle a person’s widow or widower to a benefit after their spouse passes away. Decree absolute is the document which actually ends your marriage, and the timing of it is entirely controlled by the parties (being the third stage of the divorce proceedings and dependent upon a third application form being submitted). It is for this reason that your solicitor will usually advise you not to progress to the decree absolute stage until after your financial division has been resolved; as long as you are still legally married, you will likely have some benefit of your soon-to-be-ex spouse’s pension if they die in between separation and getting your pension sharing order approved by the court.

Once the order is court approved, has come into force and has been served on the pension provider, the provider must implement the order within a four-month period. The passage of time can mean that the CETV of the pension changes between the order being made and the order being implemented. To try to combat the problems which could arise from this, the law states that a pension sharing order should always be made in terms of a percentage rather than a fixed number (i.e. it will say ‘Person 1 is to receive 40% of Person 2’s pension fund currently worth £100,000’ and not ‘Person 1 is to receive £40,000 from Person 2’s pension fund worth £100,000’).

What happened in T v T?

T v T is the latest instalment in a protracted financial remedy case. Simply put:-

• The parties separated in 2013, began proceedings in 2014, and the final hearing took place in 2015. At that hearing, the husband’s pension was ascribed a CETV of c.£826,000 and the court awarded the wife 40% of this defined benefit pension scheme (and about 50% of the other assets).
• The court’s order wasn’t sealed until May 2016. Shortly afterwards, the pension providers told the solicitors that only external transfers were allowed, and so they should have ticked a box on a required form asking for an external transfer. The solicitors obligingly rectified this (arguably locking the wife into a decision to accept an external transfer only).
• In October 2016, the scheme was revalued and given a much larger CETV of over £1.7 million. In December 2016 the CETV was revised again to around £720,000 whilst the scheme was temporarily underfunded. The wife was informed. At the same time however, the provider changed its policy so that although external transfers were available only at this discounted rate, internal transfers for the full amount were now permissible. Unfortunately, the wife wasn’t kept informed of this change. In 2018 policy was changed back again to allow external transfers for the full amount. This time, the husband was notified of the change but the wife was never told. She became concerned that her percentage was worth much less than she had thought at the time of the hearing (under the erroneous belief that she could only have an external transfer, and that this would be made at a reduced amount) and asked the court to declare that what she ought to get was 40% of the £1.7million, rather than 40% of the £720,000.
• Neither party applied for decree absolute, which meant that the pension sharing order wasn’t actually in force.

What can I learn from this?

The court held that it did not have the power to make the declaration the wife sought. However, the irony was that had the wife been properly informed, she could have accepted either (i) an internal transfer for 40% of the full amount before 2018, or (ii) an external transfer for 40% the full amount after 2018.  Instead of this, the husband did not pass the information to the wife and pursued litigation to vary the original order. As a result of this behaviour, the dispute took at least three years longer to resolve than it should have, and the husband was ordered to reimburse some of the wife’s costs.

It seems that at various points throughout the litigation the parties didn’t properly appreciate what could be achieved through the husband’s pension provider, a problem that could have been avoided if the relevant expertise had been available to the parties. It transpired that there was never any legal obligation to tick the aforementioned tick-box (narrowing the wife’s options). This highlights the benefit of instructing a pensions expert/actuary who can give the parties practical tips on dealing with pension splitting (especially where the value of the pension fund is so large as to easily justify the cost of such advice).

If you are interested in pensions and divorce, further information can be found in this free to download guide designed for divorcing couples and endorsed by the President of the Family Division.

For information on how Brett Wilson LLP's family law solicitors can assist your with your divorce, please click here.