A Brilliantly Logical Approach to Dealing with Pensions

Published: 13/06/2024 21:02


SP v AL [2024] EWFC 72(B)

In this judgment, His Honour Judge Hess sets an example of how, by following a logical thought process, seemingly complex pensions can be reduced to a very straightforward outcome.

This case addresses several common issues which can often prove rather ‘thorny’ in terms of how they are approached, such as:

  • Can we use PAG 2 (2nd iteration of Pension Advisory Group) as an authority?
  • Do we pension share or do we offset?
  • Can we exclude pre-marital pensions?
  • Do we equalise income or capital values?

The case also presents some guidance on how the outcome may differ dependent on whether it’s a sharing or needs case, and also on whether nine years is a short or long marriage (spoiler alert – HHJ Hess says nine years is a medium length marriage).

So, what were the relevant facts as far as pensions were concerned?

  • There was a seven-year age gap, with H being 57, and W 50.
  • Pensions totalled c.£1.89m, with all but c.£21k being in the NHS scheme, with H having total pension assets of £1.540m and W c.£350k.
  • The timeline of the relationship was:
    • Started 2013 (April)
    • Engaged 2018
    • Married 2019
    • Divorce petitioned 2022 (July)
    • Decree Nisi 2023

The ‘Process’ applied by HHJ Hess

Paragraph 37: First, HHJ Hess cited what he would use as his ‘guide’ or authority as to the correct approach for dealing with pensions. H referred to his own judgment in W v H [2020] EWFC B10 which drew attention to PAG 1, and suggested the support PAG 1 had from the Family Justice Council (FJC) and the President of the Family Division meant that this report could be treated as being ‘prima facie persuasive in the areas it has analysed, although of course susceptible to judicial oversight and criticism’, and not being aware of any ‘subsequent judicial departure from this proposition’, HHJ Hess now suggests ‘that it stands as the proper approach, now applying to the second edition of the PAG Report, published in January 2024, often known as the PAG 2 Report’.

Paragraph 38: The judge then states that as some of the pension issues in this case are covered by PAG 2, the case can be assisted by the guidance PAG 2 provides.

Paragraph 39: Now the judge decides whether this is a case where the disparity in pensions should be sorted by pension sharing or offsetting and looks at both PAG 2 and what Thorpe LJ said in Martin-Dye v Martin-Dye [2006] 2 FLR 901.

HHJ Hess summarises the thoughts of Thorpe LJ as being that ‘pensions should be dealt with separately and discretely from the other capital assets’. Then the judge draws the attention of the reader to the fact that PAG 2 says very much the same thing: ‘try, if possible, to deal with each asset class in isolation and avoid offsetting – a discrete solution which equalises pensions by pension sharing orders and which equalises non-pension assets by lump sum or property adjustment orders’ (page 42).

HHJ Hess then concludes this section by highlighting that although the preference is for pension sharing, sometimes the facts of a case make offsetting unavoidable. However, he says that is not the case here, so the case in hand will be dealt with by pension sharing.

Paragraph 40: Having decided that PAG 2 will be the guidance, and the case will be dealt with by pension sharing, HHJ Hess now turns to the issue as to whether all pensions should be in the pot, or just those accrued during the relationship / marriage. There are two points to consider here according to the judge:

  1. Is it a ‘needs case’ or a ‘sharing case’? Again, using PAG 2 as the guide HHJ Hess says if it’s a needs case, then all pensions are in the mix, but if it’s a sharing case apportionment may be appropriate.
  2. But there is a second consideration or section 25 factor to take into account: ‘The duration of the marriage.’ HHJ Hess sets out PAG 2’s guidance in full, which is worth repeating here:
    ‘Thus, the court will have regard to the length of seamless cohabitation/marriage when determining the extent to which it is fair and reasonable to divide the “non-matrimonial” element of any capital or any pension. All cases will be determined upon their own facts. The “marital” element of any pension will usually be shared equally. For the reasons set out above, in needs-based cases, the timing and source of the pension saving is not necessarily relevant, but the Court will nevertheless have regard to the length (or shortness) of the seamless cohabitation/marriage in determining the extent to which the needs of the claiming party will justify a division of the pre-cohabitation/marriage element of the pension … The requirement of a nexus between the relationship and a financial need to be met by a matrimonial claim has long been recognised by the case law’ (page 26).

In this particular case, the judge decides that as it is a sharing case, with a marriage of medium length (nine years), the fair approach is to focus solely on the pension assets accrued during the span of the relationship, and exclude those that were pre-acquired.

Paragraph 41: Having alighted upon PAG 2 as the guidance and pension sharing as the method, only taking into account marital pensions, the final decision in this very structured judgment is whether the pensions should be divided based on equality of capital or income. Here HHJ Hess draws on three sources for guidance:

  1. W v H [2020] EWFC B10
  2. PAG 2
  3. Family Justice Council’s report ‘Guidance on Financial Needs on Divorce’ (2018 edition)

Bringing the above three sources together, as well as highlighting there is a seven-year age gap which is considered a factor here, HHJ Hess alights upon the need for ‘Equality of pensions income’.

Reflections on the Process

I am always wary, being a person with no legal background, of proffering an opinion on judgments – either I can be seen as patronising if in agreement, or disrespectful if my views differ. I apologise in advance for any offence caused by daring to trespass into legal areas.

Firstly, let’s reflect on what made the judge’s process effective:

  • The structured approach of HHJ Hess, clearly setting out each stage of the decision-making process, made the judgment logical, ordered and consistent.
  • It provides real clarity in terms of:
    1. The authority of PAG 2.
    2. When possible, pension sharing is the way forward, not offsetting.
    3. How to decide whether all pensions are in the mix, or just the marital ones.
    4. The clarity with which HHJ Hess sets out his thoughts on whether the desired outcome is equality of income or equality of capital.

However, I’m a little troubled by what HHJ Hess says in paragraph 41 (vi) which is immediately after having alighted upon a decision to equalise by reference to pension incomes. I shall set out this section in full:

‘I have noticed that it is not uncommon for PODEs to be asked to provide an answer not only based on equal incomes, but also alternatively based on an equal capital approach. Indeed, this happened in the present case. It may be that the reason this happens is because the specimen letter of instruction in the PAG Reports (page 106) includes both approaches in its text, but it should be remembered that these are options provided in the specimen letter and it is not necessary for both of them to be included in the actual letter sent to the PODE. In the notes accompanying the specimen letter it is stated that “equalisation of benefits by reference to projected income will in most circumstances be the appropriate approach”. There may be cases where, for particular reasons, equality of capital is a suitable measure; but in my view these are uncommon and thought should be given to what is the appropriate question before the PODE report is commissioned, if necessary with the judge at the First Appointment determining the issue, and that in most cases the only question which needs to be asked is what level of pension sharing order will produce an equal level of income on retirement. Asking more questions than are necessary will certainly add to the cost of the exercise and almost inevitably lead, further on down the line, to each party advocating the figure most helpful to themselves (as happened in the present case) and making compromise less likely.’

Why am I troubled by this? There are several reasons:

  • If the parties are roughly the same age (not the case here I accept, but it is the case in an awful lot of divorces) then the pension sharing order (PSO) required to equalise fair capital values will not be materially different to that for equality of income. Even in this case, where there is a seven-year age gap, the difference in PSO required to equalise income and equalise capital values is 1% (9.2% for equality of income and 10.2% for equality of capital (paragraph 35)).
  • If calculations for equality of income are required, then a pensions on divorce expert (PODE) report is required.
  • If calculations for equality of capital are required, then in many cases, the cash equivalent values (CEVs) can be used and equalised, and this does not require a PODE. If for whatever reason CEVs cannot be used as a measure of fair value, such as with defined benefit pensions, then the Galbraith Tables can be used, and input of a PODE still minimal.
  • Was the case really made more contentious by a discussion over the difference of 9.2% and 10.2%, or was the fact compromise was made less likely by the range of figures more to do with other parts of the pension conundrum? Once it had been agreed the case should be settled by means of pension sharing, using marital pensions only, I can hardly think any parties would be advised to debate the merits of 9.2% v 10.2%.
  • The members of PAG 2 coalesced around equality of income. But one of the reasons given (at 6.14) for this was:
    ‘An important practical point is that the exercise undertaken to arrive at the figures needed to divide pensions according to their likely income value in retirement will ensure that any valuation quirks inherent in the pension are properly understood and factored into the calculations.’
    I am assuming the major ‘quirk’ concerning PAG 2 was that of DB CEVs understating the true value of the pension. This though is not an issue if equality of fair capital values is used, where Defined Benefit (DB) schemes have been valued by reference to the Galbraith tables, or (with some notable exceptions) all pensions are public sector (as was the case here, other than an immaterial amount in a SIPP).
  • It is also worth noting, at 6.24 of the PAG 2 report, it is said:
    ‘Whilst there are different views within PAG on the subject, it is certainly not the case that the pursuit of equal incomes should be regarded as “the holy grail”. The debate between an equality of income and an equality of capital value remains unresolved at the time of writing. Indeed, Francis J, co-chair of PAG, is one of those who has a general preference for equality of capital value.

In summary

If it often makes no material difference (as is the case here), and calculations for equality of capital can be more easily produced, is there not an argument that the default position of equality of fair capital values is adopted, at least on grounds of expediency?

In a paper which will follow later this year, Barrister Fiona Hay and I will explore this further, looking also at the academic and legal merits of equality of capital compared with equality of income.

George Mathieson is not an FCA regulated person, and thus is not able to advise individuals on matters covered by the FCA regulation. Any guidance that George Mathieson supplies is not covered by those protections available for the regulated activities of RBC Brewin Dolphin; including access to the Financial Services Compensation Scheme and the service of the Financial Ombudsman Service.

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