Chapter 10 of the Law Commission’s Scoping Report is devoted solely to pensions, an issue to which its terms of reference specifically refer. The report makes for concerning reading; it notes that many divorcing couples separate without a pension sharing arrangement in place and that some do not even consider their spouse’s pensions in negotiations. The Law Commission concludes that there is a ‘general consensus from stakeholders that any reform of financial remedies law should examine how pensions are currently treated on divorce’.1 This article considers the problems with the existing law highlighted by the Scoping Report as well as some potential solutions which the authors suggest the government may wish to consider in due course.

The issue in a nutshell

The Scoping Report notes various areas where there is an apparent disconnect between the law, on the one hand, and the kind of settlements which many divorcing couples negotiate on the other, which often either ignore pensions altogether or are based on an offsetting arrangement. Frequent reference is made by the Law Commission in this chapter to the recent Fair Shares report.2 Fair Shares concluded that the law in this area is ‘complicated and opaque’3 and reported that only 11% of divorcing couples who were not yet drawing their pensions implemented a sharing arrangement.4 The likely impact is significant given that 42% of wealth in the UK is held in private pensions5 which often represent a divorcing couples’ most valuable, or at least their second most valuable, asset.

The problems with the current law

The issues begin with a widespread lack of knowledge about pensions. Fair Shares found that 24% of divorcing individuals did not know if their spouse has a pension, let alone its value.6 23% of those with occupational pensions (which make up 90% of all pensions) did not know whether these schemes were defined benefit or defined contribution arrangements.7 A lack of awareness of pensions is more common amongst women than men (28% of women did not know if their spouse had a pension vs 21% of men).6 This stems, the Law Commission suggests, from the complexity of pensions, as well as a widespread failure on the part of divorcing couples to appreciate that under the existing law pensions are subject to the same principles as other assets such as the family home. Consequently, the report found that divorcing couples who agree arrangements without legal assistance ‘tend to view a pension as belonging to the spouse who has accrued the pension entitlement by way of contribution or services’.9 This, the authors acknowledge, is contrary to the existing law where ‘no asset is considered off limits to meet needs, whether it is matrimonial or non-matrimonial in source’10 (subject perhaps to consideration of the length of the marriage). Given that most divorcing individuals do not receive any legal assistance it is easy to understand how pensions are so often ignored.

This widespread lack of knowledge is compounded by difficulties encountered by divorcing individuals obtaining the necessary disclosure to reveal the existence and key terms of their spouse’s pension(s). Many litigants in person will not, for example, be aware that they could, and in many cases should, expect their spouse to complete a Form P. Even after disclosure has been obtained the value and key benefits of the pension may not be readily apparent without expert advice and few unrepresented litigants will be aware of the circumstances in which the input of a pension on divorce expert (PODE) is required, let alone able to fund this.

Finally, the impossibility of sharing a pension by agreement without a formal court order means that those couples who separate without formalising their agreements in this way cannot by default share in their spouse’s pensions. The Scoping Report quotes statistics from the Family Court which show that in 2023 there were 44,564 financial remedy applications against 112,135 applications for divorce or dissolution, meaning that only 40% of divorcing couples applied for financial orders.11 No form of pension sharing (other than offsetting) was therefore available to the other 60%.

The impact of these issues

Both the Scoping Report and Fair Shares conclude that it is likely that many divorcing individuals are in danger of reaching an age where they can no longer work without sufficient income to meet their needs in retirement. This will particularly impact women given that they typically have lower pension savings than men having had lower average earnings across their working lives, thanks often to choices made during marriages such as time spent away from the workplace or undertaking part-time work. Many practitioners will also be familiar with the situation where a wife’s income has typically been used for a family’s day-to-day spending leaving the husband’s to pay for longer-term costs, such as mortgage payments and contributions to pensions. The Scoping Report quotes a 2023 study commissioned by Legal & General into the gender pension gap which found that, at the time of divorce, women typically had pensions funds totalling £23,000 whereas men had accumulated £60,000.12 The same research highlights that a woman in her 50s will typically retire with a pension worth £39,654 compared to a man of the same age who will typically retire with funds worth £84,205.12

The Law Commission also found that it is common for divorcing couples to offset their pension claims against an increased share of their spouse’s non-pension assets. Indeed, this is referred to in the conclusions as ‘the dominant practice’.14 The authors note that offsetting is broadly considered by practitioners and the judiciary as having the potential to lead to an unfair outcome, and refer to the judgments of Thorpe LJ in Martin-Dye v Martin Dye15 and His Honour Judge Hess in SP v AL,16 which both express the ‘orthodox view’ that pension and non-pension assets should be treated separately and, where possible, offsetting avoided. Similarly, the Pension Advisory Group’s second report (PAG2)17 warns that offsetting is a complex process which can result in ‘potentially irrational or unfair outcomes’. The reasons that underpin this warning are well known: offsetting risks prioritising short- or medium-term considerations of practicality over and above a longer-term need for income in retirement. In addition, it is often impossible to achieve an outcome when offsetting which properly reflects the value which the non-pension owning spouse is giving up, partly because there is often insufficient value in the pension-owning spouse’s share of the non-pension assets to fairly offset the true value of their pension(s), and partly because offsetting involves valuing two very different types of assets (described as a classic case of comparing ‘apples and pears’ by Rhys Taylor and Hilary Woodward18).

It may be worth sounding a slight note of caution about the potential limitations of some of the data quoted in the Scoping Report. For example, the authors refer to a 2014 study carried out by the Nuffield Foundation, Pensions on Divorce, which involved an analysis of court files, and which found that pensions were disclosed in some 80% of cases but only 14% contained a pension order.19 Practitioners may agree that there has been something of a sea change in the courts’ attitudes to offsetting since the first report of the Pension Advisory Group in July 2019 and the ensuing judgment of HHJ Hess in W v H (divorce financial remedies)20 which may mean that these statistics would look rather different in a more up-to-date survey. Similarly, whilst the report records that only 11% of divorcing couples implemented a pension sharing award it would be helpful to know the typical value of the pensions which were not shared as it may be that, in many cases, the time and expense involved in dividing them was considered disproportionate.

What might reform to deal with these issues look like?

Nonetheless, it is hard to argue against the overall conclusion reached by the Scoping Report that ‘simplification of pension treatment on divorce would be welcome and is necessary to ensure that divorcing couples are fully aware of the value of pension assets and are able to split those assets in a way that is both fair and easy to manage’.21 The Law Commission does not provide explicit recommendations about how this could be achieved, that being outside the remit of the Scoping Repot save that it is explicit that ‘there needs to be a recognition of the gender imbalance … and consideration of how this and the gender pension savings gap could be addressed to ensure that women are not financially disadvantaged in retirement’.22

Readers may, however, be aware that the Scoping Report recommends that the government consider four models upon which reform of financial remedies could be based: Codification, Codification Plus, Guided Discretion and the implementation of a default matrimonial property regime. If the existing law were simply codified, this might include amending the statute to highlight the importance of pensions and that they constitute matrimonial property.23 This approach would at least highlight to divorcing couples that pensions should not be treated differently to other classes of assets and lead people to give them closer consideration.

In the Law Commission’s summary of the issues which might be included in reforms based on a Codification Plus model the authors suggest consideration of whether the Matrimonial Causes Act 1973 is amended to mention pensions as one of the factors for consideration or whether ‘pension sharing should be a default position of any financial remedies law (and, if so, whether this should be equal sharing)’.24 Whilst mandatory pension sharing would reduce the risk of divorced spouses experiencing financial hardship in retirement, this may come at the expense of meeting more immediate needs for housing unless there is a significant increase in the use of Mesher-type orders. It may then be difficult to square that with the statutory steer towards a clean break set out at s 24A Matrimonial Causes Act 1973, not to mention satisfying the desire of many clients to obtain finality. Equally, if compulsory pension sharing orders prevent couples from offsetting their pension claims it is likely that the cases in which the family home must be sold will increase which will sometimes make it very difficult to meet the housing needs of children, which in turn calls into question whether the courts could then discharge their statutory obligation to prioritise these. Further, mandatory pension sharing would reduce the ability of separating couples to tailor their arrangements as they wish. Many couples actively choose to prioritise retaining a home for their children over the longer-term financial security that a pension share might bring. Some may question whether the law should limit people’s autonomy to do this.

Under models based on Codification Plus, Guided Discretion or the implementation of an entirely new regime, consideration might also be given to prescribing the circumstances in which pensions are divided on the basis of income or capital, to whether or not pensions (and other assets) acquired post-separation should be subject to sharing and/or needs-based claims and to the situations in which a PODE report must be obtained or in which, for example, it might be appropriate to rely on the Galbraith Tables instead. The authors acknowledge that making pension sharing mandatory raises an additional question about how obtaining valuation reports could be funded and note that ‘the government should consider how this process could be made more affordable to all couples’.25

The authors also note the reforms already recommended at Appendix V of PAG226 which involve amendments to primary and secondary legislation and court forms as well as repeating the recommendations already made by the Law Commission in its earlier report, Enforcement of Family Financial Orders.27 These include recommendations that the court should be able to obtain information about pensions directly from the Department for Work and Pensions and from pension providers themselves, rather than via a sometimes recalcitrant litigant. They also recommend that it should become possible to enforce financial remedy orders against a debtor’s pension assets and that a new ground of jurisdiction be introduced under the Matrimonial and Family Proceedings Act 1984 to allow claims (limited to a pension sharing order) to be brought following an overseas divorce where the respondent holds a pension located in England and Wales.

The Scoping Report also suggest several changes which could be made to the way in which pension sharing orders are implemented. For example, the requirement to obtain a court order could be removed and the four-month period in which pension providers must implement a sharing order could be reduced, or at least amended so that it starts to run when the provider receives an application rather than all the information which they may request.

Conclusions

The Scoping Report uncovers widespread support for the principle that ‘any reform of financial remedies law should examine how pensions are treated on divorce’.28 The lack of widespread knowledge about pensions themselves, about the law in relation to pensions and the inability to obtain a pension share without a court order are all arguably incompatible with the aim to ensure that financial remedies law should be straightforward and easy to understand without the need for parties to spend large sums of money on legal fees.

There is predicably less consensus about how reform could be achieved and there are competing views about the extent to which the focus should be on recognising individual autonomy, prioritising the needs of children and/or on protecting divorcing individuals from experiencing hardship in later life. The report acknowledges these tensions and the difficulty in ‘squaring the circle between financial – and, most importantly and practically, housing – security at the time of divorce which offsetting may offer, and the long-term financial security which pension sharing may provide’.29 These are all issues which the Law Commission will need to consider further if the government shows an appetite for reform.