T v T (Variation of Pension Sharing Order and Underfunded Schemes)  EWFC B67
Published: 01/04/2022 06:10
HHJ Edward Hess’s judgment in the case of Mr T and Mrs T is without doubt the most complex and detailed pension sharing judgment ever handed down by the courts in England and Wales. It has more twists and turns than a John le Carré novel and, as you will see, features many of the pension sharing on divorce elephant traps.
The case features a former husband and wife who were both aged 53 at the time of the final variation application hearing in November 2021. Although there were various financial elements to the original judgment following the final hearing on 30 September 2015, this article focuses purely on the pension sharing order (PSO) aspects of this long-marriage case. It also excludes any legislative references as these are thoroughly referenced throughout the judgment.
As with most cases involving pension sharing, the timing of events is often as crucial as the events themselves, and so this summary starts with a chronology to highlight the timing of the key events in this particular case.
- 30 September 2015 – judgment delivered orally on conclusion of final hearing by DJ Thomas at Bromley Family Court.
- Pension Sharing Order awarded against husband’s company X pension with a CE at time of trial of £826,125.
- 3 May 2016 – Final Order perfected.
- 21 July 2016 – Order of HHJ Redgrave expressly permitted the husband to apply for decree absolute whilst he was appealing against other aspects of the original order. There was no appeal against the PSO.
- 2 August 2016 – pension administrators comment ‘paragraph F of the Annex should have the external transfer box marked as the trustee of the scheme does not permit internal transfers’.
- 11 October 2016 – Husband’s company X pension provides new CE of £1,795,362.
- October 2016 – a further unsealed version of the Annex presented to company X, this time with the ‘external’ box ticked by the lawyers at paragraph F.
- 5 December 2016 – company X pension scheme announced a policy of substantially reducing CEs for external transfers due to the scheme being underfunded.
- Early 2017 – amended Pension Sharing Annex sealed by the court.
- 8 June 2017 – new CE issued of £1,652,012, but reduced to £722,138 on account of scheme underfunding.
- Mid 2017 – both husband and wife are aware of the developments in changes to transfer values. Husband thinks wife will receive more than expected and wife thinks she will receive less than expected, as she was not aware of the option of an ‘internal transfer’ following company X’s decision on 5 December 2016.
- 15 July 2017 – wife issues application seeking a ‘declaration of the court’ in relation to the PSO, that proved to be based on an entirely erroneous understanding of the law.
- 5 September 2017 – husband (acting in person) applied for a stay on the pronouncement of decree absolute.
- 21 September 2017 – wife applies for decree absolute to be pronounced.
- 29 September 2017 – DJ Thomas temporarily stayed any application for the pronouncement of decree absolute.
- 21 November 2017 – husband (acting in person) applied for a variation of the PSO, which legally prevented the PSO taking effect until the application had been determined.
- 22 December 2017 – DJ Thomas gave permission for the pronouncement of decree absolute, which happened the same day.
- 13 April 2018 – company X pension trustees reverse their policy of reducing CEs, but wife was unaware of this development until 24 March 2021, despite court hearings on 18 April 2018, 23 November 2018, (possibly) 5 September 2019 and 8 October 2020, where husband did not disclose this important fact.
- 2 August 2021 – husband’s pension fund CE now valued at £2,471,833.
- 8 November 2021 – final variation application hearing commences before HHJ Hess.
- 10 November 2021 – in the judgment handed down by HHJ Hess, the judge:
- quotes and explains the law on moving target syndrome;
- explains the rules around CEs and pension underfunding;
- dismisses the husband’s PSO variation application on the grounds that nothing had changed significantly, and the change in CE does not justify a variation in the percentage of the PSO;
- warns about the danger of the PSO having not taken effect since 30 September 2015 when first handed down by DJ Thomas;
- dismisses the wife’s application for a ‘declaration of the court’ in July 2017; and
- awards costs against the husband of £100,000.
- The judge also concluded that the husband’s action had prevented the PSO taking effect for more than 6 years, which had been overlooked by most of the lawyers involved on both sides of the case for much of that period. The judge also warned about the ticking of the internal/external transfer boxes in paragraph F of the Pension Sharing Annex.
What can we learn from this case?
The fact that the CE increased from £826,125 at trial in the autumn of 2015 to £2,471,833 in August 2021, is simply a function of ‘moving target syndrome’. This refers to the fact that a transfer value will always be recalculated at some point during the implementation period and will almost certainly be higher or lower than the original CE. The judge made it clear that the increase in CE is not reasonable justification for the variation of a PSO. He also commented that ‘by preventing the PSO taking effect for more than 6 years, the husband had left open the possibility of “moving target syndrome” more than in most cases’, and said ‘if he feels he has lost out by it then he is very substantially the author of his own misfortune’.
What the judge did not highlight, was that had the decree absolute been applied for by the husband following the judgment in 2015, he would have capped the amount of his pension benefits that were to be included in the PSO and, therefore, the amount of benefits that would be valued at the point of implementation. In this case the husband left company X sometime in 2018, although the judgment does not say when. It is possible therefore that the overwhelming majority of the husband’s benefit will be captured in the final implementation of the PSO, whereas potentially 2 or 3 years’ worth of accrual could have been excluded from the final split had the decree absolute been applied for much sooner.
Although the wife’s application for the decree absolute was eventually successful in December 2017, the husband’s application to vary the PSO a month earlier automatically prevented the PSO from taking effect. It could not take effect until the husband’s application was finally dismissed, which it was by HHJ Hess in November 2021, whereupon the PSO immediately took effect from the date of the decree absolute in December 2017.
As the judge pointed out, neither the wife’s nor the husband’s legal team were aware that because the PSO had not taken effect, and because the couple had been divorced since December 2017, the wife was at risk of losing the PSO. Had the husband died before the final hearing before HHJ Hess, the wife would have received no spouse’s benefit from the company X pension scheme, and neither would she have received any benefit from the PSO.
The trustees of a Defined Benefit pension scheme are entitled to insist on an external transfer where they choose not to accept ex-spouses as members of the pension scheme on divorce. However, the law requires that if the trustees choose to reduce the CE where a pension scheme is underfunded, the trustees must in those circumstances offer the option of an internal transfer to the ex-spouse. This means that the ex-spouse becomes a shadow member of the pension scheme until such time as a full transfer value is once again available, at which time they would have the option of transferring out with a full transfer value.
In this case, it would appear that neither the husband, the wife, nor their legal teams were aware of this complex part of pension sharing legislation, and at the time of the original CE, only the external transfer option was offered as CEs were not being reduced. When this policy changed on 5 December 2016 and the CE was eventually reduced, the scheme did not inform the parties that an internal transfer option would now be available to the wife.
To compound this problem, the pension scheme had commented that the external transfer option box in paragraph F of the Pension Sharing Annex should be ticked to reflect the fact that the scheme does not offer an internal transfer option. This was correct at the time the comment was made, and it resulted in the lawyers agreeing to the ticking of the ‘external transfer’ box before the Pension Sharing Annex was finally approved by the court.
It is perhaps one of the happier outcomes of this case that as a result of the delay caused by the husband’s application to vary the PSO, the PSO was not implemented during the period when CEs were dramatically reduced by approximately 50%. It will never be known what the pension scheme trustees would have done had the wife applied to implement the PSO at this point, when they were in receipt of a Pension Sharing Annex electing for the external transfer option. We can only hope and pray that the administrators would have realised that an internal transfer option also had to be offered. Had they not, and had a transfer out been made on a reduced basis, then the wife’s lawyers could have been having an exceedingly difficult conversation with their insurers.
The above situation was predicted as a distinct possibility when the PAG report was drafted, hence PAG recommended in paragraphs V41 to V44 of its report that this box is not ticked, which readers of this article are encouraged to digest. Sadly, the Annex has yet to be amended. Until it is, family lawyers would be well advised not to tick either of the paragraph F boxes, and vigorously defend any request by a pension scheme administrator for them to do so.
In conclusion, it was clear from this case that the legal teams on both sides, excepting the wife’s lawyers at the latter stage of proceedings, according to the judge ‘appear to have had limited understanding of the issues with which they were dealing’. There will happily be a good outcome for the wife, not only in terms of the significant increase in CE she is likely to receive as a result of the delay, but also in receiving a greater proportion of the husband’s pension assets due to the husband (as the Petitioner) not applying for decree absolute much sooner. This ensured that further accrual in his pension scheme benefits will be included within the final implementation, and CEs have risen substantially over the period of the case.
While many of the common PSO elephant traps are encapsulated in this case, the key message has to be to apply for decree absolute as soon as possible once a PSO can take effect, usually 28 days following the date of the original Order. In this case it was the date the Order was first handed down, not when the Order was finally perfected some 6 months later. It is also important to then get on and implement the PSO as quickly as possible. As we see all too often, the longer it takes to implement a PSO, the greater the likelihood that problems will arise.