Cases involving pension commentary are rare from the Family Court at High Court level, and so it was with great interest I found myself digesting the judgment by Moor J in the recent case of CMX v EJX (French Marriage Contract) [2022] EWFC 136. The pensions in this case represented a relatively small part of the total pot, estimated by the judge at the final count to be worth over £24 million. This was a ‘big money’ case where the primary considerations were the extent to which a French Marriage Contract should be strictly adhered to or not, and how this was impacted by the needs/sharing principle, but some of the pension commentary was nonetheless arresting.

The judgment offers the reader little assistance with the detail of the pensions, so we are left guessing as to whether they were purely Defined Benefit (DB) Schemes, purely Defined Contribution (DC) Schemes or a blend of both species. Nor do we know how many pensions there were. We do know that the husband’s total pensions were worth £3,284,021 ([26]), and the wife received a 50% share of his A Bank Directors’ Pension Scheme with a CE of £2,279,490 ([77]), but what of the remaining £1,004,531? The judge’s comment 'his pensions have a total CEV of £3,284,021' and his comment (at [70]) that they have a 'combined value' of the same figure suggests more than one, and with a varied employment history there could easily be a few. The big question though is whether any of them are DB in nature?

The remaining £1,004,531 appears not to be shared, for reasons unexplained. It is offset to some degree by the wife’s own pensions of £255,796 ([26]) and we know that the husband had some significant Lifetime Allowance (LTA) tax liabilities, so perhaps that is the answer. The judgment does not elaborate.

Moor J was critical of the fact that a direction was made at the First Appointment for an equalisation of income pensions report. Early in the judgment he commented at [14] that 'all I say is that I cannot conceive of a more inappropriate direction when the assets in this case are between £22 and £28 million' and he deleted the requirement for the same when he heard the pre-trial review (although the calculations for the same were in the final report). From a PODE perspective, I suspect we would find few who would disagree. The assets in this case far exceeded needs.

The judge was also critical of the basis on which it was proposed the pensions should be split, namely by equality of income. At [49] he quoted from the case of SJ v RA and RF [2014] EWHC 4054 (Fam), a decision by Nicholas Francis QC (as he then was) sitting as a deputy High Court judge, where he said at [83]:

'Why should someone receive more just on the basis of gender? There may have been an explanation when rules required the purchase of an annuity. However, to give the wife more than the husband, on account of either age or gender would seem to me to be unacceptable discrimination unless it is a case which is governed solely by needs. If a person should receive more of a pension fund under the modern rules simply because she (or he in the case of a marriage where the husband is much younger) is likely to live longer, then such an approach would logically extend to all capital assets. Moreover, European Union judgements and rules are rapidly outlawing discrimination on account of gender. In cases distribution is being made on a basis which is not guided by need it is, in my judgment, incorrect to distribute a pension fund on the basis of equality of income …'

Moor J states at [50]:

'I could not agree more. If assets are to be divided equally, they should be divided equally. In general, there is no justification for awarding more to one party because they are younger or have a longer life expectancy. Both parties should share the fruits of the marriage equally. Moreover, in my experience, the only thing that can be said is that life hardly ever goes according to plan, whether it be one party living far longer than expected or another remarrying immediately. It follows that I have become very troubled by directions that ask a pension actuary to calculate a division on the basis of equality of income in retirement. Apart from the fact that such reports tend to be very expensive, the simple fact is that such a direction almost enshrines the Duxbury paradox into practice. It cannot be right, in general, that the younger you are, the greater the award. In any event, it has no place whatsoever in equal division cases.'

This is a point on which we would have benefited from further guidance. Was he referring to equalising pensions by capital value only in ‘big money’ cases such as this one and SJ v RA, or to all cases irrespective of size, or whether it is a needs or a sharing case?

We do not of course know the make-up of the husband’s pensions in this case, although I think it reasonable to assume that the large A Bank Directors’ pension scheme is a DB scheme. In my experience, senior banking executives have traditionally had this type of scheme, and until recent years so did all banking employees. Also, the husband had no LTA protection. Significant sums would have needed to be invested to achieve a DC pot of over £3 million, and it is inconceivable to me that would have happened without advice being given around the LTA. The judgment does not reveal this, but I think it’s a very reasonable assumption, which, if correct, is why Moor J’s comments trouble me.

In this case, it matters not whether the scheme is DB or DC. The couple are very wealthy and the available assets more than provided for the wife’s generously assessed needs. However, in the majority of small to medium money cases, that never see the doors of the High Court, it does matter. SJ v RA was another big money case, but it was (it is believed) a DC scheme and Nicholas Francis QC (as he then was) clearly stated at [83] that his comments relating to equalising by capital value rather than by income related to 'cases where distribution is being made on a basis which is not guided by need'. Moor J made a similar indication in [14] of his judgment when he criticised the need for a pension report 'when the assets in the case are between £22 and £28 million', but then appears to go further at [50] as set out above. Or does the court’s reference to 'equal division cases' at [50] mean solely cases determined by the sharing principle?

If the large pension in question featured in a 'middle money case' and it was a DB scheme valued at between £1 million to £2 million, with total non-pension capital of another, say, £2 million, including the family home, then a professional pension valuation suddenly becomes very relevant indeed. It is likely that the ‘true value’ of such a scheme benefit is greater than the CE, and often by some margin. In this event, splitting the pension by way of the CE would not achieve fairness whatsoever, nor would using the CE value for offsetting purposes (the failure to appreciate the true pension value when offsetting is the principal driver of negligence cases against solicitors in this context). This is the reason for instructing experts and in my experience the cost of an expert’s report (which I happen to think are, in the main, extremely good value for money) fades into insignificance compared to the ‘eye watering’ cost and sometimes life changing consequences to one party of getting it wrong.

Whether the method to achieve fairness in equal division cases is by way of equality of income or equality of capital is a moot one. My personal preference is for equality of income, but a minority of PAG1 members preferred equality of capital, and this was one of the few issues that PAG 1 failed to reach unanimous agreement on, as recorded at 6.17. of the 2019 PAG report. What the 2019 PAG report was unanimous on was that it should not be the CE value that is used for equality of capital calculations in cases involving DB schemes of a reasonable value, so broadly anything over approx. £200,000 of CE [6.11 Case 5].

If a couple are the same age and the calculations are performed on a like for like basis i.e. equal pension income and matching escalation rates up to and during retirement, the percentage should be the same whichever basis is used.

Perhaps counter intuitively for many, if we are looking at pension sharing pre-retirement, if the wife who is to benefit from a pension sharing order is younger than the husband member, she will require (all other things being equal) less than 50% of the pension capital in order to equalise incomes. This is because the younger wife has a longer period of assumed positive investment returns before the pension capital is required to generate an income at retirement.

What is sometimes overlooked is that in cases where we have a DB pension, even where the parties are of exactly the same age, there can be a need for the wife to receive more than 50% of the husband’s pension to achieve equality, irrespective of whether equality of income or equality of capital is sought. This would be down to the poor ‘value for money’ of the CE. It has been long recognised that the making of a pension sharing order can also be destructive of pension value when pension capital is removed from a DB scheme. In such cases, even if the instruction were to be restricted to equality of capital, a PODE would still be required – unless one is prepared to accept that a scheme CE is the appropriate measure of value for sharing. Let me explain why:

Example of why a PSO of >50% may be required to achieve equality, even if no age difference

Let us assume H and W are both aged 55, and the only pension in this case is H’s DB pension with XYZ Plc. The CE is £500,000, and he has a deferred pension of £35,000 pa payable at age 60. If there were to be a PSO of 50%, H would be left with a pension of £17,500 pa payable at age 60 (the remaining 50% of £35,000). W would receive a pension credit of £250,000 (50% of the CE of £500,000), with which she may be able to secure, on the open market, a pension at age 60 of only £12,000 pa. Why is this? It is because the CE of £500,000 does not represent the true open market value of H’s pension. If H wished to buy, on the open market (which is what W will need to do with any pension credit) a pension at age 60 equivalent to that promised by his scheme of £35,000 pa, he would need a capital sum now of c. £800,000. It can be said that £800,000 is the open market value of that pension of £35,000 pa.

If there were to be a PSO of 50% of the CE, which absent a PODE is presumably what would happen, even if measured by capital value and not income (and remember age is not an issue in this case – they are both aged 55) H will be left with a pension with a capital value of £400,000 (50% of the open market or true value) and W will be left with a pension fund with an open market value of £250,000 (50% of the CE).

PAG1 wrestled for a long time over whether pension sharing orders should be for equality of income or equality of capital, and arrived at the following in section 5.3:

'Three basic points can be simply stated here by way of introduction (see further from paragraph 5.4 below):

• If it is likely that either or both parties will draw a tax-free lump sum (whether commuted or not), this should be treated as capital.
• The balance of the pension fund, or all of it if no lump sum is to be drawn, should usually be treated as deferred income.
• A pension in payment should be treated as a current income stream.'

In section 4.4, the PAG1 report also refers the reader to the Family Justice Council’s document on the subject, which supports the view of Francis J in SJ v RA in bigger money cases where needs are met, but presages PAG’s view that in needs cases, often we should be looking at the income the pension produces.

In W v H (Divorce: Financial Remedies) [2020] EWFC B10, HHJ Hess (Co-Chair of PAG along with Francis J) relied upon the PAG report and noted at [59]:

'The Pension Advisory Group (PAG) report, although produced by an interdisciplinary working group of lawyers, judges, academics and Pension on Divorce Experts (PODEs), has the support of the Family Justice Council and the President of the Family Division and should, in my view, be treated as prima facie persuasive in the areas it has analysed, although susceptible to judicial oversight and criticism.'

The PAG report is also referred to in the FRC Primary Principles document as guidance to be 'applied, promoted and encouraged'.

Whilst I, of course, accept that the approach of PAG is subservient to and has to be subject to judicial oversight and criticism, the observations of Moor J about equalising pensions by way of capital value appear to have been made without any express reference to the PAG report’s views (and in particular about the limitations of the CE of DB pensions) at all.

As stated at the outset, Moor J’s approach on pensions does not appear to be central to this case. It is therefore unclear from the judgment to what extent these issues were raised in court and the possible adverse consequences of simply relying on CEs in 'equal division cases', particularly in cases that come before the District Bench.

A broad understanding of value must surely be attempted before division of assets is embarked upon? The courts regularly require the former matrimonial home, another property, or indeed a company to be valued before it is in a position to distribute the assets. I question why should the position be different for pensions in all but ‘big money’ cases?