Matrimonial Finance Update: The Pension Advisory Group Comes to Manchester
INTRODUCTION
On Thursday 5th December 2019 Mills & Reeve hosted a Seminar in their Manchester offices presented by key members of the Pension Advisory Group, that multi-disciplinary group of professionals specialising in financial remedies and pensions on divorce, formed in June 2017, which has worked to produce a Good Practice Guide[1], published in July 2019 and endorsed by the President, Sir Andrew McFarlane, as “formal guidance to be applied when any issue regarding a pension falls to be determined in Financial Remedy proceedings”. This one document (which can be easily downloaded using the footnote below) contains everything the money practitioner needs to know about pensions in order to give best advice to their clients. However, it is quite a dense read and so this article aims to point you towards the highlights and also give you something of a ‘road map’ to assist in getting the most out of the Guide itself, in the shortest time possible.
As we know only too well, for many divorcing couples, especially after a long marriage, one of the most significant assets under consideration will be the parties’ pensions. Typically, a Husband entering court proceedings is concerned to ‘protect my pension’; and often a Wife will be prepared to concede a Pension Sharing Order for a slightly greater share of the more immediately available capital. The Pension Advisory Group call this routine undervaluing of Husbands’ pension entitlements by way of offsetting “the last area of unintended discrimination against wives on divorce”. The Seminar highlighted that the ‘pensions gap’ between men and women at the end of their working lives is much more significant that the income gap during employment (and the pensions gap has widened over the last decade). According to the Chartered Insurance Institute, in 2018 the average female pension pot at 65 years
would give an annual income of only £1,704, compared to the income generated by the average male pension pot of £8,520. Nineteen years on from the introduction of Pension Sharing Orders, they are still only used in a small minority of divorce cases and the treatment of Pensions on Divorce is picked out by the research as a contributing factor in continuing gender inequality.2
GETTING TO GRIPS WITH THE GUIDANCE
The Guide to the Treatment of Pensions on Divorce is comprehensive (it runs to 161 pages!) and provides much detailed information on specialised aspects of unusual cases (for example, Appendix H pages 107-109 addresses Small Self-Administered Schemes, which is a niche topic, but if you are dealing with one, the guidance is there). The Guide’s Contents List is six pages in length and it is worth keeping those six pages to hand as they provide a useful insight into the wide range of topics covered. However, there are certain ‘headlines’, which will apply in every case where clients have pension assets, which I have summarised below and provided references to where you can find the supporting detail within the body of the Report.
WHAT PRACTITIONERS NEED TO KNOW
The key substantive change concerns the issue of apportionment, that is, the wide spread (in the North West anyway!) practice of only sharing pension rights built up during the marriage and/or cohabitation. This document provides authoritative guidance that in all needs based cases there should be no apportionment. All pension rights (including state pension entitlement and to the date of the Hearing) should be included in the ‘marital pot’. This is very good news for the wives we represent (in general), but will come as a nasty shock to husbands (typically). [References: Part 4 pages 22-23 and Appendix S pages 140-141]. Although the theme throughout the document is that equality of income in retirement is the fairest outcome, please note the two potential arguments for unequal division set out at para 6.22 on page 33.
The key practical change concerns offsetting, that is, the ubiquitous approach of trading future pension benefit for money now. Despite the difficulties inherent in comparing two very different asset classes (‘apples and pears’) and the complete lack of any legal basis, the Report confirms that offsetting is “by far the most frequently used approach to accommodate pensions in the overall settlement”.
The Pension Advisory Group Guidance:
i. warns against offsetting, pointing out that outcomes can be potentially irrational or unfair;
ii. provides practical advice on the steps needed to ensure that offsetting, if done at all, is done properly;
iii. advises that if clients insist on offsetting against your advice that they sign a disclaimer;
iv. asserts that as a matter of good practice where offsetting is undertaken the rationale for it should be recorded on the face of the order/set out on the D81 (and that both pre-implementation and post-implementation figures are included within D81).
V. notes that negligence claims against family lawyers in cases involving pensions “overwhelming relate to ill-considered offsetting agreements”.
[References: Part 6 para 6.21, page 32 and Part 7 pages 34-43]
The key procedural change concerns the standardisation of the treatment of pensions on divorce. Ignoring the pensions on the client’s instructions is simply not an option. [Reference para 3.11 page 21]
Best practice in every case is now defined as (with references):
i. Information gathering [para 2.5 page 14-15 and Appendix I pages 110-116];
ii. Information gathered must include State Pension information and consideration of impact on State Benefits [see Part 11 pages 56-60];
iii. Disclosure [paras 3.1-3.2 page 19];
iv. Validation checks [para 2.6 page 15];
v. Evaluation of whether client needs financial advice [paras 2.14 and 2.15 pages 16-17];
vi. Consideration of the necessity for a Pensions on Divorce Expert (aka PODE). [para 2.8 page 16, para 3.3 page 19, 3.6-3.13 pages 20-21 and paras 6.5-6.21 pages 26-32];
vii. If required, the instruction of the PODE [para 2.8-2.11 page 16];
viii. Any PODE to be instructed is required to certify with a statement of truth that they have the required skills [see Appendix C pages 86-87 and the recommended Self-Certification set out in Appendix D pages 88-90];
ix. Standard Letter of Instruction to PODE should be used [set out at Appendix E pages 91 – 96];
x. Advice to client should cover the most common pitfalls [paras 2.12-2.13 page 16, para 2.25 page 18, Part 10 pages 50-55 and paras F.14-F.16 page 100];
xi. Advice to client must NOT stray into financial matters [see paras 2.14-2.15 pages 16-17 again]
xii. All the i’s must be dotted and t’s crossed! [paras 2.16-2.20 page 17]
xiii. Implementation/Enforcement must be fully borne in mind [paras 2.22-2.24 pages 17-18 and Appendix F pages 97-105].
For those who have not yet lost the will to live, Appendices U and V make very interesting reading, showing that the Pension Advisory Group’s work in this issue has been so ground-breaking and thorough that they have been able to suggest the potential basis for a portfolio of six actuarial tables which would provide money practitioners with easy-to-compare pension valuations for all Defined Benefit pensions (Appendix U pages 143-147) and also to provide a ‘To-Do List’ for all responsible bodies in the sector (Appendix V pages 148-156) in order to improve practice on a wider scale.
Dealing with pensions is a complex and complicated aspect of financial remedy proceedings, with which all practitioners have struggled at times. Within this 161 page Guide is sound, sensible and accessible guidance which (in the end!) should make all our lives easier.
[1] A Guide to the Treatment of Pensions on Divorce – download the full document at https://www.nuffieldfoundation...(1).pdf
