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Decisions on Pensions in financial remedies cases: Wait for one and three come along at once
There have been three recent cases on the treatment of pensions in financial remedy cases; one decided by HHJ Hess and two by HHJ Robinson. Although not Court of Appeal, it is interesting to see what was said. HHJ Hess is joint author of Pensions on Divorce and co-chair of A Guide to the Treatment of Pensions on Divorce: The Pension Advisory Group Report 2019
The cases emphasise needs and the approach to pensions. I will not recite the entire facts of each case.
I concentrate on HHJ Hess’s judgement and what he said concerning pensions. HHJ Hess’s judgement is meticulous in approach and it is difficult to compress or precise in a short article what he said, so I have repeated verbatim much of what was said.
W v H : HHJ Hess 24th February 2020 Swindon
This was a first instance decision and not an appeal. H had a significant pension, there was a PODE. Regarding the pensions division the judge stated this:-
At para 59, ‘ … I shall give consideration to the opinions on these (pension) issues set out in some detail in “A Guide to the Treatment of Pensions on Divorce: The Pension Advisory Group Report” (July 2019 … (it) has the support of the Family Justice Council and the President of the Family Division and should, in my view, be treated as being prima facie persuasive in the areas it has analysed, although of course susceptible to judicial oversight and criticism.
Then at para 60 (i) the judge identified three issues:
‘The first issue is whether it is right for the court, in dividing pensions with a view to promoting equality, to target capital equality or to target the promotion of equal incomes.’
In answering that the judge said:
‘There is no ‘one size fits all’ answer to this question.’
‘There are, however, scenarios where a simple division of CEs may well not represent a fair solution.’
‘The PAG report expresses its view on this as follows:-
“In a needs-based case, in particular where there is a significant Defined Benefit pension involved, the appropriate analysis will often be to divide the pensions separately from the other assets, based on an equalisation of incomes approach, such approach often requiring expert evidence from a PODE.” (page 11)’
The judge expressed his decision in this way:
‘In my view the facts of the present case (the ages of the parties, the size and largely defined benefit nature of the pension funds, the relative paucity of non-pension assets) place it firmly in that category of case where the fair and equal outcome is to identify, as a starting point anyway, the pension sharing orders which would bring about equal incomes at a specified time in the future.’
(ii) ‘The second issue is whether it is right for the court, in dividing pensions with a view to promoting equality, to exclude a portion of the member spouse’s pension if it was earned prior to the marriage (or seamless pre-marital cohabitation).’
In answering that the judge said:
‘There has undoubtedly been an established practice in some courts considering the divisions of pension, regardless of needs issues, to make a straight line deduction from the CE of a relevant pension fund by reference to a fraction where the numerator is the number of years of the marriage (including seamless pre-marital cohabitation) and the denominator is the number of years over which the pension fund in question was accrued, and to include in its calculations and deliberations only the reduced amount of the CE.’
‘In my view this approach carries with it significant risks of unfairness as the mathematics of the present case undoubtedly illustrate.’
‘In one sense the exclusion of the pre-marital portion of the pension is no more than, in modern parlance, the identification of non-matrimonial property. In other words the pre-marital portion of the pension is non-matrimonial property whilst the remainder is matrimonial property. Where the pension was wholly accrued prior to the marriage then it is easy to identify it as non-matrimonial property: see, for example, King J (as she then was) in GS v L [2013] 1 FLR 300 and Mostyn J in WM v HM [2017] EWFC 25. The apportionment exercise seems a logical extension of this and pension funds are rarely subject to the ‘mingling’ which often occurs in relation to cash assets.'
‘In a sharing case the exclusion of the pre-marital portion of a pension might well be a legitimate exercise in principle, although, as identified in M v M [2015] EWFC B63, the court might retain an element of discretion as to the level of sharing.’
‘In a needs case, the approach needs to be treated with more caution. Where the pensions concerned represent the sole or main mechanism for meeting the post-retirement income needs of both parties, and where the income produced by the pension funds after division falls short of producing a surplus over needs, then it is difficult to see that excluding any portion of the pension has justification. In the words of Lord Nicholls in White v White [2000] UKHL 54: “in the ordinary course, this factor”..i.e. the factor that the property concerned is non-matrimonial…“can be expected to carry little weight, if any, in a case where the claimant's financial needs cannot be met without recourse to this property”.’
‘It is important to appreciate that in needs-based cases, just as is the case with non-pension assets, the timing and source of the pension saving is not necessarily relevant - that is to say, a pension-holder cannot necessarily ring-fence pension assets if, and to the extent that, those assets were accrued prior to the marriage or following the parties’ separation.’
‘It is quite unlikely that pension funds will themselves will take the case outside the category of a needs case.’
‘Further, in many cases, and the present case is a good example, the straight-line methodology of calculation, though simpler and easier to apply in practice, conceals an unfairness in that the value of a defined benefit pension scheme based on final salary does not accrue on a straight line basis.’
(iii) ‘The third issue is the extent to which the court should disaggregate the pensions in the case and promote a discrete and equal division of the pensions as opposed to attempting to execute an offset against other assets.’
In answering that the judge said:
‘The orthodox view, encouraged by Thorpe LJ in Martin-Dye v Martin-Dye [2006] 2 FLR 901, is that pensions should be dealt with separately and discretely from other capital assets and with a view to their post-retirement income producing qualities. The PAG report offers a similar view: “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 35).’
‘It is undoubtedly the case, however, that many litigants choose to blur the difference between the categories and engage, to a greater or lesser extent, in an offsetting exercise. It needs to be borne in mind, however, that mixing categories of assets runs the risk of unfairness in that valuation issues become very difficult and, absent agreement, it may be unfair anyway to burden one party with non-realisable assets while the other party has access to realisable assets.’
‘I have decided that I should divide the pensions in this case with a view to making pension sharing orders which have the effect of providing for the parties equal incomes at a specified time in the future.’
- HHJ Robinson decided two cases, RH v SV 9th March 2020, Medway, which was a limited appeal against a PSO and in KM v CV 25th February 2020, Medway, the DDJ (with respect possibly inexperienced in financial matters) valued the pension at date of separation, which HHJ Robinson disagreed with, but this appealed from decision was before the Report of the Pensions Advisory Group July 2019. I mention these two cases because HHJ Robinson also cited portions of the report, and endorsed a needs approach to pensions.
- Of course each case turns on its own facts and as a broad proposition the older the parties and the nearer to retirement age they are the greater the focus will be on pension needs. Where the parties are young and each has the opportunity to build up a pension pot before retirement, then the less pensions will be within the financial needs of each party in the foreseeable future (s25(2)(b)) or, perhaps, the lost benefit by reason of the dissolution of the marriage (s25(2)(b)).
