by Hilary Woodward, Honorary Senior Research Fellow, University of Bristol School of Law
Research shows that pension wealth in the UK is very unevenly distributed. In about half of couples one partner holds 90% of the pension wealth, and median pension wealth for men aged 65 to 69 averages £212,000 compared with £35,000 for women. On divorce, one of the options available to couples is to share their pension(s) through a Pension Sharing Order (PSO). Despite the inequalities in pension accumulation, and the fact that the option of pension sharing has been available for more than 20 years, the most recent research shows that only 11% divorces include a PSO and their use remains limited.
The Second Edition of the Guide to the Treatment of Pensions on Divorce, launched on 16 January, is an attempt to help address these issues for judges and practitioners specialising in the field of finances on divorce. Written by a multi-disciplinary team of judges and practitioners, known as the Pension Advisory Group, the Guide has been endorsed by the President of the Family Division and the Family Justice Council as formal guidance to be applied when any issue regarding a pension falls to be determined in Financial Remedy proceedings.
In 2014, Mark Sefton and I published a study into why there were so few pension orders on divorce. We found that fewer than 14% of the 369 court files which we randomly surveyed included any type of pension order, that the quality of financial disclosure regarding pensions was extremely poor, and the economic rationality and fairness of the approach towards pensions questionable in between half and two-thirds of the final financial orders. Practitioners saw pensions as one of the most complex areas of law and reported that many clients were resistant to taking pensions into account at all. These factors, combined with a strong drive towards settlements where there were no ongoing financial ties after divorce, contributed towards the unpopularity of pension orders.
Apples or Pears Project
Following this research, Rhys Taylor and I investigated the popular but particularly vexed remedy of offsetting pensions on divorce and how the offsets were being valued. Offsetting is when one party trades a right to receive a share of the other party’s pension benefits for an asset which they can receive now, such as the wife retaining the family home in return for the husband retaining his pension. The difficulty lies in comparing the values of two very different types of asset. Fourteen pensions on divorce experts (PODEs) each produced a report valuing the offset in three mock scenarios – a small, medium and big money case. The results were staggeringly divergent, particularly in the middle-money case involving a final salary, workplace pension. At a meeting with the experts to identify the reasons for the divergence of opinion, it emerged that the experts were using different assumptions to make their calculations but also that there had been insufficient information in the draft letter of instruction. It became clear that there was a need for both the lawyers and experts to improve their understanding of each other’s area of expertise.
Birth of the Pension Advisory Group (PAG)
As a consequence of the 2014 research and the Apples or Pears project, the first Pension Advisory Group (PAG) was born – a mix of 30 professionals, including judges, lawyers, pension actuaries and financial advisors, academics and a mediator, all specialists in the field of pensions on divorce. The Group’s aim was to improve understanding of this complex area of law to enable more consistent and fairer outcomes. PAG conducted several widespread consultations and published draft reports seeking feedback. In 2019, we published the freely accessible Guide to the Treatment of Pensions on Divorce. As at January 2024, the report had been downloaded over 9,830 times and cited in several financial remedy cases.
But what about the public?
Public understanding of and interest in pensions is known to be poor, particularly for women. Chapter 7 of the Fair Shares report has confirmed how little pensions are taken into account on divorce and how pensions continue to be seen as the property of the spouse in whose name they are held, rather than as a product of the marriage. With this in mind, PAG combined with Law for Life to produce a Survival Guide to Pensions on Divorce followed by a three-minute video specifically for lay and non-specialist users.
The Guide to the Treatment of Pensions on Divorce Second Edition
The second edition of the Guide to the Treatment of Pensions on Divorce (PAG2) was published online on 20 December 2023 under the auspices of the University of Bristol School of Law. PAG2 had consulted widely to find out whether improvements could be made to the PAG1 Guide. Feedback on the whole was very positive but there were some requests for more guidance in key areas such as apportionment – the ringfencing of pensions according to how much they had been built up during the marriage – a sensitive area for many clients. And the Guide has been updated to include developments in case law, the Divorce, Dissolution and Separation Act, Brexit, the Galbraith Tables, the abolition of the Lifetime Allowance, McCloud, and the recent volatility in pension valuations.
The PAG2 Guide will be followed by an updated Survival Guide in Spring 2024.
The 2014 Pensions on Divorce study was fully funded by the Nuffield Foundation, and both PAG projects have been partially funded by the Foundation, but the views expressed are those of the authors and not necessarily the Foundation. Visit www.nuffieldfoundation.org