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Dealing with pension interests on Divorce in Scotland - update from The Supreme Court

Grant Hassan | 27 Jul 2017

INSIGHTS

A new Supreme Court decision will have a significant impact on the thorny issue of apportioning pension interests when dividing matrimonial property in the event of divorce or separation.

Pension interests can, collectively, be the highest valued assets that someone owns and a failure to identify pension interests or to correctly apportion a pension value may have drastic long term implications for either spouse on divorce.

The outcome of this decision essentially provides that the Cash Equivalent Transfer Value (CETV) of an individual’s pension shall be taken at the relevant date (the date of separation or a divorce action being served) irrespective of the type of member the individual may have been during the period of marriage.

Rather than being able to calculate the value of the pension looking at active membership only, parties will now be required to rely upon the Courts to use their flexibility and discretion, hoping that they acknowledge that significant proportions of a pension valuation may have accrued from contributions made pre-marriage.

The difficultly in relying on Special Circumstance arguments provides uncertainty as there is a significant amount of discretion that the court has in assessing such claims.

The case

Following my previous article on pension sharing on divorce in Scotland in June 2016, the McDonald v Newton or McDonald case reached the Supreme Court on 11 May 2017 after being appealed by Mrs McDonald from the Inner House of the Court of Session.

The Supreme Court’s judgement was issued on 26 July 2017. This case is of significant importance to separating spouses/civil partners where pension interests are to be addressed on divorce/dissolution, but also to legal practitioners, the courts, pension providers and actuaries.

The Role of the Supreme Court

The Supreme Court plays a vital role in the development of law in the United Kingdom in addition to being the final court of appeal for all civil cases in the UK. The Supreme Court hears appeals from the Court of Session in Scotland. The decisions of the Supreme Court set precedents for similar cases thereafter UK wide.

Case history

The case is one of divorce whereby Mr McDonald raised the divorce against his wife; however Mrs McDonald sought a Pension Sharing Order in terms of husband’s pension. The main point of contention between the parties which resulted in the case making its way to the Supreme Court was the statutory interpretation of the law in Scotland on financial provision on divorce and dealing with pension valuations.

By way of background, Mr McDonald worked as a miner for British Coal. He joined the British Coal Staff Superannuation Scheme on 11 December 1978 and began contributing to his occupational pension. He married his wife over seven years later on 22 March 1985. Shortly after their marriage, Mr McDonald suffered an injury to his left leg and was unable to continue working as a miner. He stopped contributing to his pension on 10 August 1985. This was around 4½ months after their marriage. In total, Mr McDonald had contributed to his pension for around 7 years’ pre marriage and just over 4½ months during marriage. The parties separated on 25 September 2010. At the date of separation, the Cash Equivalent Transfer Value (CETV) of Mr McDonald’s pension was £172,748.38. The value at the date of marriage was £34,014.38 and £44,016.38 when he retired and ceased contributing to the pension.

The case was initially heard in the Sheriff Court who found in favour of Mr McDonald on 12 December 2013. The case was then appealed to the Inner House of the Court of Session on 11 August 2015 who determined by majority (2 out of 3) that a purposive approach to the legislation should be applied and again found in favour of Mr McDonald. Mrs McDonald then appealed to the Supreme Court.

The parties’ opposing positions

Mr McDonald argued that for divorce purposes, the value of his pension to be included within matrimonial property should be restricted to the period of marriage during which he was actively contributing to his pension policy only (being approximately 4½ months). On this basis, the value of his pension to be included would be apportioned to the 4½ month period and equated to £10,002.

Mrs McDonald maintained that irrespective of whether Mr McDonald was actively contributing or in fact drawing his pension, the value of the pension at the date of separation should be included as matrimonial property. On this interpretation, Mrs McDonald argued that the value of the pension to be taken was £138,534.

The applicable law dealing with pensions on divorce

The legal provisions which outline how pension interests are to be treated for divorce purposes are found in the Family Law (Scotland) Act 1985 (The 1985 Act) and the Divorce etc. (Pensions) (Scotland) Regulations 2000 (SSI 2000/11) (2000 Regs).

Section 10 of the 1985 Act provides that the net value of matrimonial property should be shared fairly between the parties on divorce. Matrimonial property consists of all property belonging to the parties or either of them (in sole or joint names) at the relevant date. The relevant date is the date of separation or the date a divorce action was served on the other party. Exceptions to what is considered to be matrimonial property apply where property was acquired by way of a gift from a third party or inherited. Property acquired before marriage is not regarded as matrimonial property, unless it was purchased with the intention of being used as a family home or used as household furniture for the family home. To determine the net value, the total value of all matrimonial debts needs to be deducted from the total value of all matrimonial assets. A fair division of the net value of matrimonial property shall be deemed to be shared fairly, when shared equally or in such other proportions as are justified by special circumstances.

Section 10 (5) of the 1985 Act also provides that matrimonial property includes, the proportion of any rights or interests of either person, under a life policy or similar arrangement AND in any benefits under a pension arrangement which either person has or may have (including benefits payable in respect of the death of either person) which is referable to the period to the period of marriage. Section 27 (1) of the 1985 Act defines a ‘pension arrangement’ as meaning any occupational pension scheme, personal pension scheme, a retirement annuity contract or specified annuities and insurance policies.

The calculation

Regulation 4 of the 2000 Regs outlines how to apportion a CETV for establishing how much of a pension shall be regarded as matrimonial property:

The calculation to be applied is A x (B/C)
A = Value of the pension at the relevant date
C = is the period of membership of that party in the pension arrangement, before the relevant date
B = B is the period of C, which falls within the period of the parties’ marriage

Active membership – only membership involving contributions into a pension policy.
Deferred membership – is where an individual has ceased contributing to a pension.
Pensioner membership – is where an individual is in receipt of their pension.

The matter for the Supreme Court was to determine for the purposes of C, whether this should include active membership only (argued by Mr McDonald) or all types of membership (argued by Mrs McDonald).

The Decision

The Supreme Court unanimously allowed Mrs McDonald’s appeal, setting out four main reasons for the decision. The Supreme Court concluded that the period of membership in regulation 4 of the 2000 Regs refers to the period of the person’s membership of the pension arrangement, irrespective of the type of membership. The court also outlined that the value of an interest in a pension arrangement must be shared equally, however confirmed that there are safeguards in the 1985 Act which ‘temper its prescriptiveness’ and allow the court a degree of flexibility when making awards of financial provision on divorce after taking into consideration the overall circumstances of the case.

As the Supreme Court have now clarified the interpretation of the 1985 Act and the 2000 Regs, the case will now be remitted to the Sheriff to make orders on what would constitute a ‘fair’ division of the net value of matrimonial property in light of the circumstances of this case. Whether the Sheriff will make a fair division of the net value of matrimonial property on an equal or unequal basis remains to be seen.

What are the consequences of this decision for couples on divorce or dissolution?

The outcome of this decision essentially provides that the Cash Equivalent Transfer Value (CETV) of an individual’s pension shall be taken at the relevant date, irrespective of the type of member the individual may have been during the period of marriage. Rather than being able to calculate the value of the pension looking at active membership only, parties will now be required to rely upon the Courts to use their flexibility and discretion, hoping that they acknowledge that significant proportions of a pension valuation may have accrued from contributions made pre-marriage. The difficultly in relying on Special Circumstance arguments provides uncertainty as there is a significant amount of discretion that the court has in assessing such claims.

The decision also gives rise to difficulties in attempting to quantify a special circumstance argument to justify to what extent the court should depart from the principle of equal sharing. The circumstances and figures in all cases will vary and no two cases will be the same. Complications are likely to arise when attempting to look at cases whereby an individual may have a personal pension, but for whatever reasons has effectively dipped in and out of pension contributions during the period of marriage. Similarly where an individual may have consolidated more than one pension into a new pension policy, this would require an in-depth historical investigation to establish the values of the pension policies at the time of transfer, but also to assess whether any of the pension policies may have been non matrimonial property.

To try establishing periods of when contributions have or haven’t been made during the period of marriage will result in an almost forensic investigation to justify/quantify the extent of a departure which should be applied. Consequently, input from forensic accountants and actuaries will likely be required. Conversely this was part of the reasoning for the introduction of 2000 Regs as Parliament intended to simplify dealing with pensions on divorce. The likely necessity of input from forensic accountants or actuaries will ultimately result in greater expense to the parties. Problems will also arise whereby both parties may instruct conflicting expert reports or assessments, which if the parties can’t agree, will require the court to make a decision based on conflicting evidence.

What does this mean for Family Lawyers?

This outcome will require family law practitioners to rely more heavily on the use of Section 10 (6) of the 1985 Act and also the principles which are outlined in Section 9 of the 1985 Act which are there to assist the court in determining what type of financial orders should be granted on divorce. As this case sets a precedent, there are no previous decisions or guidance on attempting to argue a departure from the principle of equal sharing based upon special circumstances whereby pension contributions were made largely prior to marriage.

In light of the circumstances of this case, Mr McDonald has not achieved the outcome he desired and the value of his pension to be included within matrimonial property will be £138,534. As the case will now be passed back to the Sheriff to determine what orders should be granted, it is expected that he will rely on special circumstances to argue that the most part of his pension value at the relevant date was in fact largely sourced from his contributions to his pension policy which he made prior to his marriage, with only 4½ months’ worth of his contributions being made during the period marriage.

If Mr McDonald was successful in arguing special circumstances, he would invite the court to depart from the principle of equal sharing and divide the net value of matrimonial property unequally. Therefore at this time, it remains to be seen whether Mr McDonald will have success in arguing special circumstances and family law solicitors will be frantically awaiting a further reported court decision which may offer further guidance on matters.