Isle of Man: A Pension Loophole

Last Updated: 9 January 2012
Article by Appleby  

Pension rights are very often an important marital resource which should be given careful consideration by any divorcing couple. Until the Matrimonial Proceedings Act 2003 (the "2003 Act"), it was not possible for the Isle of Man Court to make any orders directly regarding the division of pension benefits.

The pension rights of each party would of course be taken into consideration and, if there was much disparity between the rights of each party, the court could offset the value of those rights against other marital assets.

Now, however, under the 2003 Act the court is empowered to make orders directly dealing with pension schemes. These orders are as follows:

1. A "pension sharing" order – at the time of divorce the pension-holding spouse's benefit entitlement of the scheme is given a capital value, known as the Cash Equivalent Transfer Value ("CETV"). The CETV is calculated by treating the employed spouse as having left pensionable service at the time of divorce and establishing what would be the transfer value for the employed spouse's accrued benefits. The court order sets out the percentage which has to be transferred to the ex-spouse. The pension provider is then obliged to effectively separate one pension into two completely different schemes, and a clean break can be achieved giving each party independent rights to a portion of the pension benefits accrued. Each party will benefit from his or her own scheme when he or she reaches retirement age and is free to transfer benefits from one provider to another. Neither the death nor the retirement of the policy-holder will affect the benefits acquired by the ex-spouse.

2. A "pension earmarking order" whereby one spouse is again awarded a percentage share of the other's pension benefits but the scheme is not separated at all and benefit will only be enjoyed once the pension-holder has reached retirement age. This type of order has a rather obvious disadvantage where the pension-holder is significantly younger than the ex-spouse. Alternatively, where the pension-holder is significantly older than the ex-spouse, another disadvantage is encountered because the pension benefits die with the pension-holder.

Pension Benefits Die

One would be forgiven for thinking that since the 2003 Act divorcing parties can safely assume that their future needs will be met by the court, making either pension sharing or pension earmarking orders. This is certainly the case when the parties have pension schemes linked to employment undertaken in the Isle of Man. However, there are in fact very few pension providers who will offer benefits to Isle of Man employees. These companies have no difficulty in recognising and implementing a pension sharing order made by the Isle of Man court. However, there are of course many Isle of Man residents who have pension schemes linked to employment in the United Kingdom or elsewhere in the world. It is often the case that the providers of these schemes, when presented with a pension sharing order made by the Isle of Man Court, will simply refuse to recognise it, arguing that the Isle of Man is a completely separate jurisdiction with no power to order the pension provider to do anything. Put quite simply, no British pension provider is obliged to comply with a request to share a pension made by overseas courts.

One might imagine that the difficulty could be resolved by simply applying for an identical pension sharing order in the English courts, which the pension company will recognise and implement. There is a mechanism for doing so under Part 3 of the Matrimonial and Family Proceedings Act 1984 (the "MFPA 1984"), an Act of Parliament. When considering whether a pension sharing order should be made under the MFPA 1984, the English court will apply a number of tests.

Before an application can be made under Part 3 of the MPFA 1984, leave of the court must be obtained. Section 13 of the MFPA 1984 states that:

"the court shall not grant leave unless it considers that there is substantial ground for the making of an application for such an order" and that leave "may be granted subject to such conditions as the court thinks fit".

In addition, the court will only have jurisdiction to entertain an application under Part 3 of the MFPA 1984 in cases where:

a) Either party to the marriage was domiciled in England or Wales on the date at which an application for leave was made or the dissolution of marriage, annulment or legal separation took effect.

b) Either party to the marriage was habitually resident in England or Wales for a period of 12 months before the application for leave was made or the dissolution of marriage, annulment or legal separation took effect.

c) Either or both parties to the marriage had at the date of the application for leave, a beneficial interest in possession in a dwelling house in England or Wales that had been or was the matrimonial home of the parties.

It is quite obvious that a divorcing couple who both remain within the Isle of Man will fall at this very first hurdle of obtaining leave. Unless one of them is still domiciled in England or Wales despite residing on the Island, or unless one of them still owns a UK property which at one time was the marital home, the English court will simply refuse leave to make an application for a pension sharing order due to the lack of connection to the UK.

Harsh Economic Times

Often, and increasingly so in these harsh economic times, other matrimonial assets will be few and far between. For a wealthy couple, the opportunity to simply award one party more from the parties' savings, share portfolio etc is readily available. However, for an average couple who have no other assets apart from their matrimonial home and their pension, the opportunity for offsetting is virtually non-existent. It might be possible to put in place some other arrangement including a form of implementation once the pension is in payment but this is particularly unsatisfactory in comparison to the opportunity for a pension sharing order, giving no protection in the event that the pension holder dies before reaching retirement and certainly failing to achieve a clean break between the parties.

There are some moves in England and Wales to rectify this situation by changing the MFPA 1984 to include an additional jurisdictional basis of having an interest in an English pension. From the perspective of Isle of Man residents, it is certainly vital that this gaping loophole in the law is sewn up, and done so quickly.

Originally published in Resolution, Offshore – Winter 2011/12.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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