In this article we explore the key differentials between pension sharing in England, Wales and Scotland.
England & Wales and Scotland have long taken a differing approach to pension sharing on divorce; it is important to understand the implications when it comes to choice of jurisdiction before agreeing to share your pension.
In this article we explore the key differentials between pension sharing in England & Wales and Scotland, with a particular focus on the approach taken to valuing pension assets. However, there is no substitute for professional advice, and you should seek guidance from a specialist family lawyer before entering into an agreement to share a pension on divorce.
The legal jurisdictions of England & Wales and Scotland receive a lot of comparisons. We share similar jurisprudence, including in relation to relationship breakdown and the resulting financial implications, including the ability to share in your spouse's pensions on divorce. But there are key differences. What are they?
Date of calculating benefits
It is fair to say the Scottish approach provides greater certainty, and it can be a lot quicker. In Scotland, the valuation of the pension benefits, for sharing purposes, is carried out as at the date of separation, whereas in England & Wales it is calculated at the date the pension sharing order ('PSO') takes effect (i.e. 28 days from the date of a final financial order or the date of a final order of divorce, whichever is later) - this can be many months or even years post-separation, and means the parties will not know the value of the pension transfer out until after they have reached agreement.
Percentages or a fixed sum
For this reason, PSOs in England & Wales must be expressed as a percentage, and not a fixed sum.
In Scotland, it is far more common for the parties to agree a fixed amount to be transferred out of a pension as part of a final financial settlement.
Requirement for an order
There is also no requirement in Scotland to obtain a PSO in order to give effect to an agreement to share a pension on divorce. Parties to divorce or dissolution in Scotland can enter into a written agreement that becomes binding on the pension provider immediately upon a final order of divorce or dissolution being granted.
However in England & Wales, a court order is required.
So, why might a party elect for England & Wales as an alternative jurisdiction when considering a pension share? The answer is in the regulations. A key difference between the two jurisdictions is the approach taken to the valuation of pension rights. In Scotland the guidance is clear:
"Valuation methods used should be in accordance with the pension regulations, such as the cash equivalent method" – Law Society of Scotland
In Scotland, pensions are typically valued by obtaining a cash equivalent transfer value ('CETV') of the fund as at the relevant date (normally the date of separation), which is then apportioned to the period of the marriage (apportionment is another topic, and another important consideration when negotiating a pension sharing order whether in England & Wales or Scotland).
The Scottish approach to valuing pensions reflects its mixed common and civil law system. It provides parties with a greater degree of certainty and leaves less to the redistributive discretion of the judge. However, it sits at odds with the direction of travel of the courts in England & Wales, where increasingly judges are taking a more nuanced approach.
The clear approach now adopted by lawyers across England & Wales can largely be traced back to the publication in 2019 of the Pension Advisory Group ('PAG') report into the treatment of pensions on divorce (although arguments over pension valuations have long existed). The PAG was established to provide guidance to the legal profession and consists of a group of multidisciplinary professionals specialising in the field of financial remedies and pensions on divorce. Their report has been endorsed by the President of the Family Division as a good practice guide for family judges and lawyers, and advocates for the use of Pension on Divorce Experts ('PODEs').
Part of the role of a PODE is to assess the 'true worth' of the pension assets. One of the problems with adopting CETVs is the many different Defined Benefit schemes (especially public sector schemes) which report cash equivalent values that are much lower than the cost of replacing the benefits on the open market. So, the scheme may actually be much more valuable than the cash equivalent value indicates. Some Defined Contribution schemes also have guarantees that may make the true worth of the scheme higher than the valuation given (for example guaranteed annuity rates or guaranteed fund growth).
Since the PAG report, lawyers in England & Wales have looked more critically at CETVs and are more likely to instruct a PODE to report into the value of pension assets. The PAG report suggests, at a minimum, that parties with pension assets worth in excess of £100,000 should instruct a PODE. For this reason, receiving parties to a pension share - particularly of a Defined Benefit scheme - may find themselves better off divorcing in England & Wales. In some cases, the difference in terms of value of pension assets following a PODE report can run into the hundreds of thousands of pounds.
Before entering into an agreement in relation to your pension, you should take advice from a specialist family law solicitor. They will be able to instruct a PODE on your behalf should you need a report in relation to pensions.
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.