Divorcees – The Forgotten Victims

David Davison

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From next month, most members of final salary pension schemes will be able to sleep that bit more peacefully, secure in the knowledge that new legislation will significantly improve the level of protection their benefits receive. Yet one particular section of the public – the spouses of pension scheme members in the midst of divorce proceedings – will miss out on any benefits from these changes.

The most common method of dividing assets is for the party with the most pension (often the husband) to retain it with the other party (often the wife) receiving a higher proportion of the other assets to compensate. This seems like a sensible and pragmatic approach for many divorcing couples.

In Scotland the only pension value that the court can take into account is the Cash Equivalent Transfer Value (CETV) which is the amount available to transfer to another pension scheme. In divorce proceedings, the CETV is often an inadequate or inappropriate measure of the value of the pension given up, though the courts in Scotland appear to have their hands tied.

If we take the example of a 40 year old man who has built a pension of £10,000 a year the cost of buying an annuity to guarantee this pension would be over £150,000. On the face of it, his wife should receive over £150,000 of other assets to offset against the pension. The CETV however might typically only be about £70,000. Obviously the fact that the court can only take into account a much lower value than the cost of a guaranteed pension is detrimental to the wife’s position.

The second commonly used method of allowing for pension rights is pensions sharing and in some cases this can produce a satisfactory solution.

In public sector schemes, for example, the wife is admitted into the scheme almost as though she had always been a member in her own right and she would receive a proportion of her husband’s pension. In the private sector, however, the pension scheme has the power to insist that the spouse transfers the value of his or her share to another pension arrangement.

In our example, if the parties agreed on a 50/50 share of pension, the husband would be giving up a pension that would cost over £75,000 to secure but his wife would receive a transfer value of only around £35,000 and the pension scheme would pocket the difference.

Further changes to the legislation governing pension rights on divorce in Scotland are clearly necessary. First and foremost, pension scheme trustees should not be permitted the option to renege on part of their liability just because a pension scheme member is unfortunate enough to be going through divorce proceedings.

ENDS

Published in The Scotsman on 16 th April 2005

David Davison

Post by David Davison

Specialist consultant on pensions strategy for corporate, public sector and not for profit employers

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