Do trustees properly protect the rights of divorcing members?

Ian Conlon

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I recently prepared a report in relation to pension on divorce where the husband was retired and in receipt of a pension from the BT Pension Scheme. The pension scheme member’s wife was over age 60 so was in a position to draw the proceeds of a pension share immediately. The CETV was a multiple of approximately 20 times the pension, so for a pension of £20,000 per annum, the CETV would be approximately £400,000.

I estimated that, if the pension scheme allowed the Pension Credit to remain within the scheme, then the ex-spouse would receive a pension of around £10,000 per annum from a 50% Pension Share. However, as the scheme insists that the ex-spouse takes the proceeds of the Pension Credit externally, then the ex spouse could expect to purchase an annuity providing an income of around £6,600 per annum (increasing in line with price inflation as per the scheme benefit). So the result of applying a Pension Sharing Order of 50% was an immediate loss of joint income of around £3,400 per annum, with this loss increasing over time in line with price inflation, equivalent to a 17% reduction in overall income (or profit to the pension scheme depending on your perspective).

An Attachment Order was considered but the cost of insuring against the risk of the husband dying before the wife ruled this option out. Both parties needed an income stream so offsetting was not an option. The only way of maintaining the value of the pension assets was to remain married! Also not an option!!

At the same time in a parallel universe the Pensions Regulator is telling scheme trustees that, if an employer wishes to provide an enhancement to encourage pension scheme members to transfer out, then the trustees should start from the presumption that transferring out of a defined benefit pension scheme is not in a member’s interests. So, in the case where the trustees make the decision, how can they come to the view that it is appropriate to force the ex-spouse to transfer his or her benefits out of the scheme? Are trustees looking after members interests in this case?

This is a far from uncommon scenario; those who receive benefits from a Pension Sharing Order are the only group of beneficiaries associated with occupational pension schemes who lack any level of meaningful protection. Pension scheme trustees should be challenged as to the rationale for their approach given that retaining the benefits within the scheme adds no extra liability.