The Supreme Court has provided some welcome clarification on how a person’s rights or interests in a pension arrangement should be treated as matrimonial property in divorce cases.
The facts of the case are that Mr McDonald, who was the respondent in the case, was a member of the British Coal Staff Superannuation Scheme (the “Scheme”).
Mrs McDonald sought a pension sharing order from the Scottish Courts on her divorce from Mr McDonald, on the basis that his pension forms part of the matrimonial property which is taken into account in the financial settlement.
Mr McDonald was a contributing member of the Scheme from 1978 to 1985 when he started drawing a ill-health pension. He has been receiving a pension ever since. He married in 1985, and ceased to co-habit with Mrs McDonald in 2010.
This appeal raises questions of statutory interpretation both in relation to the Family Law (Scotland) Act 1985 (the “1985 Act”) and the Divorce etc. (Pensions) (Scotland) Regulations 2000. (the “2000 Regulations”). In essence, section 10(5) of the 1985 Act treats as matrimonial property “ the proportion of any rights or interests of either person…in any benefits under the pension arrangement which is referable to the period [ during the marriage but before the relevant date]”. The relevant date in this case is 2010, being the date the parties ceased to cohabit.
The 2000 Regulations provide for the valuation of the cash equivalent transfer value (“CETV”) and Regulation 4 contains the relevant formula, which is:
A x (B/C)
- A is the full value of the member’s rights and interests in any benefits under the Scheme at the relevant date;
- B is the period of C that falls within the period of marriage of the parties (in this case 1985) and the relevant date (in this case 2010), and;
- C is the period of membership of that party in the Scheme before the relevant date.
The dispute between the parties relates to that formula, in particular the words that fall to be interpreted in factor C, namely, “the period of membership of that party in the pension arrangement”
In essence, Mrs McDonald argued that the CETV should be apportioned by reference to the whole period of Mr McDonald’s membership of the Scheme to the date they separated (i.e. the relevant date). Therefore covering the period when Mr McDonald contributed to the Scheme and also the period when he took his ill-health pension.
Mr McDonald argued that membership was only active membership.
The appeal was allowed. The Supreme Court agreed with Mrs McDonald, reasoning that to find otherwise would involve adding words to the 2000 Regulations that are not there. It was clear that the intention of the draftsman was to not differentiate between the classes of membership. The 2000 Regulations applied to both occupational and personal pensions so the definition of active membership makes no sense in relation to personal pension schemes.
Going back to the formula, factor C is the period of membership of that party (including active and pensioner membership) before the relevant date, which is the date that the parties ceased to co-habit.
Whilst this case was about the interpretation of specific Scottish legislation, it will apply across the UK. Although it is worth noting that a pension sharing order made in England or Wales, must specify what percentage of the value of the member’s pension is to be transferred to the former spouse rather than the specific amount. The percentage is applied to the CETV of the member’s benefits, whether the member is active, deferred or a pensioner member of the scheme. This produces the monetary amount which is the pension debit.
A pension sharing order made in Scotland may, instead, specify the amount to be transferred, rather than the percentage value. In Scotland pension sharing is also possible by means of an agreement between the parties.
One of the key impacts of this case is on the calculation of factor C in the formula Ax(B/C). So it will be primarily of interest to the actuarial profession, and will only affect pension sharing order calculations performed after 26 July 2017 (ie. the date of the judgement).