Pension Offsetting on Divorce
Pension offsetting in divorce cases is a hot topic, and not one which is capable of a straightforward answer. We touched on it in our blog post here, but most recently the case of WS v WS [2015] EWHC 3941 (Fam) has given a clear(er) indication of how the court will address pension offsetting in cases where there is a significant disparity between the pensions held by each spouse.
Apples or Pears?
In his judgement, HHJ LORD MESTON QC goes to some length to outline the relevant case law and includes reference to an article in Family Law (December 2015) ‘Apples or Pears: Pension offsetting on divorce’, an article which HHJ Lord Meston QC says:
“….describes a project in which 14 leading pension experts were asked to answer 3 short mock pension offsetting problems – which they did with significantly diverging results, described as making for “a fascinating but confused picture”. It revealed the absence of any reliably consistent expert evidence as to methodology or outcome. The article also submitted that a Cash Equivalent (CE) value is often wholly misleading as to the true value of a defined benefit scheme. There was a discussion of the potential use of the Duxbury algorithm to calculate the sum required.”
Key Principles
In a very concise manner, he goes on to summarise the key principles from the leading cases of Martin-Dye v. Martin-Dye [2006] EWCA Civ 681, [2006] 2 FLR 901, Vaughan v. Vaughan[2007] EWCA Civ 1085,[2008] 1 FLR 1008 and more recently SJ v. RA [2014] EWHC 4054 (Fam) and JS v. RS [2015] EWHC 2921 (Fam).
7 Permutations
In WS v WS the parties’ respective counsel submitted no less than 7 alternate permutations of methodology for dealing with the disparity. These are clearly set out (together with the resulting figures) in the judgement at paragraphs 60 – 64 but in summary are:
For the wife (all based on a Duxbury approach to income stream from the fund itself) Mr Dyer QC suggested:
- Using a fund for a pension in husbands name and applying a flat 2.5% net return
- The wife’s net income from pension compounded at 2% per annum; and
- A discount for accelerated payment of 25%
For the husband, there was no mention of Duxbury by Mr Peel QC in his alternative methods:
- Give the husband half the difference in total pensions, as a lump sum i.e. equalise on cash equivalent values only
- Calculate a lump sum to enable the husband to buy and annuity to achieve the same lifetime income, inflation proofed
- Equalise pension funds after deducting 40% tax on CE values alone; or
- For wife to provide a lump sum to buy an annuity to add to an annuity bought with husband’s existing fund to make up the difference
There were apparently further offers and discussions and time given by the court to enable the parties to try to reach a compromise. Those discussions did not result in a settlement, but included further alternatives such as Pension Attachment, a contractual arrangement whereby the wife would pay the husband 25% of her annual pension income during joint lives and providing for variation and capitalisation with security by way of a charge over the former matrimonial home.
None were satisfactory and the court ultimately had to determine the correct approach.
The Headline Figures – How Much?
The figures put by respective counsel for the parties had ranged (depending on which approach of the 7 outlined above was taken) from £210,457 up to £1.3 million. No prizes for guessing who had submitted which figures were the correct ones to use.
HHJ Lord Meston QC decided that the methodology using a ‘conventional’ Duxbury type approach as submitted by Mr Dyer QC was correct and ‘certainly preferable to an annuity based calculation’.
The Result
So, how much did the husband secure? £425,000.
What does Duxbury say?
Using the Duxbury tables, that sum for the husband equates to an annual income of around £30,000 – assuming the fund is invested and achieves the rate of return expected under the Duxbury model.
Is that a fair decision? Perhaps one of readers from the wealth management sector will have a view. Answers on a postcard to [email protected] or get in touch with us via twitter and LinkedIn or our Facebook page where you can also find the latest news and views on family law.
