A ruling from the Supreme Court of 25th July 2017 means that all types of membership of pension schemes (be it active, deferred or pensioner) will be considered in determining the value of pensions to be taken into account on divorce. We note below the change in the law and what it could mean for divorcing couples.
Background to Mr and Mrs McDonald’s Case
Mr McDonald worked as a miner for British Coal and began contributing to their Staff Superannuation Scheme on 11 December 1978. He contributed to the scheme until 10th August 1985, when he took early retirement due to ill health. Shortly before Mr McDonald’s retirement, in March 1985, he married Mrs McDonald. A question arose as to the portion of his pension to be considered when seeking to divide assets on divorce.
When a couple seeks to divorce, the Family Law (Scotland) Act 1985 provides that the net value of the matrimonial property must be calculated and then divided between the parties. Matrimonial property is all property acquired between the date of marriage and the date of separation (excluding property acquired by gift or inheritance). A substantial part of this matrimonial property is often a spouse’s pension rights. To determine the value of a pension for matrimonial purposes, one must obtain the ‘cash equivalent transfer value’ (CETV), and this is provided for in Regulations created under the 1985 Act.
The formula provided by the Regulations was contentious in this instance due to a dispute as to the type of pension membership considered in the calculation. Mr McDonald argued that the pension should be valued by reference only to the time in which he was an ‘active member’ of the scheme (when he was making contributions). This would mean that any subsequent benefits received once Mr McDonald ceased contributing would not be included in the valuation. Mrs McDonald, however, argued that both the time that Mr McDonald had been contributing to the scheme and the time spent receiving the benefits of the scheme should be included. If Mr McDonald’s argument was accepted, the value of his pension benefits would be £10,002, compared to £138,534 if the Court agreed with Mrs McDonald.
An action was raised in Edinburgh Sheriff Court in 2013, where the Sheriff agreed with Mr McDonald. Mrs McDonald appealed to the Court of Session. The appeal was dismissed by a majority, with Lady Smith dissenting. Mrs McDonald again appealed to the Supreme Court, who unanimously allowed the appeal.
Lord Hodge gave several reasons for this. He recognised that the Regulations in particular were suitably broad so as not to exclude different types of membership. Furthermore, the argument that only ‘active membership’ should be included made little sense in the context of personal pension schemes, where contributions may be irregular. The Supreme Court was not persuaded by Mr McDonald’s arguments on the basis that Parliament clearly intended, in the 1985 Act and the accompanying Regulations, to include all types of membership in valuing a pension.
What does this mean in the context of pension sharing in divorce?
This Supreme Court’s decision provides certainty that all types of pension membership should be considered in apportioning a party’s pension. This certainly assists in considering personal pensions, where contributions may be few and far between and the concept of “active membership” does not apply.
Furthermore, a divorcing party with a large pension need not necessarily despair. The decision in this case does not automatically mean that a pension-sharing order will require a party’s interest in a pension arrangement to be shared equally. Lord Hodge explicitly states that the 1985 Act contains safeguards so as to encourage flexibility into the award of financial provision. In particular, he notes that under the Act, there is provision to denote that should contributions occur outwith the period of marriage, then there is a relevant argument for unequal sharing of matrimonial property. This should reassure parties that courts will consider the particular circumstances of each individual case before making a decision.
By Kirsty Nelson, Trainee Solicitor