Pensions are often an overlooked asset in divorces. This is despite pension assets often being worth more than the family home.

Due to the employment patterns in the UK, pension is an asset most likely to be lost to one party (often the wife) upon divorce due to inaction. Essentially, a couple can:

• Balance the pension rights against another asset (often the house). This is known as ‘offsetting.’
• Make arrangements so that when a spouse’s pension starts paying out, a proportion is paid to the former spouse. This is ‘earmarking.’
• Split the pension at the time of the divorce to give both parties their own pension pot for the future. This is known as ‘pension sharing.’

Before a divorcing couple can consider any of these options, they will need some important information about the value of the pension assets. Pensions are unlike other matrimonial assets as they cannot readily be converted to cash, however, they are often considered a capital asset.

The courts have determined that the best way to establish a pension’s worth is through the ‘cash equivalent transfer value’ or CETV. This is calculated by the pension scheme’s actuaries when a spouse requests the value.

Once you have the CETV, the negotiations can begin in earnest.

Offsetting

When offsetting, the couple’s assets are taken into account and the pension benefits are offset against the matrimonial assets such as the family home.

This can be a very simple way to achieve a settlement, however, it is not perfect. Pension values do not necessarily equate pound for pound with other matrimonial assets. In some cases, the pension pot may be much greater in value than other assets against which it is offset.

Pension actuaries often draw attention to the fact that a pension valuation can actually ignore discretionary benefits such as pension increases when in payment, generous early retirement terms, or ill-health benefits. Furthermore, pension valuations tend to fluctuate more than property values so they are quickly out of date.

Earmarking

Earmarking is a less common way of dividing a pension. Essentially, the pension scheme pays a specified amount to the ex-spouse which is specified at the time of the settlement.

The drawbacks are that the divorcing couple do not actually achieve the all important ‘clean break’ and tie up the loose ends. During the lifetime of the order, either party can apply to the court to vary it.

Furthermore, the ex-spouse does not receive any pension income until the spouse with the pension actually retires. If the spouse with the pension scheme dies, then it is likely that the pension scheme will die with them. This could effectively leave the ex-spouse without pension provision.

Pension Sharing

Due to the unsatisfactory results with earmarking, the Government introduced the Welfare Reform (Pensions) Act 1999 which gave the court powers to split pension rights between divorcing couples. Pension sharing allowed couples to obtain a clean break.

The ex-spouse becomes a member of the former spouse’s pension scheme. In effect, they are credited with a proportion of the pension. The credit is a percentage of the CETV and not, as popularly believed, a fixed sum of money.

The main criticism of pension sharing is that, occasionally, the pension credit cannot be transferred to another scheme. In the case of an ex-spouse receiving a credit for a final salary pension scheme, it can be worth staying put as final salary schemes often yield substantially greater retirement income than simple money purchase schemes.