PARTS III-IV: PENSIONS ON DIVORCE AND NULLITY

BACKGROUND

Since the 1970s, the courts have been required to have regard to the value of pension rights so that these can be offset against other assets. The Pensions Act 1995 allowed courts:

in England and Wales, to require pension arrangements to pay maintenance from a member's pension directly to a former spouse;

throughout Great Britain, to order part or all of a lump sum payable on the death or retirement of a member to be directed to the former spouse.

These provisions, which are generally known as the earmarking or attachment provisions, have been little used. They do not allow a clean financial break in a divorce settlement or on nullity of marriage and they leave former spouses vulnerable in that they lose their intended or actual retirement income if their former spouse dies before them. Pension sharing will provide an additional option for couples ending their marriage, to ensure that assets can be divided fairly on divorce. It is intended to make it easier for divorcing couples to achieve complete financial independence through a clean break settlement. It is designed to provide many former spouses, most of whom are likely to be women, with greater security of income throughout retirement.

The Government published a public consultation paper in June 1998 that included a draft Pension Sharing Bill and complementary draft legislation containing the necessary changes to tax law. The draft legislation was also scrutinised by the Social Security Select Committee as part of the pre-legislative scrutiny of Bills recommended by the Select Committee on Modernisation.

The Social Security Select Committee published its report on 28 October 1998. Many of the issues raised by the Committee echoed those raised by the 82 respondents to the consultation exercise. The Government responded to the report on 12 January 1999. Copies of the response and the non-confidential replies to the public consultation are available in the Library of the House of Commons and the Record Office of the House of Lords. Committee and the great majority of respondents supported of the principle of pension sharing. The provisions in this Bill reflect the changes made in response to Committee's recommendations and the concerns expressed by other commentators about some aspects of the draft legislation.

In particular, the provisions in the Bill have been amended to put beyond doubt that pension sharing will be available only to those who begin proceedings for divorce or annulment after the legislation has been brought into force. The Government also agrees that "attachment/earmarking" should be retained as an alternative to pension sharing, and the Bill includes changes designed to improve the current legislation which formed part of these arrangements. The Bill also includes provisions extending sections 25B to 25D of the Matrimonial Causes Act 1973 to overseas divorces etc.

The Government has also made a number of technical amendments in the light of recommendations by the Committee and/or responses to the consultation exercise. To enable schemes to simplify the administration of a pension in payment to a former spouse, schemes will have the discretion to impose a single "indexation" requirement on the whole of the pension to protect its value against inflation during retirement. Similarly, to simplify administration and reduce the costs to pension schemes, we have dispensed with the requirement for pension schemes contracted-out of the state scheme to obtain separate certificates to hold "safeguarded rights" (that is contracted-out rights which form part of a pension share).

The Government has noted the views of the Committee that former spouses of members of unfunded public service schemes should be allowed to choose to transfer out of such a scheme, a point that was also mentioned in some consultation responses. However, former spouses will enjoy the same levels of security and inflation-proofing as other scheme members of a public service scheme and, without this restriction, public expenditure would be brought forward. So, the provisions in this Bill continue to prevent former spouses from transferring out of such schemes.

The pension sharing clauses

The main purpose of the pension sharing clauses is to introduce the option of pension sharing on divorce or nullity of marriage. This will allow pension rights to be treated like other assets and a proportion, or the whole, of their value to be transferred from one spouse to the other as part of the financial settlement. Pension sharing will not be compulsory - it will still be possible to offset pension rights against other assets or to use the current earmarking and attachment arrangements.

Pension sharing will be open to couples where the pension rights exist under an occupational pension scheme, a personal pension scheme, the State Earnings Related Pension Scheme (SERPS), or other pension arrangements. Pension sharing will not apply to the basic state pension, where one partner may already substitute their former partner's contribution record for their own in the event of divorce.

The rights created from the value transferred will belong to the person for whom they are created. The eventual payment of the pension will be direct to them and will no longer depend on the circumstances of their ex-spouse.

Pension sharing will apply only in relation to proceedings for divorce or annulment that begin after the new arrangements come into force. The costs of pension sharing will be recoverable from the couple.

Structure of the provisions about pensions on divorce and nullity

Part III

This amends existing matrimonial and family law to enable the court to make pension sharing orders in relation to divorce and annulment. It also makes provision amending the earmarking and attachment provisions, and extends the England and Wales provisions to overseas divorce and nullity.

Part IV

Chapter I sets out how, in relation to a pension arrangement, a pension share is effected and the result. Chapter II makes similar provisions in relation to SERPS.

Part VI

The general provisions for the Bill in Part VI contain some measures relating specifically to pension sharing. In particular, see

Clause 78 part (regulations and orders)

Clause 79 and Part I of Schedule 12 (consequential amendments relating to Parts III and IV)

Clause 80 part (transitional provisions)

Summary of pension sharing provisions

Clause 19 (and Schedule 3) amends Part II of the Matrimonial Causes Act 1973. The effect of the amendments is to enable the court in England and Wales to make pension sharing orders in relation to divorce and nullity of marriage.

Clause 20 makes corresponding provision for Scotland.

Clause 21 (and Schedule 4) amends the sections about pensions inserted in the Matrimonial Causes Act 1973 by section 166 of the Pensions Act 1995.

Clause 22 extends the earmarking provisions, included in the Pensions Act 1995, to applications for financial relief after an overseas divorce, separation or annulment by amending the Matrimonial and Family Proceedings Act 1984. In Scotland, it is already possible to apply for an attachment order following an overseas divorce.

Part IV

Clause 23 sets out the scope of the pension sharing mechanism relating to rights under pension arrangements.

Clause 24 activates the pension sharing mechanism following a pension sharing order by the court or an agreement between the divorcing couple.

Clause 25 provides, as a result of the pension sharing order or agreement, for the pension rights of a person with rights under a pension arrangement to be subject to a debit and the former spouse to become entitled to a corresponding pension credit in the form of a right against the person responsible for the arrangement.

Clause 26 provides a power to specify the calculation of the cash value of the member's pension rights (the "cash equivalent").

Clause 27 specifies how the member's pension rights should be reduced as a result of the pension share.

Clause 28 deals with the effect of pension sharing on contracted-out rights (that is, the rights built up by members of contracted-out schemes that replace the state earnings related pension scheme (SERPS)). Clause 28 reduces contracted-out benefits to take account of a pension share. It also ensures that the state does not have to meet the cost, in the form of payment of extra additional pension, because of the reduction in the member's benefit.

Clauses 29 and 30 specify the time limit within which the person responsible for a pension arrangement must discharge his liability in respect of a pension credit. Clause29 also provides that the Occupational Pensions Regulatory Authority (OPRA) must be notified if an occupational pension scheme fails to carry out the pension share on time and enables OPRA to either impose fines in such cases or extend the time allowed for carrying out the order.

Clause 31 (and Schedule 5) sets out the ways in which persons responsible for pension arrangements can discharge their liability for a pension credit. In the case of pension schemes, this is by creating rights for the former spouse within the scheme itself or by making a transfer payment to another suitable pension scheme or arrangement. The clause also provides for cases where the person entitled to the pension credit dies before the pension share has been implemented.

Clause 32 sets out the special requirements in relation to any part of a former spouse's pension rights derived from the member's contracted-out employment. These rights are called "safeguarded rights". The clause also sets out the requirements that schemes wishing to hold safeguarded rights must meet.

Clause 33 sets out the general rules relating to the pension rights obtained by the former spouse following a pension share where the rights are provided under an occupational pension scheme. It also provides former spouses with transfer rights except in the case of unfunded schemes.

Clause 34 makes provision for pension credit rights when a pension scheme winds up.

Clause 35 provides for pensions payable by public service schemes to former spouses following a pension share to be fully protected against inflation ("indexed"). This mirrors the protection enjoyed by other members of public service schemes.

Clause 36 provides that the Secretary of State may make regulations providing for indexation for pensions payable to former spouses by private sector occupational schemes and pensions or annuities derived from safeguarded rights held in personal pension schemes.

Clause 37 confers power enabling the Secretary of State to make regulations enabling the person responsible for a pension arrangement to recover pension sharing costs from the parties to the pension share.

Clauses 38 and 39 contain technical provisions necessary to enable public service and judicial pension schemes to comply with pension sharing orders or agreements.

Clause 40 disapplies a common provision in pensions legislation, which prevents the pension rights of an individual from being passed on to another person (except on death), to enable a pension sharing order or agreement to be carried out. The disapplication also extends to any corresponding provisions of pension arrangements.

Clause 41 contains a regulation-making power to require pension schemes to disclose information relevant to a pension share.

Clause 42 defines some of the terms used in Chapter I. Chapter II

Clause 43 sets out which state scheme rights may be subject to pension sharing.

Clauses 44, 45 and 46 (and Schedule 6) provide for pension sharing to apply to the additional pension built up in SERPS. The additional pension rights obtained by a former spouse following a pension share are called the "shared additional pension".

Clause 47 defines some of the terms used in Chapter II.

Part VI

Clause 79 gives effect to Schedule 12; Part I of the Schedule makes consequential amendments relating to Parts III and IV.

Clause 80 contains transitional provisions: subsections (3) to (9) and (12) relate to pension sharing.

Clause 82 gives effect to Schedule 13, Part III of which repeals some existing legislation in consequence of the pension sharing provisions.

These clauses are described at the appropriate points in the commentary.

COMMENTARY ON CLAUSES

This clause gives effect to Schedule 3, which amends the Matrimonial Causes Act 1973 to enable the court to make pension sharing orders in connection with proceedings for divorce or nullity of marriage in England and Wales.

Clause 20: Pension sharing orders in Scotland

This clause amends the Family Law (Scotland) Act 1985 to enable the court in Scotland to make pension sharing orders in relation to divorce and nullity of marriage in Scotland.

Subsection (2) inserts into section 8(1) (which sets out the types of order for financial provision a court may make in an action for divorce) a new type of order named "a pension sharing order".

Subsections (3) and (4) insert various definitions into section 27 (interpretation). These definitions largely correspond to the equivalent definitions for England and Wales at Schedule 3, paragraph 2(3) and (4). The sole point of difference occurs at subsection (3)(b) in the definition of "pension sharing order". This provides for the percentage value or the amount of the shareable rights to be transferred. Allowing the transfer of an amount reflects substantive law and current practice in Scotland in relation to orders for financial provision on divorce.

Clause 21: Sections 25B to 25D of the Matrimonial Causes Act 1973

This clause gives effect to Schedule 4 which amends the provisions about pensions inserted in the Matrimonial Causes Act 1973 by section 166 of the Pensions Act 1995. These provisions reinforced the courts' existing duty to take account of pensions in divorce settlements and gave courts in England and Wales new powers to require that, when a pension comes into payment or a lump sum death benefit becomes payable, part or all of it of it shall be paid by the pension scheme direct to the former spouse.

Clause 22: Extension to overseas divorces etc.

This clause amends Part III of the Matrimonial and Family Proceedings Act 1984 to extend the earmarking provisions, introduced into the Matrimonial Causes Act 1973 by the Pensions Act 1995, in relation to applications for financial relief in respect of divorces, judicial separations and annulments in England and Wales after an overseas divorce, separation or annulment.

Subsection (2) amends section 18 to require the court, when deciding whether and how to exercise its powers to grant relief under the 1984 Act, to have the same regard to pension benefits as it does in relation to a domestic case.

Subsection (3) defines pension arrangement and benefits under a pension arrangement.

Subsection (4) amends section 21 of the 1984 Act by inserting two new paragraphs into what was section 21, but which, as a result of the Bill, will be section 21(1). Section 21 of the 1984 Act applies provisions of the 1973 Act to financial relief orders under section 17 (financial provision and property adjustment orders) of the 1984 Act. The additions made by subsection (4) apply to section 17 orders the same provisions about earmarking and attachment as apply under the 1973 Act where, having regard to any benefits under a pension arrangement, the court makes a financial provision order on divorce or nullity.

Subsection (5) inserts new subsections (2) to (6) into section 21 of the Matrimonial and Family Proceedings Act 1984. Of these new subsections:

(2) excludes the power to earmark a pension arrangement under new section 21(1)(be) and (bf) in cases where the only link with England and Wales is the matrimonial home;

(3) applies section 25D(1) of the Matrimonial Causes Act 1973 (transfers of rights between pension arrangements) to pension earmarking orders under the new section 21(1)(be) and (bf); and

(4) allows the Lord Chancellor to make regulations equivalent to those which may be made under section 25D(2) to (2B) and (2D) of the Matrimonial Causes Act 1973. Section 25D(2) (as amended by the Bill) provides that regulations may make provisions as to:

(a) payment of sums due under earmarking orders

(b) rights and liabilities of the parties affected in cases where a payment has been made under a mistaken belief that an earmarking order was valid;

(c) notification of change of circumstances;

(d) discharge of liability under an earmarking order of the person responsible for a pension arrangement;

(e) calculation and verification in relation to the valuation of benefits under a pension arrangement or shareable state scheme rights for the purpose of enabling the court to exercise its powers.

(5) allows the Secretary of State to make regulations equivalent to those which may be made by him under 25D(2C) to (2E) of the 1973 Act. These regulation-making powers are concerned with the supply of information from pension arrangements, calculation and verification in relation to the value of pension rights and the recovery of charges incurred by pension arrangements.

PART IV - PENSION SHARING

Chapter I - Sharing of Rights under Pension Arrangements

This clause sets out the scope of the pension sharing mechanism.

Subsections (1) and (3): pension sharing may extend to a "person's shareable rights" (defined in subsection (2)) in any pension arrangement other than an excepted public service scheme. It is intended to use the power in subsection (3) to except the Great Offices of State.

Subsection (2): most pension rights will be shareable. It is intended to use the regulation-making power to exclude survivors' benefits payable to a member in his capacity as a survivor (such as, a widow's or widower's pension payable in respect of a former marriage), an injury benefit, compensation payment, and incidental benefits such as travel concessions.

Clause 24: Activation of pension sharing

Subsection (1) lists the circumstances in which the pension sharing mechanism is triggered:

(a) a pension sharing order under the Matrimonial Causes Act 1973;

Note: In England and Wales a pension sharing order will be stayed (and so not take effect) for a period in accordance with the level of the court in which the jurisdiction is exercised. The stay provides time for the parties to appeal. If an appeal is begun during the stay period, the order will be further stayed until the appeal is disposed of.

(b) a qualifying agreement, corresponding to such a pension sharing order, effective on the dissolution of marriage under the Family Law Act 1996;

(c) a qualifying agreement, corresponding to such a pension sharing order, effective after the dissolution of marriage under the Family Law Act 1996;

(d) an agreement, corresponding to such a pension sharing order, made on an application for financial relief in England and Wales under Part III of the Matrimonial and Family Proceedings Act 1984 following an overseas divorce or annulment of marriage.

(e) a pension sharing order made under the Family Law (Scotland) Act 1985;

Note: In Scotland, a pension sharing order will take effect on the day that the order is made. However, the appeal process must be completed before the extract decree or declarator is issued. If an appeal is marked the parties will not therefore be able to send the relevant documentation to the person responsible for the pension arrangement until the appeal process is complete. The implementation period under clause 30(1) does not begin until the person responsible for the pension arrangement receive that documentation and the pension sharing order cannot therefore be implemented until the appeal process is completed.

(f) a provision to share a pension that is included in a qualifying agreement negotiated between the parties that takes effect on divorce or nullity in Scotland. The Secretary of State is given a regulation-making power to prescribe the form in which the pension sharing provision must be made;

(g) an order, corresponding to a pension sharing order in paragraph (e), made on an application for financial relief in Scotland under Part IV of the Matrimonial and Family Proceedings Act 1984 following an overseas divorce or annulment of marriage;

(h) a pension sharing order under Northern Ireland legislation;

(i) an order, corresponding to such an order, made on an application for financial relief in Northern Ireland under Part IV of the Matrimonial and Family Proceedings (Northern Ireland) Order 1989 following an overseas divorce or annulment of marriage.

Subsection (2) defines the type of agreement in England and Wales that qualifies under subsection (1)(b) and (c). Such an agreement is one that:

(a) has been entered into in such circumstances as the Lord Chancellor may prescribe by regulations. It is proposed to use the regulations to ensure that the parties have given prior notice of their intention to pension share and not received any notice of objection from the person responsible for the pension arrangement of their intention to pension share and that their agreement has been reached following mediation or some other form of negotiation involving a third party;

(b) satisfies requirements prescribed by the Lord Chancellor. It is intended to provide that agreements must meet requirements as to form, contain prescribed information and must have been produced to the court before being passed to the pension arrangement concerned.

Subsection (3) defines the type of agreement in Scotland that qualifies under subsection (1)(f). It requires an agreement to be entered into in such circumstances as the Secretary of State may prescribe and also registered in the Books of Council and Session before it can trigger the pension sharing mechanism.

Note: In Scotland, parties who divorce commonly make Minutes of Agreement to settle as many issues as possible before going to court. This allows parties to reach their own decisions (with legal advice) about the division of assets. A Minute of Agreement is conventionally registered in the Books of Council and Session (a public register kept in Edinburgh by the Keeper of the Registers of Scotland in which a variety of deeds may be registered). Deeds are usually registered for preservation and execution. This allows either party to compel the defaulting party to fulfil his or her obligations under the deed without returning to court.

Subsection (4) provides that subsection (1)(b) does not apply:

(a) when the pension arrangement is the subject of a pension sharing order (ie an order which has been made but has not yet taken effect) when the agreement takes effect, or

(b) when the pension arrangement to which the agreement relates has already been the subject of pension sharing by the couple.

Subsection (5) prevents an agreement that falls within subsection (1)(c) triggering the pension sharing mechanism in circumstances where-

(a) the couple were divorced under section 3 of the Family Law Act 1996 and, prior to divorce, had demonstrated that they had settled their future financial arrangements in one of the ways mentioned in section 9(2) of the Act; (ie pension sharing by agreement after a divorce will only be available (other than on conversion from a separation to a divorce order under section 4 of the Family Law Act 1996) if the parties did not have to demonstrate that they had settled their financial arrangements - see section 9(7) of the Family Law Act 1996.)

(b) there is a pension sharing order, made in relation to the marriage, which relates to the same pension arrangement or the pension arrangement to which the agreement relates has already been the subject of pension sharing by the couple;

(c) there is an earmarking/attachment provision under section 25B or 25C of the Matrimonial Causes Act 1973 in relation to the transferor's rights under the pension arrangement to which the agreement relates.

Subsection (6) provides that subsection (1)(f) does not apply if there is in force an order under section 12A(2) or (3) of the Family Law Scotland Act 1985 relating to the pension arrangement to which the provision relates.

Subsection (7) to (9): the effect of these provisions is that a pension sharing order or agreement in Scotland will be treated as ineffective if the person responsible for a pension arrangement to which the order or agreement relates does not receive copies of the pension sharing order or agreement, and the relevant decree of divorce or declarator (as well as the information referred to in clause30(1)(b)(i) & (ii)) within two months of the date of the extract of the decree or declarator. In the case of overseas divorces, the relevant documents should be provided within two months of the date of disposal under section 28 of the Matrimonial and Family Proceedings Act 1984. The procedure will be that the burden of sending the relevant documents to the person responsible for the pension arrangement will rest with the parties to the divorce (or annulment). This would normally be the person who would benefit from the pension sharing.

Subsection (10) makes provision for the court in Scotland to extend the two month period in exceptional cases.

Subsection (11) provides that, in subsections (4)(b), (5)(c) and (6), the reference to the party who is the transferor is to the party whose rights the pension sharing provision relates.

Clause 25: Creation of pension debits and credits

This pivotal clause provides for the member's pension rights to be subject to a debit and for his former spouse to become entitled to a pension credit equal to the amount of the debit.

In England and Wales, the amount of the debit will be a percentage of the current cash equivalent of the member's pension rights in the scheme or arrangement. The percentage will be that stated in the pension sharing order or agreement.

In Scotland, the pension sharing order or agreement may specify that the pension sharing legislation is to apply in relation to a specified amount, rather than a percentage, of the member's pension rights (see clause 20) and in that case the amount of the debit will be that specified amount or, if less, the current cash equivalent of the member's rights.

The method for calculating the cash equivalent for these purposes (see clause 26) will be similar to the well-established method used for calculating cash equivalents of the pension rights of members who wish to transfer those rights.

In determining the cash equivalent of pension rights available for pension sharing, only those rights accrued up to the day immediately before the day on which the pension sharing order or agreement takes effect are included in the calculation.

Subsection (1) provides for the shareable rights of a scheme member (the transferor) to become subject to a debit of an appropriate amount, and the former spouse (the transferee) to become entitled as against the person responsible for the pension arrangement to a credit of the same amount.

Subsection (2) provides that where the pension sharing order or agreement expresses the value to be transferred as a percentage, the appropriate amount will be that percentage of the cash equivalent of the transferor's rights.

Subsection (3) provides that where the pension sharing order or agreement expresses the value to be transferred as a specific amount (as may be the case in Scotland) rather than as percentage, that amount is the appropriate amount. But, if that amount is greater than the cash equivalent of the transferor's rights, the amount of the cash equivalent is the appropriate amount.

Subsection (4) provides a special rule for determining the benefits by reference to which the cash equivalent is to be calculated where the transferor is currently accruing rights in an occupational scheme (that is, he is an "active" member). In that case, the calculation is to be based on the hypothetical rights to which he would have been entitled had he ceased to be an active member immediately before the day on which the pension sharing order or agreement takes effect.

Subsection (5) provides that in all other cases the benefits by reference to which the cash equivalent is to be calculated are those to which the transferor is entitled by virtue of his shareable rights under the pension arrangement at that time.

Subsection (6) provides a regulation-making power to enable any description of benefit to be disregarded for the purposes of subsections (4) and (5) above.

Subsection (7) defines the valuation date for the purpose of calculating the cash equivalent of the relevant benefits. It provides scope for the person responsible for the pension arrangement to choose the day that the valuation will be made, provided that the day chosen falls within the period allowed for implementing the order or agreement. This flexibility broadly follows the existing provisions for the calculation of cash equivalent values for early leavers.