A recent Court of Appeal judgment may turn pension sharing on its head for certain public sector pensions, particularly though not exclusively where scheme members joined before April 2012 and were still in service after April 2015.

 

What is the case? 

McCloud and Sargeant [2018] EWCA Civ 2844


Where can I find it?

https://www.judiciary.uk/wp-content/uploads/2018/12/lord-chancellor-v-mcloud-and-ors-judgment.pdf


Why does it matter? 

On either divorce or the dissolution of a civil partnership, the court must consider the parties’ financial resources and divide them fairly. Pensions fall into this exercise. The court has a number of powers in relation to pensions on divorce/dissolution and may typically make Pension Sharing Orders, Offset or (less commonly) consider Pension Attachments Orders.

In the event of a Pension Sharing Order, a percentage of one spouse’s pension will be transferred into a pension arrangement belonging to the other. Recent pension reforms may complicate this for those with defined benefit public sector schemes.         

In a nutshell, certain public sector pension reforms over recent years have been applied across the board capturing all pension members and not just new entrants. When tested in McCloud, the Court of Appeal found that some of the arrangements based on age were discriminatory; put simply pension scheme members were being treated differently depending on their age. The Court of Appeal determined that the Government had failed to demonstrate that transitional protection arrangements were based upon a legitimate aim. The crux of the Judgment is this:

We have found that in both the judges’ and firefighters’ cases the manner in which … transitional provisions have been implemented has given rise to unlawful direct age discrimination.


How big a problem is this? 

Research from AJ Bell estimates that these changes could affect approximately 3 million people and cost the taxpayer £17 billion. It is no small thing. To remedy this will effectively require an unwinding of certain changes and possible reinstatement of benefits based on pre-2015 arrangements. This will be complicated and is likely to take some time.


What will happen? 

Members cannot simply go back to pre-2015 schemes across the board and this could leave some worse off because the new system has produced winners and losers. To manage this, it is expected members will be given a choice based on accrual under the old scheme vs new. Members will then be able to make an election based on which approach realises the better outcome for them in retirement.

The mechanism and timeframe to achieve is still unclear, although it is expected that all members will be treated consistently from 2022 onwards, and schemes will have until at least October 2023 to introduce retrospective changes.


Who will it affect?

It is expected that pension members most likely to be affected will be those in public sector schemes who were members both before 1 April 2012 and still in service after 1 April 2015. However this is not clear cut and specialist advice should be sought from an appropriate Pensions on Divorce Expert (PODE).* 


When will things change?

Until October 2023 at the earliest, it is understood that public sector schemes will not be required to prepare pension (cash equivalent) valuations that make allowance for McCloud. This is likely to mean that valuations prepared for divorce purposes until then will exclude any possible future uplift which could be applied to qualifying pension schemes as a result of the McCloud decision.


Should I be concerned? 

The resolution of financial arrangements on the breakdown of a marriage or civil partnership generally requires a degree of certainty and confidence in respect of accrued pension benefits as at the point of the divorce/separation.

Current uncertainty may cause difficulties for divorcing parties and their legal or financial advisers, because the valuations which their decisions are being based on could be inaccurate. This may affect pension sharing or the approach to any offsetting exercise in lieu of a pension share.

Having said that, it is unlikely parties at this stage will be prepared or willing to wait potentially two years or more, whilst schemes try to rectify their benefits in the aftermath of McCloud. Some PODE’s that we work with are trying to identify solutions to achieve a sharing of the risks and benefits which could flow from this; so as to treat spouses fairly.


Summary 

Wherever pensions are being considered on separation (divorce/dissolution), and particularly but not exclusively for those with relevant public sector accrual in schemes both before April 2012 and after April 2015, spouses need to be mindful that until at least late 2023, there will be added uncertainty about the valuation of pension benefits.

If you are concerned that this could apply in your situation, speak with your lawyer and consider obtaining specialist legal and financial advice. In appropriate circumstances, your lawyer should recommend that you consider consulting a financial adviser and/or an appropriate actuarial specialist for further guidance.


*This is a complicated and developing area of matrimonial law that underlies the importance to spouses of seeking wider advice from a pensions on divorce expert, which may include an actuary or financial adviser.