Public Sector Pensions on Divorce: A complex issue complicated further by the McCloud judgment

For separating couples there are a great many financial considerations to take into account upon divorce, but chief among these for many is what to do about the inequality in pension provision between spouses.

Always a complex issue, the fall-out from the Court of Appeal’s decision in McCloud and Sargeant [2018] EWCA Civ 2844 (unsuccessfully appealed by the Government) magnifies the need to carefully consider divorces involving public sector pensions.

What happens on divorce?

In financial remedy proceedings on divorce, the court will look at the extent of the parties’ financial assets and divide them in accordance with what is considered fair. Pensions are part of this assessment and the starting position is consideration of whether contributions made to pension funds during the marriage should be shared equally between the parties.

This can be dealt with by a Pension Sharing Order, which in simple terms takes a percentage of the Cash Equivalent Value (“CEV”) from the pension fund of one party and transfers it into a pension arrangement belonging to the other party. The two pensions then stand alone and the parties are free to deal with them as they see fit, completely independent of the other party.

Alternatively, in some situations, one party may opt to forego a share of the other’s pension in exchange for a greater proportion of the other assets, such as the family home. Known as ‘offsetting’, this has the advantage of providing security and a home for the person retaining the property, but does potentially leave them exposed to an income-poor retirement or a need to downsize at a later stage.

Expert advice on divorce is crucial

It is important to take independent advice from an expert family law solicitor to advise on the terms of a likely financial settlement including pensions. They, in turn, may recommend that further advice is sought from an actuary or an IFA.

Some parties feel that this might be an unnecessary complication, cost or delay, but failing to deal with pensions properly can have huge implications in later life. It is always our advice to consider whether to seek the expert opinion of a Pensions on Divorce Expert (“PODE”), and that is now supported by the recent publication of ‘A Survival Guide to Pensions on Divorce’ by Advice Now, which helps de-mystify pensions and highlights why it is important to properly factor them into a divorce settlement.

Public Sector Pensions

Over recent years, pensions in both the private and public sector have been significantly reformed, with the reduction of final salary schemes, increased state retirement ages and so on.

Public sector pensions have been subject to considerable reform and in 2015 further changes were introduced. Crucially, these changes were applied across the board i.e. to all pension members, not just new entrants.

Transitional arrangements were applied, with different rules depending on whether a scheme member had already retired, their age, the terms of the scheme itself, and so on.

McCloud Judgment and its aftermath

The Court of Appeal found that the arrangements, based on age, were discriminatory, resulting in the 2015 arrangements needing to be unwound.

However, it was not a case of ‘back to the drawing board’. Members could not simply be put back in the pre-2015 schemes because this would leave some of them worse off as not everyone lost out through the move to the new schemes. The Government needed to find a way to address the situation to avoid some losing out.

A consultation took place, managed by HM Treasury, in 2020. In principle, members needed to be given the better of what they would have accrued in the old scheme and what they would have accrued in the new scheme.

The outcome of that consultation is, very simplistically, that members will be given a deferred choice, and so will be presented with a choice of which will give them the better option on retirement.

How and when this will be achieved is still being worked out, although it is understood that all members will transition/be treated consistently from 2022, and that schemes will be given until later in 2023 to work out the changes and options for their members.

Who are mostly affected?

For reasons that are far too detailed for this article, those pension scheme members currently thought to be the most affected by the above will be those who were public scheme pension members both before 1 April 2012 and after 1 April 2015.

It is estimated that 3 million people are affected and the cost to HM Treasury will be around £17billion.

Why is this relevant to divorce?

Until Autumn 2023 at the earliest, the public sector schemes will not produce CEVs that make any allowance for McCloud and so will exclude consideration of any potential, future, uplift being provided to a pension scheme member as a result of the decision.

As pension sharing and offsetting rely on there being some certainty over the accrued pension benefits as at the point of the divorce, this causes difficulty for PODEs and solicitors alike, as the figures we are working on may be inaccurate.

However, a divorce settlement is unlikely to be put on hold for over 2 years whilst separated couples wait for the schemes to rectify matters post McCloud, and PODEs are working towards finding solutions on pension sharing which share the risks and benefits between the parties. Offsetting options are likely to be viewed as riskier to put in place, as less certainty can be placed on the CEV or benefits received on retirement.

All divorcing parties involving public sector schemes will need to recognise that until at least late 2023, there will be added uncertainty on what a pension sharing arrangement will mean for both parties.

What is the moral of this story?

It is now more important than ever to seek expert legal advice on a pension share, particularly if public sector schemes are in place.