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The Pension Advisory Group’s final report: reviewing a paradigm shift in pensions practice

Matthew Richardson, barrister of Coram Chambers, offers an introduction and overview of a report set to change the future of financial remedies practice significantly.














Matthew Richardson, barrister, Coram Chambers

In July 2019 the final report of the Pension Advisory Group (PAG) was published. The product of two years' worth of work by an experienced group of practitioners from a diverse set of backgrounds, the report is the first guidance to assist professionals in how to approach pensions on divorce in the nearly 20 years that pension sharing orders have been available. This article sets out to review some of the headline content from the report, which will change the way in which pensions are considered principally by introducing a vast array of improvements in the way that pensions are understood and treated.

I was fortunate enough to play a part, albeit small, in the production of the PAG final report, but even with my limited involvement I have seen quite clearly just how important the work is. Ultimately practitioners now are faced with a simple but stark choice between being aware of and applying the contents, or being negligent. And if more authority for the contents were needed, take it from the words of McFarlane P in the foreword:

'I endorse this report and, in doing so, commend it to all judges and practitioners as formal guidance to be applied when any issue regarding a pension falls to be determined in Financial Remedy proceedings.'


Basics and terminology

Looking first at some of the key concepts and definitions relating to pensions on divorce, and noting that there is a comprehensive glossary attached to the PAG report at Appendix A:

Broadly speaking, there are two main categories of pensions – known as 'DC' schemes and 'DB' schemes. A Defined Contributions ('DC') scheme is a pension whose value is primarily defined by the contributions made to it – in other words with reference to how much is in the pension fund. DC schemes are typically private pensions. An example would be a fund held in a SIPP (Self-Invested Personal Pension) with a provider such as Hargreaves Lansdown, whereby the key measure of the pension's value would be the amount of money that had been invested by the pension holder.

A Defined Benefit ('DB') scheme is a pension whose value is primarily defined by the benefit one gets from it – in other words how much will the regular pension payments be? DB schemes are typically public sector pensions. An example would be an NHS 'final salary' pension, whereby the key measure of the pension's value would be how much the monthly payment would be on retirement, which would be calculated in accordance with years worked and salary earned over that time.

The Cash Equivalent ('CE') figure (a.k.a. CEV or CETV) is the capitalised value of pension benefits – in other words it is the notional amount of money that a pension is said to be 'worth'. Confusingly, the CE figure actually means different things depending on whether it relates to a DC scheme or a DB scheme. This is due to the significant difference between the two types of pension asset, and is a key reason why it is so important to properly understand the pension assets in a case, so that properly-informed comparisons of value can be made. Comparing the CE of a DC scheme with the CE of a DB scheme is far from straightforward – it has been likened to comparing apples with pears.

A Pensions On Divorce Expert, or 'PODE' is the new term for a single joint expert who is suitably qualified to report as to pensions.


Overall structure

The PAG report opens with an introduction and overview, followed by a review of 'essential action points' that need to be considered in cases where pensions are a relevant asset. The report then goes into more detail on a number of key practice areas, some of which are highlighted below.

The essential stages in a typical case are set out as follows:

Gathering of information in relation to all pensions, including state pensions

Careful review of whether any of the 'complicating factors' may be present (there are 26 of them listed in the PAG report)

Review of the valuation figures and whether they are reliable and reasonable

Service of applications on pension trustees

Consideration of whether an expert report is needed

Finalising the appropriate approach to, and particulars of, valuation and division of pension assets

Completion of key court forms

Seeking pension administrator approval

Consideration of when to seek Decree Absolute

Implementation


Selected highlights from the PAG report

It is not possible to do justice to the entire report in this article. PAG have published a 14-page executive summary to accompany the main report. Some key content that may be of particular initial interest to practitioners is as follows.

Offsetting

This is a commonly-deployed means of dealing with pensions on divorce, whereby the right to a pension share is traded for another asset. A common example of this is where one party retains more or all of the former family home and the other retains their pension, the values of each being 'offset' against one another.

Broadly speaking, the PAG warn strongly against this practice, and highlight the fact that the overwhelming majority of negligence cases brought against solicitors in relation to financial remedies cases are on the basis of offsetting calculations having been done incorrectly. PAG point out that due to the nature and the nuances of pension assets, it is a highly complex task to assign them a value figure that can fairly be compared to a completely different asset like a house. As such the PAG report recommends that where offsetting cannot be avoided, it is likely to require a report from a PODE.

Apportionment

Another common matter arising in pensions cases is where one party seeks to ring-fence part of their pension that is said to be non-matrimonial. The PAG report is quite clear in its treatment of 'apportionment', saying that this is 'rarely appropriate' in needs cases and justifiable only with good reasons. Again, the input of a PODE will be required.

Apportionment is a good example of one of the pensions pitfalls that the work of the PAG have sought to address. One of the key aims of the PAG was to ensure better and more consistent outcomes in cases by way of the adoption of a clear and unified approach across the jurisdiction. At present, for example, there are areas of the country where 'standard practice' in local courts is to consider only the portion of pension assets acquired during the marriage, whereas in other areas the opposite is the case. This cannot be right, or fair. The PAG report provides clear guidance as to current and future best practice.

Equalisation of income or capital?

The PAG identify two main reasons why dividing pensions according to their income value, rather than their capital value, would often be preferred. First, the nature of a pension asset being to provide for income in retirement, it makes sense to consider the value with reference to what that income will be. Second, in terms of needs, it is hard to assess income needs in retirement without knowing what the parties' incomes from pensions are going to be. See Part 6, in particular from 6.13 onwards, for more information.

Draft letter of instruction to a PODE

Perhaps among the most valuable parts of the PAG report is Appendix E – the draft letter of instruction to a pensions expert for the preparation of a report. Not only its key content, but its explanatory notes, are highly commended.

The writer would suggest that given the large number of complicating factors identified when it comes to pensions division, and the degree of expertise needed to link and compare the value of pensions to other asset classes, it may be prudent for financial remedies practitioners to include as part of their early advice to clients the fact that a PODE report – and thus the cost of obtaining it – is likely to be necessary.

The PAG report does deal with cases where PODE reports are not likely to be needed, but even the minimum level of combined CE value totals that likely warrants expert instruction is something that many practitioners will likely have to reconsider. Combined CE value of over £100,000 is a situation where 'careful thought' should be given to a PODE report, and over £200,000 one is 'usually' necessary (see page 29).

Pension freedoms

In April 2015 a far greater degree of flexibility was introduced to the accessibility of pension assets. This can be hugely consequential as it means that in the divorce context it may be possible to cater more specifically for the needs of the parties. However, there are also risks and limitations. For example, the Money Purchase Annual Allowance, triggered when funds are taken from a pension (in broad terms – see 8.12 for more details), might mean that it is impossible to rebuild a pension fund after a share has been implemented.

State pensions

State pensions can be among the most valuable assets in a case. The PAG advise that state pensions information be obtained (via forms BR19 and BR20) in every case. It is interesting to note, by way of example, that a recent analysis by pension firm Aegon has estimated that the current full state pension of about £8,800 per year would cost £327,000 to buy as an annuity for life.


Conclusion

It is plain that the 'standard' way of doing things is frequently inadequate and the pensions aspect of all cases requires far more careful and thorough attention than has typically been given to date. Practitioners who do not update their knowledge and working practices choose not to do so at their own risk. For example, do readers know that filling in section F of Form P1 is considered to be giving regulated financial advice?

Furthermore, the PAG set out a checklist of the minimum amount of pensions information that is necessary for each and every case, and it is not a short list. For example, do readers working in this area always collect state pensions information for both parties in every case? Are defined contributions schemes checked for the possible presence of any form of guarantee? Are defined benefit schemes checked for underfunding? Is Form A routinely served on pension providers early in proceedings? Is Form P completed and signed?

Other highlights within the report include Income Gap, the Lifetime Allowance, approaches to the valuation and comparison of different types of pensions, the reliability (or lack thereof) of cash equivalent figures, taxation issues, timing of Decree Absolute, and implementation.

Interestingly, the PAG also make a series of recommendations and observations as to improvements that could be made to things such as court forms. It is noted, for example, that Form D81 is considered 'inadequate for pension purposes' and there are suggested changes to bring it up to date. The writer would also observe that section 2.13 of Form E does not appear to ask sufficiently clear and detailed questions about pensions such that matters like state pensions are covered as standard.

The PAG have produced a hugely useful guide on how to understand and manage pension assets, not just by themselves but in the wider context of the family finances as a whole. There is so much valuable content and practical advice that it is hard to know what to include and what to omit from this summary article, but to try and cover it all in such a short space is both impractical and unwise – this article cannot and should not be a shortcut for becoming appropriately familiar with the contents of the full report.  It is clear that the future of financial remedies practice is changing significantly, and the PAG report could not be recommended highly enough.

As it says in the PAG report, 'ignoring the pensions or agreeing to ignore the pensions is not an option.' It is suggested that the same can be said of the PAG report itself.

28 July 2019