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W v H (divorce financial remedies) [2020] EWFC B10

HHJ Hess (co-chair of the Pension Advisory Group) considers financial remedies proceedings arising out of a divorce, in the first substantial treatment of pensions post the PAG publication.

1. This case is notable principally due to the approach taken to pensions – it is a rare published case where pension sharing is addressed in a needs-based context and on a set of facts that is within the range of 'day-to-day' matters seen by many family law professionals. The judge has given specific consideration to the report of the Pension Advisory Group, to the extent of quoting significant passages from the report itself, and the judgment very helpfully addresses some of the most common and most important factors involved many pensions cases.

2. The three key pensions points addressed here are:

a. Whether to divide pensions according to capital value or income value

b. Whether to exclude pension assets acquired before the marriage (a.k.a. 'apportionment' or 'ring-fencing')

c. Whether to treat pensions separately or whether to 'offset' the division of pension assets against the division of other assets

3. Helpful references for readers may include:

a. The report of the Pension Advisory Group, which can be accessed here

b. This author's previous article summarising the PAG report and explaining some key concepts and terminology around pensions on divorce, which can be accessed here

4. It is notable that at paragraph 59 of the judgment the judge indicates he has approached the three pensions points above with specific reference to, and reliance upon, the PAG report, which is noted to have

'the support of the Family Justice Council and the President of the Family Division and should, in my view, be treated as being prima facie persuasive in the areas it has analysed, although of course susceptible to judicial oversight and criticism.'

The facts of this case
5. The wife ('W') was 50 and The husband ('H') was 48. Length of relationship including cohabitation was 17 years. There were three children of the marriage, ages 18, 16 and 10. W and the children remained in the former family home. W was principle carer for the children and H earned the more significant income both during the marriage and after separation. W's anticipated future income from working was relatively modest (c.£14,000 per annum gross) and H's was relatively significant (c.£144,000 per annum gross plus bonuses). The key assets in the case were the former family home, with a market value of c.£730,000 and a net equity of c.£240,000, and H's defined benefit ('DB') pension fund with a cash equivalent ('CE') figure of c.£2.1m. Both parties had notable debts including litigation costs.

6. The judge concluded that the case was a needs case, and that there was a reasonable requirement for W to remain in the family home until the end of the existing mortgage product's interest-only term, namely November 2024, which meant that H's housing needs would be met until that time via the rental market. Thereafter H had a reasonable need to purchase his own property (see judgment paragraph 38). The parties were agreed that it was a case where spousal maintenance should be paid (and where child maintenance would be paid) and by the time of the final hearing there was a relatively nominal difference in the figures the parties were presenting on maintenance (see judgment paragraph 40).

Housing, income, maintenance, debts
7. The court's approach to housing, income, spousal maintenance and debts was a careful and methodical one that makes the judgment very accessible, and does not require summary or repetition, on the basis of it being specific to the facts of the case and not the notable factor in the judgment. That being said, there is a helpful short summary of the key principles of contributions and equal division of capital at paragraphs 46 to 53 that may be of assistance for practitioners looking for a helpful reference point on these matters.

8. There is also a helpful mention at paragraph 70(i) of the case of AB v CD [2017] EWHC 3164 on the issue of global maintenance orders, the judge here noting that whilst AB v CD provides 'strong support' for the making of such an order, it is worth bearing in mind that

'The existence of a global order carries with it the complication of knowing how to proceed in future if, for example, circumstances change … if a disaggregated order can be made fairly then it is often the better approach…'

9. The treatment of pensions is the notable factor in this case and takes up a majority of the judgment. The three key pensions points identified are those set out above, and summarised in the judgment at paragraph 58.

10. On the first issue, namely whether the court should divide pensions with a view to equality of capital or equality of income, the following observations are made at paragraph 60:

a. There is no 'one size fits all' answer to this issue

b. Whilst there are a number of situations where reference to the overall / capital value figures is likely to be the appropriate means of calculation for the purposes of division (for example where pension assets are relatively small, where parties are relatively young, where pension assets are relatively straightforward) (60(i)) …

c. … there are scenarios where division with reference to capital value 'may well not represent a fair solution', in particular where there is a defined benefit pension involved and/or where parties are closer to pension age. (60(ii))

d. The PAG report makes specific reference to this, and the judge has quoted at 60(iii) from the report itself. Key parts of that quotation being 'Given that the object of the pension fund is usually to provide income in retirement, it will often be fair … to implement a pension share that provides equal incomes from that pension asset … Equality of income will often be a fair result … A division that pays little or no attention to income-yield may have the effect of reducing the standard of living of the less well-off party significantly.'

e. The Family Justice Council's report 'Guidance on Financial Needs on Divorce' makes a similar point, namely that 'In small to medium money cases .. where needs are very much an issue, a more careful examination of the income producing qualities of a pension may well be required…'

f. On the facts of this case, as a needs case, the starting point was assessed to be pension sharing with reference to equality of income, not capital

11. Whilst it is not said explicitly in this judgment, the writer would submit it is apparent from both this judgment and the PAG report that if one were to suggest a 'normal', 'standard' or 'default' approach or assumption to pension sharing, it would be that other things being equal, sharing pensions with reference to income, not capital, is more likely to generate a fair result. Whilst of course this cannot be treated as any sort of formalised or strict approach, the broader principle of sharing with reference to income accords with the broader nature of what a pension asset is actually for – it is an asset that produces income upon retirement. Thus, it makes good sense that one would consider a pension's income figures, in preference to its capital value figures, when determining how it should be divided.

12. On the second issue, namely whether the pre-marital portion of the pension should be excluded from division (often known as 'ring-fencing' or 'apportionment'), the following observations are made at paragraph 61:

a. Although it has been 'an established practice in some courts' to make a straight line deduction in order to exclude pre-marital pension contributions, 'this approach carries with it significant risks of unfairness' (61(i)).

b. The justification of the above approach to deduction is sometimes said to originate from the case of H v H [1993] 2 FLR 335, but in fact there are very good reasons why this is not now applicable, including  'that at the time it was delivered pension sharing did not exist, White v White had not been decided and the use of CEs in these cases was not widespread.' (61(ii))

c. Pensions apportionment is in one sense 'no more than, in modern parlance, the identification of non-matrimonial property' (61(iii))

d. Crucially, it is said at 61(iv), that in a needs case 'Where the pensions concerned represent the sole or main mechanism for meeting the post-retirement income needs of both parties, and where the income produced by the pension funds after division falls short of producing a surplus over needs, then it is difficult to see that excluding any portion of the pension has justification. In the words of Lord Nicholls in White v White [2000] UKHL 54: "in the ordinary course, this factor"..i.e. the factor that the property concerned is non-matrimonial…"can be expected to carry little weight, if any, in a case where the claimant's financial needs cannot be met without recourse to this property".' (emphasis added by the writer)

e. The rationale behind this is emphasised with reference at 61(v) to the PAG report, which points out that pensions should be treated no differently to other classes of assets when it comes to meeting needs – if an asset is required to meet needs then its source and date of acquisition is secondary, potentially to the point of irrelevance:

f. "The vast majority of cases … will be needs-based. …  It is important to appreciate that in needs-based cases, just as is the case with non-pension assets, the timing and source of the pension saving is not necessarily relevant - that is to say, a pension-holder cannot necessarily ring-fence pension assets if, and to the extent that, those assets were accrued prior to the marriage or following the parties' separation. It is clear from authority that in a needs case, the court can have resort to any assets, whenever acquired, in order to ensure that the parties' needs are appropriately met"

g. The nature of the Lifetime Allowance being to limit the tax benefits of pension assets worth more than the Lifetime Allowance figure (presently £1,055,000) means that 'it is quite unlikely that pension funds will themselves take the case outside the category of a needs case.'

h. The unfairness identified at 61(i) is expanded upon at 61(vii) in relation to defined benefit pensions, where it is pointed out that most DB schemes acquire more value towards the end of the contributions period than at the beginning, and so to exclude on a straight line basis fails to reflect the disproportionate nature of contributions.

13. On the third issue, namely whether to treat pensions separately or to 'offset' the division of pensions against the division of other assets, the judge at paragraph 62 is keen to highlight the PAG recommendation to try where possible to avoid offsetting, due to the risks of unfairness that accompany the exercise. The judge notes at 62(ii) 'that mixing categories of assets runs the risk of unfairness in that valuation issues become very difficult, and, absent agreement, it may be unfair anyway to burden one party with non-realisable assets while the other party has access to realisable assets.'

14. The writer would also draw attention to the PAG recommendation that usually where offsetting is being considered, it requires expert assistance from a Pensions on Divorce Expert ('PODE') to be able to undertake suitable calculations for such purposes. To proceed with offsetting in the absence of PODE advice as to how to approach the calculations carries with it a significant risk of liability for professional negligence.

15. In this case, therefore, the judge rejected H's proposed apportionment approach as unfair (and it is interesting to note how different the division would have been  - see paragraph 63(iv) in particular for the figures) and determined that equalisation of pensions income at age 60, on the facts of this case, was the fair outcome. The judge also rejected W's proposed offsetting of pensions assets against equity in the family home on the basis that it would not provide H with adequate capital to re-house by way of future purchase.

16. The key terms of the final order to be made are found in the judgment at paragraphs 65, 71 and 76.

17. On the matter of costs, it is worth reading paragraph 41, where the judge rejects a request from W for an extra £1,000 per month in periodical payments for 26 weeks (the writer assumes this is a typographical error and should refer to months) to pay her outstanding legal costs of £26,000, on the basis that it would be a back door costs order that was not justifiable, bearing in mind FPR 28.3(5).

Summaryby Matthew Richardson, barrister at Coram Chambers

You can read the full judgment of W v H (divorce financial remedies) [2020] EWFC B10 on BAILII

Footnote for consideration as to publication:
Whilst it is noted that this judgment is from a Family Court case with a judge sitting below High Court level, in terms of the authority with which this judgment can be taken, it was delivered by HHJ Hess, who at the time was: the Designated Family Judge for Wiltshire, the co-chair of the PAG, the co-author of the practitioner text 'Pensions on Divorce: A Practitioner's Handbook', and one of the two lead judges responsible for the implementation of the 2018 Financial Remedies Pilot.