House of Commons - Social Security

Select Committee on Social Security Fifth Report

11. The legal term for the financial settlement on divorce is 'ancillary relief'. England and Wales operate a discretionary system of ancillary relief. Scotland has a different system. In England and Wales the basic legislative provisions are contained in Section 25 of the Matrimonial Causes Act 1973. These provisions set out factors that the court must take into account in deciding on the adjustment of assets on divorce. The factors are wide ranging and include income, earning capacity, health needs, lost benefits (specifically including pensions) and age. Broadly speaking the provisions of Section 25 enable the court to take into account a wide range of factors, placing the needs of children first.[37] This bespoke system enables the court to look at each case individually and to tailor the adjustment of assets to the needs of the family. There are some general principles which have emerged from decided case law over the years which enable experienced practitioners to advise clients as to the likely outcome but there is always a band of reasonable outcomes and precise prediction is difficult. In England and Wales, as in Scotland, most cases are settled by negotiation and agreement and relatively few are decided on by the court.

12. The courts' principal objective must be to safeguard the needs of the children. In this regard the courts in England and Wales will be concerned to ensure first and foremost that the children of the family are adequately housed. Housing for the parent who looks after the children is therefore a priority in most cases. Housing for the other spouse is also high on the list of the court's considerations. English jurisprudence takes a generous view of maintenance requirements and maintenance orders for spouses (normally wives) are common. Where there are young children spousal maintenance orders are likely to be made for an indefinite period of time, although they may be brought to an end when the children are old enough and the former spouse is able to resume or commence employment. In cases where the marriage is a long one and the couple are older, the needs of the spouses on retirement will also be an important factor. The value of pensions has historically been recognised in divorce proceedings by offsetting their value against other property, principally the value of the matrimonial home. This is likely to be less so where the couple are younger. Pensions do not, therefore, feature as part of the solution in every case. Pension sharing will not change this and in many cases it is likely that the pension will be left intact.

13. Although the 'clean break' appears to be a popular aspiration among divorcing couples and their lawyers,[38] it is often hard to achieve, especially where underage children are concerned. The availability of pension sharing could lead to a revival of interest in Mesher orders, where the sale (and division of the proceeds) of the matrimonial home is postponed until the children have grown up.[39] A pension sharing order coupled with a Mesher order could become an alternative to the stereotypical offsetting settlement under which the husband keeps the pension and the wife keeps the home.

14. Scotland has a different system. In Scotland there is a concept of matrimonial property which can be quite complex to determine in particular cases. The law provides that the total matrimonial property should be divided fairly (in practice usually equally) between the parties. Pension benefits accrued during a marriage are part of the matrimonial property, and are therefore taken into account when matrimonial property is divided, but there is no automatic presumption that the pension itself should be split 50-50, as long as the total matrimonial property is shared equally.[40] Scotland places much less emphasis on ongoing maintenance (aliment) than in England. Orders for spousal aliment in Scotland are much less common than maintenance orders in England and will normally only last for a maximum of three years, to allow for a period of adjustment. Existing Scottish legislation allows for a capital settlement by instalments or a deferment of capital settlement. This is very rarely used.

Application of Scottish principles in the rest of the United Kingdom

15. The Lord Chancellor's Ancillary Relief Advisory Group[41] was asked in March 1998 to consider, among other issues, whether the Scottish definition of matrimonial property would be appropriate in England and Wales, and whether there should be a presumption that property should be divided equally.[42] The Group concluded that "whilst the Scottish system is a skilfully crafted modification of presumptive equal division we are unanimous in our conclusion that that system would not be appropriate for our jurisdiction."[43]

16. Mr John Denham, the Parliamentary Under Secretary (now Minister) of State for Social Security, recognised that "potentially family law can evolve over time in England and Wales and in Scotland and it will be necessary for pension sharing provisions to evolve with these changes of family law."[44] Lord Justice Thorpe observed that "unfairness in individual cases is the price you pay for stated principles,"[45] though he was loath to comment in detail on the Scottish system.[46] Mr Martin Pointer QC gave us his personal view that it was "extraordinary that there should be two such different approaches"[47] on either side of the Scottish border, but he also said that it was difficult to see how the Pension Sharing Bill could bring in the same policy for both jurisdictions, "because it only touches one part of the matrimonial assets."[48] Families Need Fathers called for the Government to publish information on the effects of grafting pension sharing on to the existing systems[49] and in oral evidence their representatives emphasised the advantages of greater certainty that resulted from the more formulaic approach of Scottish law.[50]

17. In our view it would not be appropriate to use pension sharing legislation to introduce the more wide-ranging reforms of extending (or adapting) the Scottish treatment of matrimonial property to the other jurisdictions in the United Kingdom. We endorse the Advisory Group's conclusion that "none of us consider that the present system is perfect but statutory reform should surely be preceded by research and consultation far wider and profounder than this group can provide, and clearly encompass social and public policy issues."[51] Among the social and public policy issues that needs to be considered is whether sufficient weight is being given to pensions in divorce settlements. In our view the courts should give greater priority to the prospective incomes in retirement of each of the divorcing couple when approving financial settlements on the dissolution of a marriage.

The 'relevant date' in Scotland

18. In Scotland all pension and other asset values are set at the 'relevant date'. This is the date at which the parties cease to cohabit or the date of service of the summons in the action of divorce.[52] Significant practical difficulties could arise where pension values are involved. Three separate valuations will be obtained in the making of a pension sharing order in Scotland: at the relevant date, as close as possible to the divorce hearing and the valuation day when the order is made by the court.[53] Each of these valuations will be in lump sum form and it will be up to the court to decide whether the pension sharing order itself should be expressed as a lump sum amount or in percentage terms.[54] Like house prices the value of the pension could alter substantially in the period between the relevant date and the making of the pension sharing order, which may be several years.[55] The general rule in Scottish law is that increases in the value of matrimonial property accrue to the owner of that property. A pension share cannot be instantly achieved at the relevant date. Both parties will wish to see their share increase in value in the interim period. A percentage share would be complicated by the scheme member's ageing and any additional pensionable service. A lump sum award without adjustment would ignore natural cash equivalent transfer valuation (CETV) changes in the period. We recommend that the Government should monitor the operation of pension sharing in Scotland in respect of the changes in valuation of the pension share between the relevant date and the date of implementation of the pension share. Clause 4(3) of the draft Bill provides that if the valuation day valuation is lower than the amount specified by the court, the value received by the former spouse will receive the lesser amount.[56] We recommend that the Government should monitor the operation of pension sharing in Scotland, with a view to introducing as necessary a requirement that the valuation of a pension share at the time of making the sharing order should be based on a percentage of the transfer value of the pension at the relevant date.

Earmarking and attachment

19. Courts have had the power since the 1970s to earmark pension assets for maintenance payments.[57] In response to pressure in the House of Lords, the Pensions Act 1995 introduced powers of attachment, so that courts could require occupational and personal pension schemes to make payments direct to the former spouse.[58] In Scotland these provisions apply only to lump sums (commuted lump sums on retirement or death-in-service benefits), but in Northern Ireland and in England and Wales the courts may also (or alternatively) require schemes to pay maintenance to the former spouse.

20. These powers have significant limitations, as the former spouse may be at risk of losing the intended retirement income if the scheme member dies.[59] The power to make earmarking or attachment orders has been little used[60] and we have been told that many of the attachment orders made have been found to be unworkable in practice.[61] Attachment orders are attractive in respect of death-in-service benefits. In practice a simple member nomination may be completed, diverting lump sum death benefits (payable at the discretion of the pension scheme trustees) to the former spouse. This element of life assurance can in some cases be very useful, providing valuable protection to a former spouse where maintenance/aliment is being paid. Retaining the use of attachment orders for such death benefit protection, even where a separate pension sharing order covers the savings element of retirement benefits, need not involve a significant element of double counting as the death-in-service element of the transfer value used in calculating a pension sharing order is generally speaking, either non-existent, negligible or at worst very small.[62] It is envisaged that pension sharing will become the usual arrangement applied to pension rights, replacing any consideration of attachment in most cases. We recommend that attachment should be retained for use in cases where it is clearly shown to benefit one of the parties.

Legal competence and judicial training

21. Most divorce cases in England and Wales are dealt with by County Courts. Some cases, which are more complex or where the couple's assets are very large, are adjudicated by the High Court which has a specialist family bench.[63] At County Court level ancillary relief cases are increasingly often being heard by 'ticketed' family judges.[64] Scotland has no specialist family bench and few specialist family solicitors or advocates. In England and Wales family law cases are undertaken by a large number of solicitors, not all of whom are specialist family lawyers. Pension sharing will require family law practitioners and mediators to offer competent advice in the complex area of taxation and pensions. Independent actuarial advice may be required to assist in the evaluation of different options for securing a pension credit as part of the division of the total assets of a marriage. It is essential that suitably regulated independent and appropriate advice should be made available to divorcing couples, and that their legal advisers and the courts should be properly equipped to handle the complex issues which could arise.

22. There is a perception among recently divorced women that pension rights were not often taken into account in the divorce settlement,[65] although solicitors reported that in most cases they were aware of the husband's occupational and personal pension rights.[66] The Lord Chancellor's Department told us that "the main decision people have to take on pensions will not be that dissimilar to the kinds of decisions on other assets on which lawyers have to advise their clients"[67] and that pension sharing would be covered in judicial training.[68] Lord Justice Thorpe told us that he believed "very strongly"[69] in the need for continuing education of judges, and that "there has been far too little in the past."[70] He praised the "tremendous record" of the Solicitors' Family Law Association[71] and told us that the Family Law Committee of the Law Society was "very good."[72] Lord Justice Thorpe was sure that the Family Law Bar Association would prepare themselves appropriately.[73] For the Family Law Bar Association, Mr Martin Pointer QC assured us that the question of judicial competence should not be a serious anxiety.[74] Both Lord Justice Thorpe and Mr Pointer referred to the role of the Judicial Studies Board.[75] We recommend that the Government should require the Judicial Studies Board to provide for the training of 'ticketed' or specialist judges at each level on the implications of pension sharing before it comes into effect.

23. The Law Society is to introduce a family law accreditation scheme from 1 January 1999,[76] which was welcomed by Fairshares.[77] Mediators will also have an important part to play in making sure that pension aspects of divorce are properly understood.[78] The Solicitors' Family Law Association had reservations about the Law Society's scheme and were actively considering the introduction of their own accreditation scheme with a higher standard.[79] The Law Society of Scotland had accreditation for family law specialists[80] and they expected to run courses on the introduction of pension sharing.[81] The Trades Union Congress were "rather concerned about the varying quality of [solicitors'] advice."[82] Fairshares told us that they received "the same complaints time and time again"[83] about solicitors: "mandatory training would prevent on-the-job training at the expense of the hapless litigant."[84] Mr John Denham told us that "we will clearly need to look at the evolution of the new Financial Services and Markets Act to make sure everything is in step"[85] and that he was "not complacent"[86] about the issue of training and awareness which was "one we do want to get right."[87] We believe that there is an urgent need for the professional lawyers' organisations to develop their family law accreditation schemes to enable them to carry out training on the implications of pension sharing before it comes into effect.

24. We recommend that the new Financial Services Authority should review the provision of pensions advice in divorce cases, including the adequacy of investment advice made available by family lawyers, and if necessary provide further guidance for independent financial advisers and insurance companies before pension sharing comes into effect.

37 In its response to the DSS consultation, the Family Law Bar Association proposed a far-reaching revision of Section 25 of the Matrimonial Causes Act 1973 - see DSS 70 paragraphs 9.4 and 9.6. Back

38 Ev.p.135. Back

39 Q.8, Q.11-12, Q.97, Ev.p.51 paragraph 7, Q.257, Q.372, Q.503-6, Q.543, Q.573. Back

40 Q.14-15. Back

41 Ev.p.28. Back

42 Report to the Lord Chancellor by the Ancillary Relief Advisory Group, 30 July 1998, Lord Chancellor's Department, paragraph 1.3 and Appendix 2. Back

43 ibid., Summary of Recommendations page 36 paragraph 4. Back

45 Q.110. Back

46 Q.112-3. Back

47 Q.256. Back

48 Q.256. Back

49 Ev.p.113 paragraph 10. Back