Will the retirement benefits be divided equally?
During the 1980s and 1990s the courts put a great deal of importance on the needs and reasonable requirements, as set out in section 25 of the Matrimonial Causes Act 1973 (MCA 73), of the spouse rather than dividing the matrimonial assets equally.

In most cases the needs have to be satisfied from limited resources and the first priority of the courts is to ensure that during settlement the former spouse (usually the wife) and children receive the family home and maintenance payments where applicable and the scheme member (usually the husband) of the pension arrangements would retain the retirement benefits. This approach would also apply to couples with substantial assets and the wife would therefore receive considerably less than 50% of the matrimonial assets.

Although the needs of a couple on divorce are important for the court, since the case of White v White (2000) where the matrimonial assets are substantial the court should start with a 50/50 split of the assets, including any retirement benefits, and only depart from this rule if there is a good reason for doing so.


What pension schemes are referred to as defined benefit?
Where the rules of a pension scheme specify the benefits to be paid at normal pension age (NPA), then this is known as a defined benefit scheme. Defined benefit schemes are offered only by employers as part of their occupational pension scheme, are commonly known as final salary pensions and are governed by the Occupational Pensions Regulatory Authority (OPRA).

The benefits paid at retirement age are based on the number of years of service and the final salary of the scheme member. These schemes were started by most 'blue chip' companies to help retain the best employees as the benefits to the members from a final salary pension are much greater than from a private pension. However, due to the high cost of operating these schemes most employers are replacing them with occupational money purchase scheme, group personal pension (GPP) or group stakeholder pension.

Through public service schemes the government provides a final salary pension to the civil service, NHS, teachers, fire, police and local authorities and the Armed Forces Pension Scheme operates a defined benefits scheme that covers the Army, Navy and Royal Air Force.


What pension schemes are known as defined contribution?
A defined contribution scheme could be offered by an employer or set up by an individual as a private pension. The benefits provided at retirement age by a defined contribution scheme will be wholly dependent on the contributions made by the employer, the individual or by both. These schemes are usually administered and the assets managed by a life assurance company where the fund managers must be authorised by the Financial Services Authority (FSA).

At retirement the spouse can use a pension fund to buy an annuity and has the option to use an open market option to search for the highest pension annuity. Once you have purchased an annuity it cannot be changed, so learn more about annuities, compare annuity rates and before making a decision at retirement, secure a personalised pension annuities quote offering guaranteed rates.

An employer can offer the employees a defined contribution scheme in the form of a group personal pension, group stakeholder pension, occupational money purchase or additional voluntary contribution (AVC) scheme. An individual could establish a personal pension, stakeholder pension or free standing additional voluntary contribution (FSAVC) scheme or have existing retirement annuity policies (RAPs).


How is the value of a defined benefit scheme determined on divorce?
A defined benefit scheme will not have a fund value for each members holding but rather the benefits at retirement are projected as a pension income based on the members current salary, the schemes accrual rate, expected years of service and a final salary adjusted for earnings growth including career progression to retirement age.

Although during ancillary relief proceedings the court will require the cash equivalent transfer value (CETV), expert evidence from a pensions expert can determine a fair value of the retirement benefits from a defined benefit scheme. The CETV Method from the provider assumes that the scheme member will leave service at the time the valuation that is unlikely to be correct. The procedure for collecting this information is shown in detail in the step-by-step guide.

It is therefore necessary for a pensions expert to conduct a pension audit on the assumption that the member (usually the husband) will continue in service and that the former spouse (usually the wife) will be entitled to benefits that are greater than her percentage share of the providers CETV.

The suitably adjusted CETV will reflect the circumstances and specific needs of the parties on divorce and include death in service benefits as well as discretionary benefits not included in the CETV Method. It will also consider the other methods used in the valuation such as the past service reserve and the fund value of the scheme.


How is the value of a defined contribution scheme calculated on divorce?
Calculating the value of a defined contribution scheme is much easier than a defined benefit scheme. This is because the value of these pension arrangements depends on the contributions made to date, the investment growth and the charges. Therefore the CETV produced by the provider and required during ancillary relief proceedings as shown in the step-by-step guide will usually be sufficient in determining the value of the retirement benefits.


Can a pension sharing order be applied to the state basic pension?
It is not possible to use a pension sharing order against the members pension rights accrued in the state basic pension. The former spouse will have to apply to the Benefits Agency to secure retirement benefits based on their former partners contributions. These benefits will not be allowed if the former spouse re-marries before the age of 60 as the new partners contribution record will apply to the spouses state basic pension.

A pension sharing order as shown in the step-by-step guide can however be applied to the state earnings related pension scheme (SERPS) and the court will specify as a percentage the proportion of state scheme rights to be transferred as safeguarded rights to the former spouse.


Will the type of pension plan influence the financial order percentage?
All pension arrangements, whether defined benefit, defined contribution or state pensions in the form of SERPS will in principle be subject to the same percentage determined by the court or agreed between the parties through their solicitors. However, the needs of the parties may require different percentages applied where there is more than one pension arrangement.

For example, a retired scheme member with a final salary pension and two personal pensions in payment may have different rates of escalation to protect the pension income against inflation. This will influence the percentage applied by the pension sharing order to each of these arrangements, as shown in the step-by-step guide, if the parties require a specific pension income, the payment of which will also be influenced by the different annuity rates for men and women.

For an earmarking order different percentages may be applied as the court may decide that the former spouse requires 100% of the lump sum death benefit from the members final salary pension including 40% of the pension income and tax free lump sum at retirement age.


Are there any advantages of earmarking over a pension sharing order?
The first advantage is that with an earmarking order the former spouse can earmark the members lump sum death benefit in addition to the pension income and tax free lump sum as part of a final salary pension, whereas a pension sharing order can only apply to the pension income and tax free lump sum. This advantage would provide protection to the former spouse if after divorce she received maintenance payments from her former husband.

In the event of his death during service, these payments would stop and by earmarking the lump sum death benefit the former spouse will receive this money as compensation. In most cases this benefit will represent four times the scheme members annual salary. Another advantage is that an earmarking order can be used during judicial separation as well as divorce and nullity of marriage whereas a pension sharing order will only apply to divorce and nullity.


After divorce, are pension plans at risk from a pension sharing order?
Once a pension sharing order has been implemented there is no possibility for variation of settlement order as it will be out of time and also because of new provisions introduced to the Matrimonial Causes Act 1973 (MCA 73) that protect the pension scheme from further variation.

Therefore there will be no risk to the scheme member or former spouse as a result of a pension sharing order and they will be able to retain their percentage of the retirement benefits. However, where there are pension arrangements at divorce and no financial orders applied at that time, then these arrangements would be at risk from a pension sharing order or earmarking order in the future.


After divorce, are the earmarking benefits to the former spouse at risk?
There are significant risks to the former spouse and earmarked benefits could be lost or reduced. The scheme member could choose to stop the earmarked pension arrangement and this would deprive the former spouse of a larger pension at the members retirement age. The earmarking order could be varied at a later date but there would be an associated cost to the parties.

Another risk is that the member can choose to defer taking the benefits until a later date so the former spouse may have to wait for the members 75 birthday before receiving the earmarked benefits. Further risks are that if the scheme member died before taking the retirement benefits the earmarking order would no longer apply and the former spouse would not receive any benefits either in the form of a pension income or tax free lump sum and also the earmarking order will be terminated if the former spouse re-married.