Pensions and divorce: the 1998 survey - a survey among solicitors
A hard copy of this report summary can be obtained by contacting Paul Noakes [E-Mail: Paul.Noakes@dwp.gsi.gov.uk] or by writing to him at the 'Social Research Division, Department for Work and Pensions, 4th Floor, Adelphi, 1-11 John Adam Street, London WC2N 6HT'.
Research Report No. 117
By Julia Field
This survey of solicitors examined current practice in the treatment of pension rights on divorce after reforms introduced by the Pensions Act 1995 came into effect. The aims of the research were to look at how pension rights are dealt with on divorce; the operation of new provisions in the Pensions Act 1995; and to contribute to an evaluation of provisions for pension sharing on divorce contained in the Welfare Reform and Pensions Act 1999. The survey was conducted in England, Wales and Scotland by the National Centre for Social Research who also undertook a complementary qualitative study.
The main findings from the 1998 survey of solicitors were:
- Husbands were much more likely than wives to have some pension rights, most frequently in current occupational pensions. The number of years of husbands' pension contributions and the value of their rights were also higher than for wives.
- Where rights in occupational and personal pensions were held, it was more common for husbands' than for wives' rights to be taken into account. It was also more common for pension rights to be taken into account in divorce settlements in Scotland than in England and Wales.
- Cash Equivalent Transfer Value (CETV) was the most common form of valuation for non-state pension rights in England, Wales and Scotland.
- Offsetting pension rights against other assets was the most common way of treating rights in both current occupational pensions and personal pensions, but lump sum payments were also common for occupational pension rights. Earmarking was used infrequently and a relatively small number of cases involved Attachment Orders or Section 12A Orders.
- About one third of solicitors did not know whether the parties to divorce had rights in the State Earnings Related Pension Scheme (SERPS).
- In England, Wales and Scotland over half of the solicitors thought the provisions in the Pensions Act 1995 were useful, although many had some reservations; about one fifth had mixed views.
- Half of solicitors in England and Wales and two thirds in Scotland were in favour of plans for pensions sharing (included in the Welfare Reform and Pensions Act 1999); a further 27 per cent in England and Wales, and 13 per cent in Scotland were in favour, but with reservations. The main advantage perceived was that it allows a`clean break' divorce.
Introduction
The Pensions Act 1995 reinforced the court's existing duty to take account of pension rights in divorce settlements. New powers, known as Attachment Orders (England and Wales) and Section 12A Orders (Scotland), often referred to as earmarking provisions, enable the courts to require a pension scheme to make payments direct to a former spouse, but only once a pension becomes payable. In England and Wales this can include regular payments from the pension but in Scotland payment is limited to part or all of lump sums payable on retirement or death. The Pensions Act 1995 also introduced the Cash Equivalent Transfer Value (CETV) as the prescribed method of valuing pension rights in divorce cases. The new provisions came into force in 1996.
The Welfare Reform and Pensions Act 1999 introduced provisions for pension sharing on divorce whereby the pension is divided into two separate sets of rights at the time of divorce.
Methodology
In 1998 the National Centre for Social Research (formerly Social and Community Planning Research) carried out a survey of over 500 solicitors in Great Britain (357 in England and Wales and 164 in Scotland) to examine the treatment of pension rights on divorce and the operation of the new provisions in the Pensions Act 1995. The approach followed that of an earlier survey of solicitors carried out for the Department in 1995 before the Pensions Act 1995 came into force.
Random samples of solicitors were asked to provide anonymous information about their most recently completed divorce case involving pension rights since the new provisions came into force. Most were interviewed by telephone after being sent a postal questionnaire to assist them in preparing the information sought.
The most recent divorce case
The survey was designed to provide a representative sample of all divorce cases subject to the new provisions. Eighty one per cent of these cases in England and Wales, and 61 per cent in Scotland, were known to involve some pension rights, defined as one, or both, parties having rights in at least one of the following:
- a current occupational pension scheme
- retained rights in the occupational pension scheme(s) of previous employer(s)
- a personal or private pension plan
- SERPS.
Among all cases in the sample, including those which did not involve pension rights, husbands were much more likely to have rights in non-state pensions than wives. 59 per cent of husbands, but only 26 per cent of wives, in England and Wales had rights in current occupational pension schemes. In Scotland the corresponding figures were 41 per cent of husbands and 15 per cent of wives. Rights in non-state pensions were held by both husband and wife in 38 per cent of cases in England and Wales and 18 per cent of Scottish cases.
Rights in SERPS were more evenly distributed - 21 per cent of husbands and 18 per cent of wives in England and Wales, and 14 per cent of husbands and wives in Scotland. However, around a third of solicitors did not know whether the parties to the divorce had rights in SERPS or not. The percentages with rights in SERPS are thus likely to be underestimates.
Since the earlier, 1995, survey of solicitors, the proportions of divorcing men and women with rights in current occupational pensions had risen substantially in England and Wales; 59 per cent of men had such rights in 1998 compared with 48 per cent in 1995. For women the percentage increased to 26 per cent from 17 per cent in 1995. There was no equivalent increase in Scotland.
Pension rights and other assets held in divorce cases with pension rights
Non-state pension rights
Looking only at cases where pension rights were known to be held by at least one party, rights held by husbands were again much more common: in England and Wales 94 per cent of husbands had non-state rights compared with 51 per cent of wives; in Scotland the figures were 83 per cent and 34 per cent respectively. In 46 per cent of cases in England and Wales and 30 per cent of cases in Scotland both the husband and wife held non-state pension rights.
Rights in current occupational pension schemes
Rights in current occupational pension schemes were the most widespread; they were held by 73 per cent of husbands but only 31 per cent of wives in England and Wales and 66 per cent of husbands and 22 per cent of wives in Scotland. In 22 per cent of cases in England and Wales and 14 per cent of cases in Scotland both parties had these rights.
Pension rights in current occupational pension schemes can amount to a substantial asset in divorce cases. Men tended to have the larger rights in current occupational pension schemes both in terms of years of contributions and the value of those contributions. In England and Wales, the average number of years of contributions was 15 for men but only nine for women, and the median value (for current occupational pension rights that were valued) was close to £50,000 for husbands' rights compared with £7,000 for wives' rights. Nearly one in three of the husbands with rights in England/Wales had valuations of over £75,000, as did one in ten of the husbands in Scotland. The median value of husbands' rights in Scotland was considerably lower than in England/Wales, at approaching £23,500. At least in part, this is because in Scotland pension rights are valued in proportion to the length of marriage (as is the case with other matrimonial property).
Valuation of occupational pension scheme rights
No valuation of current occupational pension scheme rights was sought for 14 per cent of husbands' and 26 per cent of wives' rights in England and Wales, and for 11 per cent and 32 per cent respectively in Scotland. Of those where a valuation was given, valuation by Cash Equivalent Transfer Value (CETV) was reported for 71 per cent of husbands' and 68 per cent of wives' rights in England and Wales. Use of CETV was more widespread in Scotland: it was used for 89 per cent of the husbands' and 81 per cent of wives' rights that were valued.
Over 80 per cent of valuations in England and Wales were obtained from the pension scheme, employer or an actuary. Most were delivered within four weeks and most solicitors in England, Wales and Scotland found the valuations easy to understand and felt that they contained enough information. Charges were seldom made in England and Wales and, in the minority of cases where they were made, were mostly in the range £100 to £149. In Scotland, while the pension scheme or employer were also the commonest source of valuation, actuaries were more often used than in England and Wales. Charges for valuing husbands' current occupational pension scheme rights were more likely to be reported in Scotland - about four in ten solicitors reported such charges - as well as a broader range of charges (from £150 to £599).
Rights retained in occupational pension schemes of previous employers
Only small minorities of the pension rights cases had retained rights in occupational pension schemes: just over one in ten husbands and about one in twenty wives in England and Wales and Scotland had such rights.
Rights in personal pension plans (PPPs)
As with the other types of non-state pensions, more husbands than wives held rights in PPPs: 26 per cent compared with 16 per cent in England and Wales; 31 per cent compared with 13 per cent in Scotland. In just under one in ten of all the pension rights cases both the husband and the wife held rights in PPPs (seven per cent in England and Wales and eight per cent in Scotland). There was also some overlap with current occupational pension schemes: nine per cent of husbands in England and Wales and 11 per cent in Scotland held both types of rights.
Where PPP rights were valued, the CETV was used for two-thirds of the husbands' PPP rights in England and Wales and 93 per cent in Scotland. On average, the value of rights in PPPs was lower than for current occupational scheme rights (a median of nearly £18,000 for husbands' PPP rights and £3,000 for wives' rights in England and Wales, and £8,500 for husbands' rights in Scotland; valuations of wives' rights in Scotland were done in only a handful of cases).
The vast majority of valuations were obtained from the pension plan provider, and arrived within four weeks of requesting them. There was seldom any charge made. Valuations were mostly said to be very or fairly easy to understand and to contain enough information.
Rights in SERPS
In the pension rights cases, around a quarter of husbands and of wives in England and Wales and Scotland were known to have rights in SERPS. Most of these husbands also had rights in a non-state pension scheme: just three per cent were reported to have rights “only” in SERPS. Slightly more wives had rights only in SERPS: 13 per cent in England and Wales and eight per cent in Scotland. Between 36 and 40 per cent of husbands and wives were reported to have no rights in SERPS, but for about the same proportions it was not known or not established whether there were any rights in SERPS.
Even in cases where the existence of SERPS rights was known, little more than that was established: the number of years of contributions was not known for more than half; in about nine out of ten cases no valuation had been applied for and, in most of the rest, although a valuation had been asked for, it had not been obtained.
Other assets
Pension rights are only one among several types of assets to be considered in divorce settlements. Over nine in ten husbands and three-quarters of wives in England and Wales had earnings from employment at the time of divorce. In Scotland three-quarters of husbands and nearly half the wives had earnings, but information on this was not known in around a fifth of cases. As might be expected, husbands' earnings were, on average, higher than wives' earnings. About two-thirds of couples had regular income other than earnings - usually from Child Benefit. Owning the matrimonial home was reported for 95 per cent of couples in England and Wales and 79 per cent in Scotland, the median values of equity held being close to £36,000 in England and Wales and £23,000 in Scotland. The majority of couples (around nine in ten overall) had some additional assets valued at anything from under £500 to over £1 million and with the medians at around £15,000 in England and Wales and £12,500 in Scotland.
Taking account of the different types of pension rights in the divorce settlement
Current occupational pension schemes
Pension rights in current occupational pension schemes were much more likely to be taken into account in divorce settlements in Scotland than in England and Wales, and husbands' rights were more likely to be taken into account than wives' rights: 71 per cent of husbands' rights in current occupational pension schemes and 50 per cent of wives' rights in England and Wales were taken into account compared with 84 per cent of husbands' rights and 72 per cent of wives' rights in Scotland.
The longer the marriage, the greater the value of the pension rights, and the greater the value of the couple's other assets, the more likely it was that these current occupational pension scheme rights were taken into account. For example, in England and Wales where the marriage had been of up to 10 years duration, husbands' current occupational pension scheme rights were taken into account in 37 per cent of cases, compared with 87 per cent of cases where the marriage was of 20 years or more duration. They were taken into account in 65 per cent of cases where the valuation of the rights had been under £50,000, compared with 93 per cent of cases where the valuation had been for £50,000 or more. Similarly, when other assets totalled less than £25,000, the pension rights were taken into account in 66 per cent of cases, compared with 82 per cent where other assets totalled £150,000 or more.
Methods of taking pension rights into account
The method most often used to take current occupational pension scheme rights into account was offsetting against other assets (wholly or partly); this was done for 70 per cent of husbands and 44 per cent of wives in England and Wales and three quarters each of husbands and wives in Scotland (based on cases where pension rights were taken into account). Offsetting of pension rights against each other was also frequently used for wives' rights in England and Wales (33 per cent of cases). A lump sum allocated to the former spouse, paid at the time of divorce, to compensate for loss of (future) benefit from the particular pension rights was also a much more frequently used solution than was earmarking of the pension (37 per cent of husbands in England and Wales, and 47 per cent in Scotland).
Earmarking was infrequently applied: where the husband's current occupational pension scheme rights were taken into account, the pension was earmarked in only 17 per cent of cases in England and Wales, and in only eight per cent in Scotland. There were no instances of wives' rights being earmarked.
In England and Wales, Attachment Orders were arranged for just seven per cent of the cases in which the husband's current occupational pension scheme rights were taken into account.
A quarter of husbands' and half of wives' rights in current occupational pension schemes were “not” taken into account in England and Wales. The most frequent explanations given were that their values were not large enough or that each party had agreed to retain their own pension rights. Two other factors were important: that the couple had agreed not to consider the pension rights, and that the value of other assets outweighed the need to consider pension rights.
Personal pensions
As with current occupational pension scheme rights, rights in PPPs were taken into account more often in Scotland (81 per cent, husbands) than in England and Wales (61 per cent husbands, 43 per cent wives). Similarly these rights were more often taken into account in cases of long marriage, high value rights and high values of other assets. The main reasons for not taking such rights into account were similar to those reported for occupational pension schemes.
Offsetting of the pension rights against other assets was the most usual method of taking PPP rights into account, used in 88 per cent of cases in England and Wales where husbands' PPP rights were taken into account. Twenty six per cent of PPPs were earmarked and attachment orders were arranged for about three quarters of these. There were no instances of earmarking of PPP rights in Scotland nor for wives in England and Wales.
SERPS
Of cases with known SERPS rights, these were taken into account in the divorce settlement for only 13 per cent of husbands and 10 per cent of wives with rights in England and Wales. No instances were reported from Scotland. Among the reasons for not taking them into account (England and Wales), two stood out: the rights were not large enough; and, that the size of other assets outweighed the need to consider SERPS rights.
Overall position regarding taking pension rights into account
Only four per cent of husbands had no pension rights among the cases where it was known that either one, or both, parties had some rights. In contrast, a third of wives in England and Wales and over half in Scotland in these cases had no known pension rights.
35 per cent of husbands in England and Wales and 27 per cent in Scotland had rights in more than one type of pension scheme. Fairly small proportions of wives held more than one type of pension rights: 12 per cent in England and Wales and 16 per cent in Scotland.
In 59 per cent of the pension rights cases in England and Wales both husband and wife had some pension rights (including non-state rights and SERPS). In Scotland a lower proportion of cases involved both husband and wife with rights - 39 per cent.
Solicitors' views on the usefulness of the provisions in the Pensions Act 1995
Overall, just over half the solicitors felt that the new provisions were useful, though many had some reservations. In England and Wales 23 per cent thought them useful, 35 per cent thought them useful with some reservations, 17 per cent did not think they were useful and for 22 per cent it was not clear or they had mixed views. The equivalent figures for Scotland were: 38 per cent useful, 17 per cent useful with reservations, 18 per cent not useful, 18 per cent mixed views. Solicitors gave a range of reasons why they found the new provisions useful or not. The importance of taking rights into account and the usefulness of the provisions in cases of long marriage or large pension rights were the most often mentioned useful aspects. Earmarking hindering a clean break and uncertainty over the level of final payments were the most cited reasons for not finding the provisions useful.
Solicitors' views on pension sharing
A majority of solicitors were in favour of the proposed legislation to allow pension sharing (or splitting) at the time of the divorce. In England and Wales, 50 per cent were in favour in general, and 27 per cent with some reservations. In Scotland 68 per cent were in favour and 13 per cent with reservations. The key advantage perceived was that it allowed a clean break divorce (mentioned by 24 per cent of solicitors in England and Wales and 19 per cent in Scotland). Nevertheless only 30 per cent in England and Wales, and 22 per cent in Scotland, said they would have considered pension sharing in the case they reported. A further 15 per cent (18 per cent in Scotland) said 'maybe'.
Report details
Field, J. (2000) “Pensions and Divorce: The 1998 Survey”, DSS Research Report No. 117, Leeds: CDS (£36.00)
Other relevant publications
Field, J. and Prior, G. (1996) “Women and Pensions, ”DSS Research Report No. 49, London: HMSO (£35.00)
Prior, G. and Field, J. (1996) “Pensions and Divorce, ”DSS Research Report No. 50, London: HMSO (£25.00)
Arthur, S. And Lewis, J. (2000) “Pensions and Divorce: Exploring Financial Settlements, ”DSS Research Report No. 118, Leeds: CDS (£24.00)