Pensions and divorce: exploring financial settlements - a qualitative study of 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. 118
By Sue Arthur and Jane Lewis
This qualitative study examined financial settlements arising from divorce and the way in which solicitors deal with pension rights in such settlements. In-depth interviews were undertaken with 30 solicitors who had participated in an earlier survey (`Pensions and Divorce: The 1998 Survey', DSS Research Report No. 117). Together with the survey, this study aimed to examine the operation of new provisions in the Pensions Act 1995 and to collect baseline information to evaluate provisions for pension sharing on divorce contained in the Welfare Reform and Pensions Act 1999. The research was undertaken by the National Centre for Social Research.
The main findings from this qualitative study of solicitors were:
- Solicitors preferred to compensate a divorced party for the loss of pension rights through offsetting against other assets, a lump sum, or both, rather than through earmarking. This reflected a priority of ensuring that the parties' immediate needs were met.
- Solicitors did not generally distinguish between earmarking with, and without, Attachment Orders. Their view was that earmarking provision could be used or considered where: the value of other assets was insufficient to compensate the non-pension holder; there were substantial assets; and in the case of an older couple close to retirement.
- The main problem perceived with earmarking was that it does not create a 'clean break' between the couple. Other concerns were the future and uncertain nature of an earmarked pension; and widespread unfamiliarity with earmarked pensions. Solicitors noted that future needs could also be met by means other than earmarking.
- Solicitors had a broad understanding of pension sharing proposals. They saw the ability to create a clean break between the couple as a key benefit with both practical and psychological advantages. While pension sharing was seen as an improvement on earmarking, a preference remained for dealing with pensions through compensation methods.
- There was concern over the possible administrative cost of pension sharing; and that it could be disadvantageous if it meant that a non-pension holder was provided with future resources at the expense of meeting current needs
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
The sample of 30 solicitors was purposively selected to reflect geographical distribution, size of firm and proportion of divorce work undertaken, whether the solicitor acted for the husband or the wife, and the range of different approaches to treating pensions in divorce settlements (using off-setting, lump sum payments, earmarking, attachment or not taking account of the pension).
Qualitative research allows topics to be examined in greater depth than a survey and the research explored in detail the rationale underlying solicitors' treatment of pensions rights, their experiences of obtaining valuations and the circumstances that led to the use of Attachment and Section 12A Orders. While qualitative research does not use statistically representative samples it is possible to draw wider conclusions from the findings if samples are systematically selected.
Solicitors' approach to financial settlements
Solicitors' assessment of a divorce case involved their own judgements, the circumstances of the case and the wishes and priorities of their client. The importance of solicitors' discretion, and the need for creative approaches to resolving complex cases, were emphasised.
Factors taken into account in reaching a financial settlement included: length of marriage; ages of parties; ages and needs of children; needs of parties for income and housing; income, earning capacity and other resources. Solicitors highlighted the importance of assessing immediate needs, such as housing and income, and future needs. Except where the couple was approaching retirement age, future needs appeared to be given less emphasis.
An important principle underlying solicitors' assessment of the options in a case was the desire to achieve a '“clean break”' between the couple. Solicitors in Scotland mentioned the Scottish legislation as the basis for this principle. Solicitors also noted that clients themselves often sought a clean break.
Approach to pension rights
There was widespread recognition that pensions should be taken into account in the financial settlement, and of the value of pension rights. However, there were very mixed views about what a claim on a pension was based on: fairness; compensation; or needs.
Solicitors reported that both partners in a couple had a low awareness that pensions should be taken into account as part of a divorce settlement. There was a belief that husbands can be possessive about their pension rights and that some wives can be reluctant to claim against a husband's pension rights. This was said to be due to: a lack of awareness of the pension's value; being persuaded by husbands not to claim; and a concern about their more immediate financial situation, rather than future needs. Reflecting this, solicitors said they approached pension rights in a different way depending on whether they were representing the husband or the wife.
Solicitors said that they would usually look at any pension rights and get an initial valuation. Pension rights were generally not considered worth pursuing for: a young couple with no children; a couple who were a long time off retirement; a short marriage; equivalent pension rights between husband and wife; and small pension rights (either absolute or relative to other assets). SERPS rights were seen as of low importance and rarely valued or taken into account in financial settlements.
Conduct and process of reaching financial settlements
Solicitors emphasised the importance of full financial disclosure and expressed concern about proceeding without it in any negotiations. It was not always clear how systematic the process of surveying all the financial resources and reaching a negotiating position was.
Solicitors' consideration of different types of assets and how they can meet clients' objectives are shaped by a number of factors. Some said that they considered the pension in a different way from other assets because it is a resource that cannot be realised until some time in the future.
Some cases were driven by a specific need for one of the assets or for a clean break. A client's decision not to continue with negotiations was influenced by: avoiding conflict and acrimony; a low expectation of entitlement or little interest in the available financial resources; and the cost of legal fees.
Obtaining financial information and pension valuations
It was generally recognised that the Cash Equivalent Transfer Value (CETV) is the form of valuation provided for in pension legislation and required by the courts. Although descriptions of it varied, and there appeared to be confusion among some solicitors, it was generally understood to be a measure of the current value of the pension.
Solicitors described applying to the pension scheme for a CETV as a matter of course at an early stage and it was generally seen as a straightforward procedure with the time taken generally unproblematic. There was very little experience of obtaining valuations of SERPS rights.
Because the CETV is only a measure of the pension's current value, it was seen as an inadequate measure of the non-member's actual loss. Some solicitors preferred valuations based on the projected value of the pension. Although they were sometimes unclear about precisely how this differed from a CETV, it was generally seen to take into account future growth in the value of the pension fund, and to provide a valuation for the different elements of the pension.
Solicitors expressed some concern about the use of CETV and earmarking because the non-member's entitlement is calculated on the basis of the current value of the pension but is not paid until some point in the future. This sometimes led solicitors to seek valuations from actuaries or further information about the pension entitlement to help them assess how much should be earmarked.
Solicitors also reported seeking actuVerdana valuations, where the scheme was thought to be particularly valuable or complex. These were said to take more account of the individual circumstances of the case and to include future growth in the scheme. Again, however, there seemed to be a high level of confusion about actuVerdana valuations; solicitors acknowledged that they were heavily reliant on the expertise of their actuary.
Earmarking and other methods of dealing with pension rights
Solicitors did not generally distinguish between earmarking without and earmarking with Attachment Orders. They described two distinct strategies for taking pension rights into account. The first was to give the non-pension holder a direct entitlement to a share of the pension through earmarking. The second was to compensate the non-pension holder for her loss of pension rights, through offsetting it against other assets or a lump sum, or both. The solicitors interviewed expressed a clear preference for dealing with pension rights by compensating for their loss rather than through earmarking.
Solicitors reported having earmarked pension income (in England only), the lump sum on retirement, and the death-in-service benefit. Sometimes just one of these elements had been earmarked, and sometimes two or all three, and sometimes a proportion, or a fixed sum, or the whole of one element of the pension had been earmarked. In some cases earmarking of pension income or of a death-in-service benefit had been used to secure maintenance payments that would otherwise no longer be paid when an ex-spouse retired or in the event of their death.
Not all earmarked cases in England involved Attachment Orders. Where Attachment Orders had not been made, some solicitors were unaware of their existence, while in other cases the wife's solicitor had not requested one.
There was broad agreement about the circumstances where they would use, or consider using, earmarking provision: where the value of other assets is insufficient to compensate the non-pension holder; where there are substantial assets, either in absolute terms or in relation to immediate needs; and in the case of an older couple close to retirement. However, these circumstances do not automatically lead to earmarking.
There were said to be other advantages to earmarking: for example, an earmarked portion of a pension scheme would provide a greater return than an invested lump sum, and the threat of earmarking as a negotiating tactic.
A number of concerns about earmarking and reasons for not using it were identified. These related to the impact of earmarking on the settlement, uncertainties inherent in the concept of earmarking, and practical difficulties. Although solicitors identified ways of dealing with these problems, concerns about using earmarking remained. Solicitors reported that courts and pension schemes were unfamiliar with earmarking in general, leading to inconsistencies in their practice.
The major problem perceived with earmarking was that it does not create a clean break between the couple. Other concerns were that an earmarking order might jeopardise the ability to meet a non-pension holder's current needs because her share of other available assets might be less; and the future, contingent and thus uncertain nature of an earmarked pension.
A number of practical difficulties were also identified. First, it was noted that earmarking requires a court order. Secondly, there was concern about the need for a couple to remain in contact with each other or with the pension scheme. Third, some solicitors reported finding pension companies very co-operative in dealing with Attachment Orders and Section 12A Orders; others found them less willing to cooperate.
Solicitors' strong preference for compensating the non-pension holder by offsetting the pension against other assets was linked to the priority of ensuring that the parties' immediate needs are met - particularly a secure home and a secure way of funding living expenses. This was seen to reflect the wishes of the client. Solicitors noted that future needs could be met without earmarking, through the future sale of the home or through investment of a lump sum, perhaps in a pension or an annuity.
Pension sharing
Solicitors were generally aware of, and broadly understood, pension sharing proposals. They anticipated its key role would be in cases where earmarking is currently considered appropriate, although there were suggestions that it might be used more widely. It appeared to be positively received as another option for dealing with pensions that should be available as well as, rather than instead of, other mechanisms. Although pension sharing was generally thought to be an improvement on earmarking, there remained a preference for dealing with pensions through compensation methods if possible.
By comparison with earmarking, a key advantage of pension sharing was seen as the ability to create a clean break, and give the non-pension holder control of her share of the pension. The clean break aspect of pension sharing was seen to have both practical and psychological advantages.
Concerns about pension sharing included:
- the possible administrative cost
- uncertainty associated with pensions as a future asset which cannot easily be quantified
- a non-pension holder might be provided with future resources at the expense of current needs
- uncertainty about precisely how it would operate, including confusion about whether the non-pension holder's share would have to remain in the same scheme, and, conversely, a belief that the non-pension holder would have to have an existing scheme into which her share would be transferred.
Solicitors identified aspects of preparation for the introduction of pension sharing that would be helpful to the profession:
- clear guidelines about how pension sharing should be structured and how it would operate
- adequate advance notice of implementation, and
- preparatory work with the pensions industry.
Report details
Arthur, S. And Lewis, J. (2000) “Pensions and Divorce: Exploring Financial Settlements, ”DSS Research Report No. 118, Leeds: CDS (£24.00)
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)
Field, J. (2000) “Pensions and Divorce: The 1998 Survey, ”DSS Research Report No. 117, Leeds: CDS (£36.00)