Earmarking pensions in divorce

The pension issue in divorce could not always be solved by the simple solution of offsetting a pension against other assets and different solutions are now available. It has to be said, also, that the courts have become increasingly pro wife in the matter of pensions and the example given on the previous page would probably not be regarded as satisfactory.

In divorce and pensions, if the former matrimonial home was worth, say, £100,000 and the husband’s pension was worth, say, £50,000 the courts would probably be unlikely now to say that in return for the wife getting the house the husband should keep the pension. In the case of a non-working wife looking after dependent children a court would probably be more inclined to think within the context of divorce pension entitlement that:-

(a) The wife has little prospect of being able to build up a pension provision of her own in such circumstances and that she ought to be provided for in future and

(b) Because the husband has an earning capacity whereas the wife does not then he should be able to rebuild his pension provision whereas the wife might not be able to do anything about a pension if she was not provided for at this stage.

The simple example given above was therefore never really regarded as satisfactory by the courts and nor has it been regarded as fair by women’s pressure groups. In divorce pensions have assumed a greater and greater significance. In fact Parliament has now passed laws which give the courts more power to deal with pensions in divorce.

The first such attempt was the Pensions Act 1995 and this gave the courts power to make what is called an “ear marking” order. Say, for instance, a husband (and it is typically the husband) has a pension provision with a transfer value of, say, £100,000. Under the Pensions Act 1995 the courts would have the power to ear mark a certain percentage of the future pension benefits for the benefit of the wife. This would take the form of an order addressed to the trustees of the husband’s pension fund directing them to pay a given percentage of his future pension benefits to the wife. This would apply to both any lump sum he might receive and also to the pension payments he would receive. The court also has power to force the husband to commute a part of his pension entitlement so requiring him to take a lump sum even if he does not want to do so.

There are two points worth noticing about this. First, the wife only receives any benefits when the husband takes his pension entitlement – whether lump sum or pension. If he were to die before taking either of these then the wife would lose any benefit of an ear marking order. Second, ear marking was something which was always capable of being varied – whether as to the amount of the lump sum that the wife should receive or the amount of pension she should have. This means there was not a “clean break” between husband and wife and that the husband was still vulnerable to further claims by the wife if her circumstances (or his) altered. Neither of these situations was regarded as very satisfactory and so Parliament in due course passed the Welfare Reform and Pensions Act 1999.

All the same, the provisions of the earlier Act remain in force and it is important to realise that the courts can still make an ear marking order against a pension if they think it appropriate (or, indeed, if that is what the parties want). However, ear marking is very uncommon in practice and when pensions are shared it is now almost always by a pension sharing order made under the Welfare Reform and Pensions Act 1999.

To find out about more about pensions and divorce please continue.