The perils of pensions in a Scottish divorce by Denise Laverty

Divorce|August 25th 2015

“Grey divorce” or “silver splitters” are just a few of the terms bandied about in recent reports that divorce amongst the over 60s is rapidly on the rise. The average length of marriage for men getting divorced at 60 or older was 27.4 years, with only 14 per cent having being married for less than a decade. For women in the same age group the average length of marriage was nearly 32 years.

Divorcing wives, typically, tend to have lower pensions, particularly if they have given up or put careers on hold to have and raise the children of the marriage. S10 (5) of the Family Law (Scotland) Act 1985 specifically provides that benefits under a pension arrangement form part of matrimonial property and since 2000 the orders available to divorcing spouses extended to include pension sharing orders whereby a proportion of one spouses pension rights must be transferred into a pension scheme in the name of the other spouse. This has provided some comfort to “silver splitters” who may therefore be forgiven for assuming that they will be entitled to a share of their husband’s pension or other assets to an equivalent value, and in many cases this will be correct.

But what happens if, during the marriage, the husband has had an accident or for any other reason has been found unfit to work and the rules of his pension scheme allow him to receive his pension income earlier than the normal retirement age? Does this make any difference to the wife’s entitlement to share in the husband’s pension on divorce?

This is exactly the situation that Annie McDonald found herself in when she separated from her husband Thomas in 2010 after 25 and a half years of marriage. Thomas worked as a miner. He joined the British Coal pension scheme in December 1978. In March 1985 he and Annie were married. In August that year he was found unfit to continue working with British Coal due to an injury he had sustained at work. He was 32 years old at the time. The rules of his pension scheme provided that, having retired due to ill health, he became entitled to receive his pension income for life. He was no longer required to make any contributions into his pension scheme.

Twenty five years later when Annie and Thomas separated their solicitors obtained valuations for their respective pensions. Annie had a pension valued at £7,639. Thomas’ pension was valued at £172,748.38. There was no dispute that these were the values of the pensions as at the date that they separated. The dispute arose over how much of Thomas’s pension amounted to “matrimonial property”.

Under Scottish family law, subject to several exceptions, “Matrimonial property” is defined within the Family Law (Scotland) Act 1985 as all property acquired during the marriage (i.e. before separation) by either party to the marriage. Where the matrimonial property is a pension the Act specifies that it is only the benefits in the pension scheme that are “referable to the period” (of marriage) that form “matrimonial property”. Put simply when pension valuations are obtained if the pension was entered into prior to marriage a calculation is carried out to apportion the value of the pension for the period of marriage. It was not in dispute that the formula that must be used to carry out the calculation in such circumstances is set out in pension regulations introduced in 2000.

Annie argued that when the formula was applied the value of Thomas’ pension which amounted to “matrimonial property” was £138,734. Thomas argued that it was only £10,002.

The Sheriff in Edinburgh agreed with Thomas. Not surprisingly Annie appealed the Sherriff’s decision and family lawyers have been awaiting the judgment since the appeal was heard in May 2015. The appeal judgment was published on 18th August 2015. Annie’s appeal was refused.

How could they both use the same prescribed formula and arrive at such vastly different figures? And, if you are faced with similar circumstances, is there anything you could do to avoid or minimize such perceived unfairness?

The answer to the first question lies in the formula itself. One of the key components of the formula is the period during which the person is a ‘member’ of the pension scheme. It was argued for Thomas that the term ‘member’ only applied to ‘active membership’ of the pension scheme and that once Thomas retired and started to receive his pension he was no longer an active member but a pensioner member. On that basis, as he retired seven months after their date of marriage, applying the formula resulted in the calculation of £10,002. It was argued for Annie that the term ‘member’ included the full period during which Thomas was a member i.e. both active and pensioner and that if the legislation had intended the term ‘member’ only to apply to active membership it would have specifically stated this.

Unfortunately for Annie, Lord Malcom and Sheriff Principal Abercrombie QC, two of the three judges who heard the appeal seemed to have had no difficulty in agreeing with Thomas’s interpretation of ‘member’. However, Lady Smith, the third Judge gave a very long detailed opinion disagreeing with her two fellow judges; whether this provides Annie with sufficient impetus to take her appeal to a higher level remains to be seen. There will no doubt be many both within the legal profession and outside it urging her to do so!

Not only were the Judges, unusually, divided in their opinion but so too is the opinion amongst my fellow family law specialists. Those who support Lady Smith’s dissenting opinion seem to agree that any unfairness which might have resulted from a decision to interpret ‘member’ as meaning both active and pensioner member and therefore valued £138,734 of the pension as matrimonial property could be rectified by the court dividing the matrimonial property on an unequal basis in Thomas’ favour. The court has the discretion to do this where it is justified by ‘special circumstances ‘.

Unless the decision is further appealed or the legislation amended to define the term ‘member’, we are left with this decision and anyone in Annie or Thomas’ situation, whether they be a ‘silver splitter’ or someone much younger, should ensure that they receive specialist family advice. The decision also applies to situations where a spouse has stopped paying into a pension scheme but is not yet receiving the pension. This is particularly relevant to Armed Forces Pension Schemes. Pensions are a complex beast, they come in a variety of different forms and ensuring that they have been taken into account when dividing the assets and been valued properly is an essential part of a family lawyer’s role. Added to this is the requirement to consider and receive advice on whether ‘special circumstances’ exist to justify an unequal division of the matrimonial property. It is clear from the opinions of all three judges that whilst they disagreed on the eventual outcome. they did agree that any unfairness resulting from the decision could still, in other cases, be addressed in this way.

Marilyn Stowe comments:-

It is is to be hoped this case heads immediately to the Supreme Court where one would expect “The Supremes” to put right a manifestly grievous wrong. If anything demonstrates how shocking and unfair the outcome would be if our own discretionary based law is substituted for an arbitrary formula, it is this. Indeed the Supreme Court has commented that if a change is required it is to Scots law not our own.

It is also a great pity that the Scottish Appeal Judges didn’t save a great deal of time trouble and expense of there is to be a further appeal by coming down on the side of fairness and the same conclusion as Lady Smith.

Once again we see in a Scottish case a draconian outcome dictated by a formula rather than a fair and reasonable outcome taking into account all the Section 25 MCA 1973 factors, as in England where the courts adopt a discretionary approach. Long may they be able to exercise their discretion to avoid this type of outcome.

 

Denise is an accredited specialist in family law and a qualified solicitor in Scotland, England and Wales with over 22 years of experience. She is recognised as a leader in her field and is considered ‘one to watch’ by the latest Chambers and Partners’ guide to the legal profession. She is part of the Family Law Team at bto solicitors who are based in Edinburgh and Glasgow and has experience of both the Sheriff Courts and the Court of Session.

Author: Stowe Family Law

Comments(3)

  1. Ruth Deech says:

    Special pleading by those who profit, because this pension is going to be swallowed up by costs! He was injured and therefore presumably is still in need. The property split could have tilted things differently, without this colossal waste of time and costs. It all depends what your view of “unfair” is.

  2. Marilyn Stowe says:

    Dear Ruth
    Thanks very much for your comment. I agree with you about costs eating up the pension and perhaps the case will settle. It should. But this case clearly demonstrates that the use of an arbitrary formula can cause injustice if the Section 25 factors are not applied.
    I don’t know what the outcome would be if it was heard in England, I don’t have access to all the facts, but all the relevant factors would be taken into account including disability and contributions of the parties.
    This is why I have such a firm contrary opinion on the subject, despite my great respect for you and all you have achieved.
    Regards
    Marilyn

  3. Denise says:

    When the case was heard by the Sheriff Court the only issue in dispute was the valuation of the husbands pension. They had already agreed on a division of their other matrimonial property. The matrimonial home had already been sold and the proceeds divided equally. Had this not been the case and had the court been asked to firstly decide the value of the pension which fell to be treated as matrimonial property and then, secondly, to decide how the total matrimonial property should be divided then the court would have had discretion to order a division on an unequal basis if it considered this was required by the principle of fairness. However, this wasnt before the court and unless there is a sucessful appeal or change in the legislation to define the term ‘member’ for the purposes of the ‘formula’ then I certainly wont be recomending to any client to agree to anything that may then preclude them from being able to argue for an unequal division of their assets if the circumstances warrant it. It is not clear from the judgment of the first instance how or at what stage the parties agreed to sell the matrimonial home and divide the proceeds equally and this may well have taken place before either sought legal advice. If so it highlights the perils of the DIY divorce and the added dimension that a pension can bring.

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