Pension Offsetting – Is a consistent approach possible
or even appropriate?
George Mathieson, Mathieson Consulting
This paper will be published in January Family Law and is available to download at
www.familylaw.co.uk.
Sir Michael, My Lords, Ladies and Gentlemen,
I am honoured to have been asked to speak at the FLBA Annual Conference, a gathering of many of
the great minds in the field of family law, and I have to confess to being somewhat daunted at
speaking in a room full of such illustrious lawyers when my only scholarly experience of law was
taking an exam in ‘Law Relating to Banking’ as part of my Associate of the Institute of Bankers
qualification in the 1980s.
I had a real problem with remembering case names – the only ones that stuck in my mind were to do
with ‘The London Rubber Company’ and ‘Carlill v Carbolic Smoke Balls’. However, I found out that a
mark was awarded for every case cited. But I also found out that the exam was not marked by
lawyers, but by bankers, and I took a view, that in all probability, the examiners would not know the
difference between a real case and a fictitious case. So I decided to employ, as case names, the
names of legal practices then in Birmingham. So I cited, Edge v Ellison, Pinsent v Curtis, Martineau v
Johnson, and to my eternal shame I not only passed, but passed with distinction.
So given my lack of legal background, you will excuse me, I hope, if I largely stay clear of the law in
my presentation, and look at the thorny issue of offsetting from the perspective of the pension
practitioner.
As case law develops in the field of pensions and divorce, a difference of opinion would appear to be
emerging between the court’s view of pensions, and the views of the majority of experts. Such a
difference of opinion is not helpful if experts are commissioned to write reports and undertake
actuarial calculations, and ultimately the court turns around and says, ‘It’s all very well for the expert
to value pensions in this way, but we are going to view pensions this way.’
What has happened in the past year or two?
SJ v RA [2014] EWHC 4054 (Fam)
First we had the judgment of Mr Nicholas Francis QC sitting as a deputy judge of the High Court in
December 2014. In this case H and W both had substantial Defined Contribution (DC)/Money
Purchase pension funds, both were over the age of 55 (the age at which pensions can be drawn),
and the Pension Freedom rules (allowing access to the entirety of funds as a lump sum, albeit after
payment of tax) were in force, and it was a big money case.
At para [83] of his judgment, Mr Francis QC stated:
© LexisNexis and George Mathieson
1
‘The husband has pension investments with a CE of £1,865,430 and the wife has
pension investments with a CE of £753,000. The competing schedules have very slightly
different figures, probably just a reflection of valuation date. The wife says that there
should be a pension sharing order to provide her and the husband with an equal
income. Given that the wife is younger and female, this would provide her with a
greater share of the combined fund values. I would regard such an approach as unfair
and anachronistic in a case where assets exceed the parties’ needs. The recent well
publicised changes to pension regulations will mean that pension investments are
virtually to be treated as bank accounts to people over 55, as these parties are. Why
should someone receive more just on the basis of gender? There may have been an
explanation when rules required the purchase of an annuity. However, to give the wife
more than the husband, on account of either age or gender would seem to me to be
unacceptable discrimination unless it is a case which is governed solely by needs. If a
person should receive more of a pension fund under the modern rules simply because
she (or he in the case of a marriage where the husband is much younger) is likely to live
longer, then such an approach would logically extend to all capital assets. Moreover,
European Union judgments and rules are rapidly outlawing discrimination on account of
gender. In cases where distribution is being made on a basis which is not guided by
need it is, in my judgment, incorrect to distribute a pension fund on the basis of equality
of income and there is no need for actuarial reports in the overwhelming majority of
such cases. I should expect courts to be most reluctant in the future, in bigger money
cases, to provide permission for actuarial reports on the issue of how to effect equality
of income. Moreover, I suspect that annuities will, in the overwhelming majority of
cases, become a thing of the past.’
On the facts of this case, I totally agree with the view of Mr Francis QC on how pensions in this case
should be dealt with. However, following this judgment, reference to SJ v RA started to creep into
letters of instruction. We were still asked to calculate the pension sharing order required to achieve
equality of income, but we were also asked to comment on the implications of this case in so far as
settlement goes.
Now the vast majority of cases where we are instructed do not follow the facts of the case in SJ v RA.
They nearly always contain:
•
Defined Benefit (DB)/final salary pensions which are fundamentally different to DC funds as I
will show later. DB schemes do not allow access under the Pension Freedom Rules, they
cannot be cashed in, and they cannot be treated as a bank balance after tax.
•
The cases do not often involve parties with substantial pension assets, and ‘needs’ is often the
determining factor.
•
The cases often involve parties aged under 55, where the Pension Freedom Rules cannot be
invoked.
So I was perturbed by the extrapolation of the judgment in SJ v RA, which as I say I thought was an
excellent judgment as far as pensions are concerned, based upon the very specific facts of the case.
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JS v RS [2015] EWHC 2921 (Fam)
Then came the judgment of Sir Peter Singer in the case of JS v RS. I set out paras [70] to [75] of this
judgment below:
‘70. Offsetting is a technique whereby W's pension would be left intact and H would be
compensated with a capital sum to replace what might otherwise have been a pension
sharing order. Subject always of course to the amount of the compensatory payment,
the advantage in terms of future security to W is obvious. The advantage to H is the
accelerated receipt of spendable capital in place of a 20+ year wait to commence
receipt of a taxable lifetime income stream. The advantage of offsetting from my
perspective is that it seems to me the fairer alternative, viewed objectively and overall.
71. In her report Mrs Ford makes the point that pension funds are not directly
comparable with other assets, and that this always gives rise to difficulty in deciding the
value to place on the pension rights. The starting point remains her conclusion on the
adjustment that would be necessary to produce equality of income in retirement. In
making this calculation the value of the pension fund is usually discounted to allow for
the fact that its benefits are not recognisable as an immediate lump sum cash asset, and
that the pension income is taxable.
72. Her conclusion is that “H will require a pension cash transfer to the value of
£248,067 to fully match the additional pension income receivable by W.” She suggests
that “as a result of my research, allowing for [that figure] and the greater value (due to
immediate access and difference in taxation) generally put on an immediate cash sum …
to offset against a pension share, I suggest that a cash payment of £210,856 to H …
would be a fair equivalent value.”
73. It is at this point that I part company with Mrs Ford. No submissions at all were
made by either party in relation to this suggested outcome, other than the responses I
have already recorded to my temperature-taking suggestion that £40,000 might be an
appropriate sum. But I shrink from the suggestion that a payment in excess of £200,000
should pass from W to H to compensate him for the potential loss in 20+ years of a
lifetime income stream of (at today's value) £5300 annually subject to such tax
consequences as may prevail at that time and for that uncertain term.
74. I am aware from my general reading that there is at present debate but as yet no
conclusion on precisely this topic of appropriately arriving at an offsetting figure. I am
not aware from my own knowledge nor have I researched what the competing methods
might be. I am thus left in the unsatisfactory position where I must alight upon an
amount which will necessarily be arbitrary if, that is, H is indeed to receive as part of the
overall distributive process consideration for the fact that during this marriage unequal
pension benefits have arisen.
75. In my judgment it would be appropriate for me to make a pension sharing order to
at least reduce the imbalance in pension benefit entitlement which has arisen during
the course of the parties' relationship. I would not necessarily make an order for as
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much as the 23.8% suggested by Mrs Ford's calculations. Offsetting is in this case and in
my view by far the preferable and fairer course to take. But I certainly regard a cash
payment of over £200,000 as very significantly excessive. Given all the uncertainties
which would beset any attempt at principled evaluation I simply take £60,000 as the
amount which in all the circumstances of this case W should pay H in order to maintain
her pension entitlements intact.’
So here we have acknowledgement of the debate, and of different points of view within that debate.
But we also have acknowledgement of the unsatisfactory position in which this leaves the judge. And
whilst I have sympathy for the position in which Sir Peter Singer found himself, I and the majority of
pension experts have a real problem with the quantum of the settlement. It is simply too low. We
would all benefit were there to have been a quantitative analysis of how £60,000 was arrived at, but
from this judgment we are no wiser, other than Sir Peter Singer thinks the expert’s valuation is too
high.
Apples or Pears? Pension Offsetting on Divorce
We then had an excellent paper, Apples or Pears: Pensions on Divorce (‘Apples and Pears’) written by
Rhys Taylor, barrister and arbitrator, and Hilary Woodward, Honorary Research Associate at Cardiff
University. 1 This paper, which was also presented to this very same FLBA National Conference last
year, was the summation of a discussion forum attended by some of the (non-legal) experts in this
field, in which they all expressed their own views as to how pensions should be valued for offsetting
purposes. There was a very wide range of opinion among the experts, and the authors concluded:
‘Whilst the broad s 25 brush is entirely appropriate when considering asset distribution
on divorce, it is another matter altogether to arrive at an arbitrary figure, for want of
evidence or lack of appreciation of the issues in play.
The lack of explicit reasoning for pension offsetting outcomes, identified in the Nuffield:
Pensions on Divorce report, is not a cause of these issues but may be a symptom. How
much more thought would be taken if lawyers were required to record the rationale for
their offsetting decision?
To date, it has not been possible to arrive at a working formula which might be applied
in the valuation of pension offsets. Further interdisciplinary discussion between
lawyers, actuaries and IFAs of the above key factors is needed, to achieve better mutual
understanding and consistency, and grasp of the interrelationship between pension
offsetting assumptions and Duxbury calculations. Interdisciplinary forums, so successful
in the child law context, are a model which financial remedy lawyers could consider.
In addition to further interdisciplinary discussion, both lawyers and judges might
consider whether some adjudication of pension issues would be appropriate. This is not
a call to open the floodgates but for a few test cases to be judiciously selected to
1
[2015] Fam Law 1485 and
http://www.familylaw.co.uk/system/froala_assets/documents/53/Apples_or_Pears__Pension_offsetting_on_divorce__FLBA_Conference_paper_.pdf.
© LexisNexis and George Mathieson
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provide some clarity in this confused and neglected corner of the law.’
On the subject of debate and discussion, I have produced close to 2,000 reports as a Single Joint
Expert, and last month was the first time ever I was called to give oral evidence in court as an SJE (I
have done so on a number of times previously as a party expert) and to have my methodology and
assumptions for offsetting rigorously challenged and tested. I totally agree with the comments in
Rhys’ and Hilary’s paper about the need for testing the arguments, and debate about the approach –
I am up for it!
In April 2016 the Family Justice Council published a document entitled Sorting Out Finances on
Divorce. 2 The guidance is aimed at litigants In person but, as Mr Rhys Taylor states in a paper he
published in June 2016, Pensions on Divorce: Another Witches Brew, 3 although it is ‘Intended as
handy guide to “needs” cases for Litigants in Person’, it contains a lucid treatment of pensions at
pages 42–47. Family lawyers (and judges) would be well advised to make regular reference to this.
The working group which produced this report contains many luminaries, including HHJ Edward
Hess. It is a very helpful and authoritative document.’
At page 43 the FJC guide states:
‘The proper treatment of pensions on divorce is a complex and technical subject, to
which this guide can provide only the most basic introduction.’
It then goes on to say:
‘Because of the technical nature of pensions, if you or your spouse has significant
pension funds, whether from a private pension scheme or by virtue of employment (e.g.
in the NHS, police, armed services, or teaching profession), or if you are close to
retirement, it is strongly advisable that you seek legal advice and / or advice from an
Independent Financial Adviser who has experience in dealing with pension divisions on
divorce. In certain cases, they in turn may suggest a report is obtained from a pension
actuary about your situation.’
In June 2016, Mr Rhys Taylor published the aforementioned Pensions on Divorce: Witches Brew
paper. This is an outstanding and (necessarily) lengthy document, which provides a comprehensive
exposé of the everyday conundrums which a court faces when deciding how to deal with pensions
on divorce and dissolution of civil partnerships. To anyone who has not read this paper, I thoroughly
recommend doing so. Having identified the plethora of issues and conflicting opinions in this field,
the paper concludes:
‘Underlying pension legislation has developed significantly in the last few years. The
implications of this have yet to be fully worked through in case law and practice in
Family Courts.’
Apples and Pears concluded that there was a need for lawyers and experts to discuss areas of
common concern outside of the court arena. That remains my view.
2
3
https://www.judiciary.gov.uk/wp-content/uploads/2016/04/fjc-financial-needs-april-16-final.pdf.
http://www.familylaw.co.uk/news_and_comment/another-witches-brew-pensions-on-divorce.
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The FJC paper is a great stride forward in seeking to authoritatively promote consistent practice. It is
no slight to litigants in person to say that the document has been written with their needs in mind
and has been made intentionally accessible for the layperson. Pensions on divorce are, however, a
witches’ brew of complexity. The members of the Family Justice Council might draw inspiration from
the employment law context, where a guide to common issues arising was in use for many years,
and which is currently in the process of renewal, in light of pension reforms.
Having spoken with many of the experts involved in the field, I can confidently say that many would
welcome the opportunity to engage in constructive interdisciplinary dialogue with their family
lawyer colleagues in practice and with the judiciary.’
WS v WS [2015] EWHC 3941 (Fam)
Next came the judgment of HH Judge Lord Meston QC, sitting as a deputy judge of the High Court in
WS v WS. The facts of the case, as far as pensions were concerned, were that H and W both had
substantial pension assets, but with W having c. £3m in a DB pensions and H c. £1m in a DC pension,
and both parties were over the age of 55. So far (other than we now have a DB scheme), there is a
similarity between the facts of this case and that of SJ v RA. Reference is made in the judgment to a
judge, at a directions appointment, having refused permission for an expert. Reference is also made
in paragraph 46 to why the remedy of Offsetting was being pursued instead of Pension Sharing:
‘Neither party has pursued the suggestion of pension sharing because it is recognised
that pension sharing would take the husband well over the lifetime allowance with
severe taxation consequences. This common view appears to have been based on the
advice of a consulting actuary contained in a letter of 12th November 2014.
Accordingly, as recorded in the order made last year by Parker J the court has been
asked to consider offsetting, i.e. in the context of this case a payment or allowance in
favour of the husband from non-pension assets to cover the disparity between the
parties' pension positions, it being acknowledged that the wife's defined benefit
pension scheme from Morburg Bank is more valuable than the husband's money
purchase scheme.’
The first point to make is that there is a possibility that the whole premise for offsetting is flawed. I
am not in possession of all of the facts of the case, but from those facts I have been able to glean, I,
in common with a number of other experts, question whether a Pension Sharing Order would have
resulted in a significant LTA tax charge. Given W’s age, and the fact that she was in receipt of a
pension of £92,086 pa, there is every possibility that her pension would have already been assessed
against the LTA, and as a result, any pension credit awarded to H would not be tested again. If this is
correct, and had this been known, would they have pursued the remedy of offsetting with such
determination?
However, having decided to pursue offsetting, the question was then quantum and HHJ Lord
Meston QC was presented with a wide range of numbers. In excess of 40 paragraphs of the
judgment are devoted to consideration of the relevant case law, the competing submissions of
counsel and the conclusion, and there is not the time at this juncture to consider all 40 paragraphs in
depth. However, the range of quantum was between £300,000 submitted by counsel for wife, by
reference to Duxbury capitalisation of the income differential between the pensions and a discount
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for accelerated receipt, and £1.3m by counsel for H, based upon the cost of buying an annuity to
match W’s pension income.
Ultimately, HHJ Lord Meston QC awarded H with £425,000 by way of offset capital, citing at
para [71]:
‘An important element in the decision as to whether a lump sum payment under Option
A is achievable or is unrealistic is the quantification of the pension offset payment. It is
quite apparent when looking again at the rival arguments and different figures
suggested that there is no obviously right figure or correct calculation. However I
consider that Mr Dyer's argument for a conventional Duxbury approach is correct, and
that it is certainly preferable to an annuity based calculation. I have decided that the
appropriate figure should be £425,000.’
This was having previously dismissed the argument that the Duxbury figure should be discounted for
accelerated accrual at para [63]:
‘It was also submitted that a 25% discount should then be applied for accelerated cash
payment. The figure proposed on behalf of the wife for an offset payment was
£300,000 (after the suggested discount for accelerated receipt). However, in this case I
cannot see that it would be appropriate to provide for any such discount, since
whatever payment is made would not be to replace the benefit of sharing an income
stream for which the husband would have otherwise had to wait a substantial time. The
alternative basis upon which Mr Dyer argued for such a discount was that there should
be some reflection of the fact that the wife might predecease the husband. However
again I cannot in this case see any justification for including such a discount in a
Duxbury-based calculation based on current average life expectancies.’
Following this judgment, I (along with 12 other experts) put my name to a paper entitled WS v WS:
Pensions experts’ review. 4
It is a long article but there are a number of extracts I would like to repeat in full:
‘In the case of WS v WS the flawed motivation for offsetting is to avoid the “severe
taxation consequences” of a 55% Lifetime Allowance tax charge deducted from the
husband's pension credit. Even if a Lifetime Allowance charge was applied and the
husband inadvisably immediately withdrew all his money from the tax shelter of his
pension, the tax rate of 55% on an award of £1,046,729 would leave him with £471,000.
It is hoped that the reader has already started to consider that the Duxbury calculation
of £425,000 was a more severe consequence.
As the case here appears to be built on a false premise, the judge was in an unenviable
position. Both are drawing pension benefits, and one imagines that both value them. At
61, the husband is likely to jealously regard the wife's secure, inflation-proofed, sleepat-night pension. While he has significant other assets, even ultra-wealthy clients value
4
[2016] Fam Law 504 and http://www.familylaw.co.uk/news_and_comment/ws-v-ws-pensions-expertsreview.
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having cash and guaranteed investments as part of their portfolio. A guaranteed return
from cash, gilts or a defined benefit pension gives the holder more freedom to
speculate with their other assets. If the offset question can be seen as generating
answers at two polar positions, in the absence of a cogent reason for the offset one
might reasonably expect a decision that meets somewhere between the two. A Duxbury
calculation, however, is – in the opinion of many pension experts – the iciest tip of one
of the poles.’
So why do the majority of experts reject Duxbury as a basis of assessing the quantum of non-pension
capital to be received in offsetting cases? Let us consider comparative positions of the parties in any
divorce case where, say, W has a Defined Benefit/final salary pension and H, by way of offsetting,
has a lump sum of non-pension capital designed to produce an income equal to that of W, using
Duxbury to arrive at its quantum:
Investment Risk
Inflation risk
Wife’s Defined Benefit Pension
Income from Duxbury fund
None - unless scheme fails and
Sustainability of income dependent upon
goes into PPF, but even then
real investment return of 3.75% pa over
there is underpin
inflation
None – pensions usually
Whether inflation increases can be added
indexed in line with CPI or RPI
depends on investment return
Duxbury premised on assumption that party
Mortality risk
None – pension paid for life
will die when they are meant to (actuarially)
if they live any longer, fund exhausted.
Dependent’s
Usually present with defined
pensions
benefit pension
Not taken into account in Duxbury
In essence, how can equality be said to have been achieved if on the one hand one party has an
income immune from investment risk, immune from inflationary risk, and immune from the risk of
living too long, whereas the other party has an income which will be unsustainable if investment
returns go wrong, if inflation takes off, or if they have the temerity to live too long?
There seems to be a simple dismissal of the value many people place on the security of income in
retirement. In BJ v MJ (Financial Remedy Overseas Trusts) [2011] EWHC 2708 (Fam), [2012] 1 FLR
667, Mostyn J stated at para [75] that, ‘No-one nowadays seriously would think of buying an
annuity.’ This is a theme Mostyn J returned to in JL v SL (No 3) (Post-Judgment Amplification) [2015]
EWHC 555 (Fam), [2015] 2 FLR 1220 where he stated: ‘[the] argument for a conventional Duxbury
approach is correct, and that is certainly preferable to an annuity based calculation.’
Now clearly Mostyn J’s views are very influential, but I would suggest that the dismissal of the value
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people place on the certainty of income afforded to them by an annuity or defined benefit pension
scheme is misplaced, other than in big money cases. Most people who do not have the benefit of
significant wealth need to know with certainty, what their income is going to be in retirement.
Annuities are not a thing of the past. Where certainty of income is required, people do seriously
think of buying an annuity.
If it is felt that the majority of people favour flexibility over certainty, perhaps someone would like to
try and convince all public sector workers that they should give up their entitlement to a defined
benefit pension and have a defined contribution/money purchase fund instead, because it will give
them greater flexibility. Good Luck!
So let me return to the title of this paper, Pension Offsetting – Is a consistent approach possible or
even appropriate? What I have identified so far is that the Judiciary seems to be asking for guidance
and consistency of approach, but when a judgment is delivered, as in SJ v RA, there seems to be a
desire to extrapolate from this judgment and apply it to all cases, even if the facts of subsequent
cases are fundamentally different.
There appears to be almost a hardening of positions between the pensions experts and the legal
experts, and I would like us to work more closely together, so that without removing the discretion
of the courts, a consistent approach is found dependent upon the facts of the case. Thus, it becomes
less of a lottery for the divorcing couple whether the expert’s approach (currently, it is regrettable
that experts cannot agree on a consistent approach) is accepted, or whether the court follows the
precedents – because between the two positions, there can be a massive gulf in quantum.
To start this process off, I, and I think that the majority of other experts, may be persuaded to agree
that the judgment in SJ v RA of Mr Nicholas Francis QC gives an excellent basis for how pensions
should be dealt with if we have solely DC funds, assets exceed needs and the parties are over age 55.
I also would like to think that we can all agree that we cannot use the judgment in SJ v RA as a basis
of settlement in cases where there are Defined Benefit schemes for a number of reasons:
•
First, as stated by Mr Francis QC, Defined Contribution pension schemes can be treated as a
bank account, since they are capable of being cashed in and converted into a bank balance,
after the deduction of appropriate tax. The same cannot be said of Defined Benefit schemes.
To be treated as a bank account, a pre-requisite for applying the methodology in SJ v RA, the
Defined Benefit pension has to be transferred from its DB structure into a Defined
Contribution scheme. Here there are practical difficulties in so far as (a) the Trustees of the
scheme require evidence that the member has received advice to undertake such a transfer;
(b) many IFAs will be reluctant to provide such advice (influenced by their PI insurers); and (c)
if we are dealing with any of the Public Sector scheme, such a transfer simply is not permitted.
•
Second, even if we can view a DB pension as a bank balance, simple comparison of CEVs (after
making deduction for tax) does not work. As soon as we mix in one case DB and DC funds, or
even have two DB pensions, CEVs can become wholly misleading.
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Case 1: Why CEVs are misleading – DB v DC
W aged 60 (just before retirement) has Public Sector pension CEV £300,000
H aged 60 (just before retirement) has Scottish Widows pension CEV £300,000
We have equality of CEVs, therefore should there be no offsetting on the basis we already
have equality of pensions?
But:
W will receive pension of £12,800 pa, plus a lump sum of £38,400, plus a widower’s pension
of £6,400
H may be able to secure index linked pension of £7,800 pa with no lump sum, or pension of
£6,809 pa with a lump sum of £38,400
Is a pension a capital asset to be judged on CEV (in which case no difference) or is it a future
income stream (in which case substantial difference)?
Case 2: Why CEVS are misleading – DB v DB
H aged 59, member of Defined Benefit scheme, CEV £750,000
W aged 59, member of different Defined Benefit scheme, CEV, £500,000
Both parties wish to retain their pensions.
Therefore offsetting is chosen remedy, with W to receive £250,000 more of non-pension
assets
But:
Closer examination of schemes reveals:

Both H and W will receive a pension of c. £20,000 pa from age 65.

Therefore, pensions are almost identical – just that the CEVs have been calculated
differently by two different schemes.
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So having hopefully agreed that it is appropriate to use the basis of settlement set out in SJ v RA
consistently in cases involving solely DC funds where assets exceed needs (and with one or two other
provisos) I hope we can also agree that such a consistent approach is not appropriate the moment
any DB schemes of any consequence appear on Forms E.
If we can have consensus of the above, then we have made progress. What needs to happen next is
that all parties, the pension experts, the Judiciary, members of the Bar, and solicitors come together
to hear and examine rigorously each other’s arguments for the various approaches being adopted in
cases where there are DB schemes. I am too constrained by time to explore at this juncture the
differing positions adopted by experts, and the academic arguments for each position, but the
aforementioned paper Apples or Pears does examine these in some detail. It has also become
obvious to me that certain solicitors are becoming very clued up as to the approach different experts
take, and selection of the expert is now sometimes been influenced by whether the solicitor driving
the instruction is for the H or W. This is, again, unsatisfactory.
But I am afraid that solicitors must take some of the blame for experts not having a common and
consistent approach, because, to put it bluntly, many solicitors do not understand what they are
asking for when it comes to offsetting. Many believe that there is a single offset value for all
pensions. However, different letters of instruction will frame questions about offset values in
different ways, and each will generate a different approach and different answer. For example, we
regularly see the queries framed as follows:
•
Are the CEVs a reliable/realistic/accurate/fair (choose as appropriate) basis for offsetting? If
not please provide such a figure.
•
What is the capital value of each pension for offsetting purposes?
•
Having calculated the pension sharing order required to achieve equality of income, please
advise as to the non-pension capital required, if the parties adopt the remedy of offsetting, to
achieve the same outcome.
•
For offsetting purposes, how much non-pension capital would W require to buy an annuity on
the open market equivalent to H’s pension income?
There are many other variations on such a theme. If the question can be clearly defined, then we
have a better chance of agreeing consensus as to what the answer should be.
What about discount for tax or utility?
Hitherto this paper has concentrated on how to value the pension for offsetting purposes – Duxbury,
CEV, annuity. But the method for valuing the pension is just the first of two contentious processes.
The second is applying, if appropriate, a discount for utility and/or tax. The common argument
presented is that the person who receives a greater amount of non-pension assets has advantages
over the person who retains the pension assets. The advantages include the flexibility and
accessibility (The Utility Argument) of the non-pension capital, compared with the pension which is
simply a future whole of life income stream, and that the person who receives non-pension capital
may be able to arrange their financial affairs in such a way that not all of the income they derive
from the fund is taxed whereas the entirety of pension income is taxed. Therefore, it is argued, there
should be a discount placed on the non-pension capital to reflect its inherent advantages.
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But the quantum of that discount, if any, is contentious, and often boils down to horse-trading.
Now one of the advantages of the approach of Mr Nicholas Francis QC in SJ v RA is that there is no
need to worry about arguments for tax/utility. His approach of saying ‘these Defined Contribution
funds, let’s take their value as a bank account balance, after calculating the tax to be deducted on
their full encashment’ automatically deals with and removes any argument for discount based on
utility/tax.
However, once again such an approach does not work as soon as we introduce Defined Benefit
pensions to the equation.
Now I hold a very firm view that a formulaic approach to quantifying discounts is not possible,
because it ignores the individual circumstances of each case. For the same reason I very firmly
believe, that any discount, if there is to be one, should be quantified by the lawyers and their clients,
and ultimately the courts, and not be within the purview of the pensions expert, who simply is not in
possession of all of the facts of a case to adjudicate. Any pensions expert who thinks he can quantify
an appropriate level of discount when offsetting, or any lawyer who thinks there should be a simple
formulaic process, misunderstands the rationale of discounts.
•
For example, let us consider a case where H is retaining pension assets valued at £100,000 and
in lieu W is retaining by way of offset the equity in the FMH, also valued at £100,000, and this
equity in the FMH meets a very basic housing need. Is not W’s capital she received by way of
offset equally as illiquid as H’s pension fund? If so, it could perhaps be argued that the
discount should be 0%.
•
At the other end of the spectrum, take a case where W is to receive £1m in cash by way of
offset, and income needs (generously interpreted) have already been met. Such a sum is
replete with utility and tax arguments, and thus perhaps the discount will be significant.
Unless the pensions expert is to be burdened with arguments about the nature of the offset assets,
needs, and the other (non-pension) aspects of the settlement, any expert who understands the
premise of discounts should recognise that pontification of the quantum of discount is outside their
knowledge and area of expertise. Lawyers should also recognise that a formulaic approach to
quantifying the discount is very difficult.
So perhaps as far as quantifying the discount to be applied when offsetting it is appropriate to adopt
a consistent approach, which would be:
(1)
When dealing with a case like SJ v RA (DC funds treated like a bank balance), the arguments
for discount are in effect automatically dealt with in the approach adopted and require no
further consideration.
(2)
When dealing with DB schemes, the pension experts should not be expected to quantify, as
they are unlikely to be aware of all of the facts which would affect the discount.
(3)
The lawyers should realise that a formulaic approach misses the raison d’être of discounts.
Such an approach does not give a formulaic basis for discount, but very firmly establishes that it is
for the lawyers to argue over, and quite frankly, the Pensions Experts should shut up on this issue.
© LexisNexis and George Mathieson
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Conclusion
In February 2013, whilst addressing the annual dinner of the FLBA, the President of the Family
Division touched on the problems of Litigants in Person. Sir James Munby said, ‘The courts will have
to identify innovative ways of handing large numbers of litigants in person; the legal profession will
have to think of innovative ways to assist those who no longer have public funding.’ If we as experts,
both legal and pensions, are struggling with the concept of offsetting, what hope is there for the
thousands of litigants in person going through the courts?
As part of that call for ‘innovative ways’, we need a serious high level debate between all interested
parties on the subject of valuing pensions for offsetting. Writing articles in Family Law is all well and
good, but it does not allow for a rigorous cross-examination and defence of the arguments. If such a
debate between all of the interested parties can result in greater commonality of approach between
the various positions of the various experts, and greater commonality of approach between the
experts, Judiciary, and lawyers, then the current wholly unsatisfactory Lottery of Outcome, and the
comments of Sir Peter Singer, 5 will become issues of the past.
I am ‘up for’ such a debate/working party and extend an invitation to others including barristers who
practice regularly in this field, a judge or judges who sit in one of the higher courts, solicitors, and
other pensions experts to help me move this debate forwards towards a ‘consistent’ approach to
pensions (dependent upon the types of pensions involved) which I believe not only to be
‘appropriate’, but also highly desirable. The recent excellent work undertaken by the Family Justice
Council concerning needs in financial remedy cases might serve as a model and provide a forum for
further debate.
I am grateful to Mr Rhys Taylor of 30 Park Place, Cardiff and 36 Family for reviewing a draft of this
paper and for the observations of Ms Beverley Morris of Divorce and Family Law Practice. I also
thank Miles Hendy of Fraser Heath who is largely responsible for producing the article WS v WS:
Pensions experts’ review, which many experts were happy to endorse. Any mistakes in this paper
however, remain mine.
5
‘I am aware from my general reading that there is at present debate but as yet no conclusion on precisely this
topic of appropriately arriving at an offsetting figure. I am not aware from my own knowledge nor have I
researched what the competing methods might be. I am thus left in the unsatisfactory position where I must
alight upon an amount which will necessarily be arbitrary.’
© LexisNexis and George Mathieson
13