A report in 2019 transformed the way in which pensions are treated in financial settlements. This has led to changes in assessing equality in how pension pots are divided, either by income and capital, in the event of a settlement. The author explains the current situation and what's at stake.

In this article Victoria Cannon, partner and head of family at law firm Hugh James, talks about the importance of cash equivalent transfer value (CETV) in divorce cases where pensions are a significant sum.

Cannon, who has written before in these pages (see an example), says that many people are unaware of how significant pensions can be in divorce settlements, particularly in military families or those with public service pensions. In fact, pensions may be the largest asset to be divided, sometimes even more valuable than property.

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The approach before the Pensions Advisory Group Report
Before the introduction of the Pensions Advisory Group (PAG) guidance in 2019, pension negotiations were often imprecise. Actuaries were rarely instructed unless pensions were large, mainly due to the high costs involved. As a result, pensions were often treated differently from other assets, leading to what was frequently referred to as comparing "apples and pears.” Calculations for pension sharing orders were basic.

Courts would skim off periods of pre-marriage accrual or post-separation contributions, then calculate the remaining portion as a percentage of the overall pension. In some cases, if one party wanted to retain more capital, a rough "offset" figure was calculated to allow one party to keep a larger share of the pension in exchange for a greater portion of other assets.

The PAG Report – a new era
In 2019, the PAG released its much-anticipated report, chaired by Francis J and HHJ Hess, both well-regarded for their expertise in financial remedy cases. This report transformed the way in which pensions were treated during financial settlements, providing clear guidance for practitioners. It addressed whether pensions should be divided based on capital value or income, and whether there should be ring-fencing for pre-marriage accrual or post-separation periods. It also provided clarity on the use of offsetting.

Crucially, the report emphasised that in "needs" cases – where there isn’t enough capital or income to satisfy both parties' requirements – pension sharing should focus on ensuring equal income at a specific point in the future. For example, in W v H, HHJ Hess made it clear that “one size does not fit all,” indicating that where pensions are small and the parties are young, division by capital value is appropriate.

However, for medium to large pensions in "needs" cases where parties are older, dividing by income may result in a fairer outcome.

HHJ Hess also highlighted the risks of using a straight-line approach to ring-fencing pre- or post-marriage pension accrual. In fact, following PAG, apportionment has become less common, particularly in "needs" cases. As clarified in RH v SV (Pension Apportionment: Reasons), the court will generally place less emphasis on contribution-based arguments when needs are the priority.

The role of experts
Since the introduction of the PAG report, the norm has shifted towards relying on actuarial expertise to assess equality in pension division, whether by capital or income. For pensions exceeding £100,000 ($130,910), especially those involving defined benefits, an actuarial report is often recommended. In cases involving public service or NHS pensions, the McCloud judgement has led to delays in obtaining accurate CETVs, but these are gradually becoming available.

Conclusion
For anyone facing divorce, it’s essential to give pensions the attention they deserve. The involvement of pension experts, or PODEs (Pension on Divorce Experts), can be invaluable in determining the fairest way to divide pension assets – whether that’s through capital, income, or offsetting. However, as with all financial matters, much depends on the specifics of the case, the advocacy presented, and, ultimately, the discretion of the judge.