Why is pension sharing necessary?
Providing for retirement is very important to many people, and the pension can therefore be one of the most substantial assets. The Welfare Reform and Pensions Act 1999 introduced a new method of dealing with pension rights on divorce, known as “pension sharing”. It was made available in all divorce and nullity proceedings, which began on or after 1 December 2000.
Pension sharing is available alongside the former methods of dealing with pensions on divorce such as offsetting and earmarking. These former methods are proving to be less popular as they neither provide a satisfactory way of giving ex-spouses a fair share of the pension entitlements, nor in the case of earmarking do they provide a clean break between the parties.
What does the Act do?
The Act was designed to provide a clean break, so that the pension is split at the time of the divorce, with the ex-spouse given a percentage share of the pension benefits of their former spouse. When the court makes a pension sharing order, the ex-spouse must be offered suitable pension provision. This could be an internal transfer where benefits are provided in the spouse’s scheme or external, which means that a transfer will be paid to a suitable pension scheme capable of receiving the transfer. Where benefits are set up within the spouse’s scheme, those benefits must be treated in the same way as those for early leavers.
What do HR personnel need to know?
As a life-changing event, divorce may have implications on the employee’s pension rights, which HR personnel need to appreciate. Where an occupational pension scheme is involved the responsibility for communicating information in relation to pension rights on divorce will lie ultimately with a scheme’s trustees.
As you may be aware life assurance benefits are often paid under discretionary trust provisions of schemes. Members are usually required to complete a nomination form that identifies the person(s) the member wishes to receive such benefit, in the event of their death. The form is not legally binding but trustees will consider its contents when exercising their discretion under the trust provisions. Therefore it is likely that on divorce a member will want to refer to someone other than his ex-spouse in the nomination form. Often it will be the responsibility of HR to send out nomination reminders to members.
In addition there are further complicated rules on the disclosure of information to divorcing parties that must be provided within strict time limits (some as short as 21 days). The trustees of occupational pension schemes will have made a number of policy decisions in relation to pension sharing, such as whether to offer ex-spouses an internal or external transfer and where required to amend their scheme’s trust documentation to adopt the pension sharing divorce legislation at the earliest opportunity.
Who will pay for the administration involved in pension sharing orders?
There is a considerable amount of administration involved in arranging and setting up pension sharing orders, for example the provision of a valuation of accrued rights. The Act states that schemes should not bear the administration costs and it would clearly be unfair for schemes to meet such costs, especially with the current economic climate leading to underfunded schemes. Trustees may therefore charge the parties a reasonable amount for the administration. These charges must be communicated to the concerned parties at the outset and may be required to be paid up-front before the pension share goes ahead. The National Association of Pension Funds has recommended a range of maximum charges of £750 – £1,000 + VAT per pension sharing order.
The actual pension sharing process should, in theory, become clockwork. However, HR personnel should be aware that despite the number of decisions and changes that should be made to a scheme to deal with pension sharing, many occupational pension schemes are not able to deal with that first pension sharing order when it arrives in the post. Therefore it is advisable if you have not already received that first pension sharing order to give an indication to the trustees that an order is likely to be made so that they can be ready.
Maria Riccio, partner at Blake Lapthorn Linnell