Statistics from the Office for National Statistics (ONS) indicate that approximately one in five divorces in England and Wales occur where the individual's previous marital status was divorced. Although these statistics might seem unremarkable in isolation, an upward trend (2010-19 increase: 4.9% men / 2.6% women) points toward increasingly complex settlement arrangements where multiple prior marriages and family units must be considered. Factor in an ageing divorce profile (2010-19 increase >55 years old: 70% men / 87% women), and, unsurprisingly, pension-related matrimonial Professional Indemnity (PI) claims are on the increase. Most PI insurers have yet to generally formalise guidance regarding pension sharing reports, but whether the widely perceived yardstick of a £1m fund is still appropriate to recommend a pension actuary report is under debate.  PI insurers who have reacted are asking firms if they advise clients with pensions worth more than £100,000 to obtain a report from a pensions expert.

Pensions can be one of the most valuable family assets, and the least understood. The Pension Advisory Group warns lawyers of the "need to take care not to stray into giving financial advice". Section 2.15 of the Guide to the Treatment of Pensions on Divorce states:

"Remember lawyers are not regulated, qualified or insured to give financial advice: ticking the box for an external or internal transfer where there is an option would amount to financial advice - independent regulated financial advice must be obtained by the client."

There are two main obstacles when recommending a pension actuary report.

  • Additional costs:  A cursory search on the Internet shows costs of £1,500 to £2,000 as a general rule of thumb. However, the costs of such reports will inevitably come from the aggregate matrimonial assets and open up another area of hard-to-get expert evidence, for which permission might be required and further dispute introduced. Although it's helpful that these figures are generally available, thus managing the client's initial expectations, it's really up to the actuary to justify its level of fees. 
  • Delays:  Five to six months is commonly quoted as the lead-in time for completing a pensions report, although the performance of the pension administrators can heavily influence this timescale. Given the timeframe, the need for a pension report should be flagged as soon as possible after instructions are received.

Only a Court can issue pension sharing orders. Every workplace pension scheme will need to be considered, but state pensions are also subject to pension sharing orders. Of course, both parties to a divorce will have a state pension entitlement, known as the basic State Pension, but anyone who receives an additional State Pension will be expected to declare this for the purpose of a pension sharing order. The Matrimonial Causes Act 1973 sets out more information on pension sharing orders. Section 25 of the Act sets out the matters to which a Court is to have regard when deciding whether to make a pension sharing order and include; the income, earning capacity, property and any other financial resources of both parties together with their respective financial needs, the standard of living enjoyed by the family before the marital breakdown and the ages of both husband and wife at the time of the divorce.  With so many variables at stake, pension sharing orders are not as straightforward as they sound.

In fact, it is increasingly difficult for the courts and practitioners to balance and forecast pensions assets and future pension assets against the clean break principle that society and the courts prefer.

In practical terms, in most cases, if a husband and wife agree that one spouse’s pension is to be shared, then a Pension Sharing Order will need to be made by the Family Court.  There is no legal requirement for pensions to be shared 50/50, and in the absence of an agreement between the Parties, the Courts will be asked to consider an appropriate pension sharing order based on the merits of each individual case.

When considering pensions in the context of a divorce settlement, an additional resource that should not be overlooked is the client's Independent Financial Advisor (IFA) who, particularly in the event of a collaborative divorce, can professionally value pensions, help complete the necessary paperwork and, in some cases, work for both parties.  Although, it has to be borne in mind that IFAs are not actuaries and pension forecasts are notoriously difficult to corroborate.

To obtain an insider view of the challenges relating to pension sharing, we canvassed opinions to form a Financial Advisor’s perspective of the issues relating to pension sharing.  In summary:

  • Applying an arbitrary value yardstick is unwise and, in many cases, difficult to implement until establishing a realistic value of the joint pension pot. Generally speaking, individuals have little idea about the actual value of their pension benefits, particularly with Defined Benefit schemes involved. This oversight can be exacerbated by the legacy left by employers enrolling employees into Defined Benefit schemes without any real explanation of the scheme benefits beyond an explanatory brochure.
    In some cases, individuals who have forgotten about Defined Benefit schemes, possibly from employment many years ago, are surprised when reminded of them and learn how valuable they are. Even with some knowledge of a Defined Benefit pension, there can be a general perception that the value will be insignificant as it relates to past earnings.
  • Where there are benefits that provide a guaranteed level of income and increases in dependents’ pensions, these are likely to be valuable, arguably more than the transfer value offered. Pension benefits from funds that do not provide a guaranteed level of income or increase in payment can be more easily valued and taken into account with the divorcing parties’ other wealth. It is genuinely hard for individuals to understand how valuable the benefits they are potentially giving up could be worth, regarding both their own and their dependents’ life expectancy, even with specific financial advice. Solicitors need to fully understand what pension benefits the divorcing parties have, as these benefits might form a substantial proportion of the divorcing parties’ wealth.
  • The next stage is to decide whether further analysis is needed to balance the interests of the divorcing parties. Where benefits are in place, and there is a desire for the divorcing parties to be in equal positions, a secondary pension report should be considered, most likely with actuarial input, to fairly value the income streams concerned about the total asset pool. The costs of ascertaining accurately what pension benefits exist, including actuarial reports to value the income stream and overall asset pool fairly, thus making complaints far less likely, is money well spent.

In an article titled "The 'irreversible' pension mistake costing women £1bn each year", published by The Telegraph in January 2022, they state that "nearly half of divorced people admitted to not discussing pensions during their proceedings" and quotes a divorcee saying she "bitterly resents the outcome of her divorce 20 years ago...". Here lie significant problems for PI insurers regarding the sums of money involved and the potential delay in challenges being made by disgruntled clients. Faced with 40-year high inflation and the prospect of falling into poverty in retirement, it's unsurprising that these headlines are fuelling dissatisfaction with the matrimonial advice received perhaps even decades ago.

Indeed, PI Insurers are seeing a rise in the number of professional negligence claims against solicitors by disgruntled former clients who, years after their divorce settlements, are seeking compensation for perceived under-valued divorce settlements. It is perhaps important to remember that the limitation period is six years from which the cause of action accrued or three years from the date of knowledge. Whilst the six-year rule is seemingly straight forward enough, it seems claimants’ solicitors are seeking to rely more on their client’s ‘date of knowledge’ where the settlements were agreed more than six years ago, on the basis that the husband or wife did not realise until some several years later that they could have claimed for more.  PI insurers need to be alive to this growing trend. Reynolds Colman Bradley LLP is dealing with one such case notified to its PI insurer. The Claimant (W) and her former husband (H) divorced in 2010 and attended a Financial Dispute Resolution Hearing in 2012.  Under the financial settlement, W received a proportion of the family matrimonial home, the couple’s home-grown business and a lump sum of H’s pension.  However, it was not until some nine years later that W sent a Letter of Claim against her former solicitors, who represented her during the divorce settlement, claiming for the loss of chance of recovering a more advantageous settlement.  

Whilst each case will turn on its own facts, given the potential value of assets in divorce settlements, it is an area which would benefit from expert advice from specialist divorce Counsel. Adding expert fees may be disproportionate in some circumstances, but it is important for solicitors to take clear instructions, document these and to consider all the options.

Undoubtedly, it's an overused analogy, but PI insurers could be facing the perfect storm of large losses coupled with the possible complication that the firm performed the legal work many years ago. Long-tail liabilities make claims investigation and loss assessment more difficult.

Although insurers are keeping a careful watching brief, an accurate picture of the frequency and severity of pension-related losses will take some time to emerge. When a definitive trend appears, insurers will undoubtedly respond with targeted underwriting strategies and risk management recommendations. In the meantime, firms should carefully consider their policy and procedures regarding pension sharing report recommendations and signposting to specialist service providers. Where clients refuse to engage with an actuary or suitable qualified IFA, you should insist on written instructions from the client confirming their decision.

CONTACT US

Caspar Rogers
E crogers@paragonbrokers.com
T +44 (0)20 7280 8209
M +44 (0)7587 183486

This article is published without responsibility on the part of the author or publishers for any loss occasioned by any person acting or refraining from action as a result of any views expressed in the article. Specific risk management advice requires detailed knowledge and analysis of firm and practice area facts relating to the risk. The information included in this article cannot and does not attempt to satisfy this requirement for any of its readers.