Divorce, pensions and navigating a 50+ year old Act in HNW cases

Richard Kershaw, partner at Hunters Law LLP, outlines how financial settlements on divorce rely on specialist input, with pensions often requiring Pensions on Divorce Experts, complex assets demanding forensic and tax accountants, and IFAs supporting long-term cash-flow planning, particularly in high and ultra-high-net-worth cases under the Matrimonial Causes Act 1973.

The division of finances on divorce is governed by a 53-year-old Act of Parliament (the Matrimonial Causes Act 1973) and 50 + years of case law. There is no one size fits all approach to which fellow professionals we will need to consult, and yet in our HNW and UHNW world there are some common themes.

Pensions and PODEs

Pensions are frequently one of the most valuable assets in divorce, typically the second largest asset in a marriage after the family home.

Since 1 December 2000, the Family Court has had the power to order that a pension be shared with a spouse (or civil partner). Currently, and critically, pensions cannot be shared when cohabitees separate.

There is a reporting lag on the number of pension sharing orders approved by the court. In 2021, the last year for which combined figures are available, there were 113,505 divorces and 23,622 pension sharing orders, with the number of pensions shared reducing from 26,202 in 2021.

The only way in which a pension can be shared is by an order of the court. The order can be arrived at by agreement, after disclosure and negotiation, or imposed by a court at the end of a litigated process.

For anything other than very simple Defined Contribution pensions, or where the value of the pension assets is below £100,000 when a pension share may not be indicated at all, we instruct a Pensions on Divorce Expert (PODE) to advise on how the pension(s) should be shared. The PODE is invariably instructed as a Single Joint Expert (SJE) so that their report is (a) independent and (b) binding on the parties. Typically, a PODE will be instructed to advise on the appropriate percentage to be shared to produce equality of income in retirement.

The actual percentage in which the pension will be shared is a question for the court when looking at all of the statutory factors in the Matrimonial Causes Act 1973, which include the duration of the marriage, each parties’ age and earning capacity, contributions to the marriage (there can be no discrimination between financial and non-financial contributions) and future needs. The court is required to produce a result which achieves “fairness.”

It is settled case law that a pension which is “matrimonial”, so which has been built up during the marriage, should be shared equally between the parties. A pension which is part matrimonial and part non-matrimonial may be shared in different proportions. A pension which is 100% non-matrimonial may still be shared if the economically weaker party’s financial “needs” require that.

The court cannot make a pension sharing order against a foreign pension; nor can a pension sharing order made outside England and Wales be enforced here.

Accountants

It is crucial to understand the value of the parties’ assets before thought can be given to how those assets should be distributed. We instruct and work closely with forensic and tax accountants on a range of instructions, including in the last 18 months:

• Valuing a YouTube channel

• Valuing a spouse’s private equity co-investment and carried interest in a number of PE funds

• Advising on tax and liquidity in a closely held property company

• Advising on CGT issues across complex transfer scenarios

IFAs

Whilst family lawyers are familiar with the requirement to produce a budget for Form E disclosure purposes, there is a significant value-add for some clients in instructing an IFA to prepare more sophisticated cash-flow modelling.

IFAs often serve as an invaluable conduit in handing over a client at the end of a bruising negotiation, assisting the client to transition from a period of financial jeopardy to one of financial certainty.

By Richard Kershaw, Partner, Hunters Law LLP