As this week’s International Women’s Day focuses our attention on some of the ways in which women are impacted financially, recent research from Steve Webb and family law Barrister Rhys Webb highlight upcoming changes to divorce legislation and share their concerns that divorcing women – as well as some men – might be adversely affected when pension wealth is shared as part of the divorce process
April 2022 will see the biggest shake-up in divorce law in half a century, with couples now able to secure a ‘no fault’ divorce within six months of first applying. But concerns have been expressed that a process which is designed to be largely online, including serving of divorce papers by email by default, could lead to even fewer cases where pension wealth is fairly shared at the time of the divorce.
Under current law, a divorce can only be granted on the basis of the ‘irretrievable breakdown’ of a marriage. A period of separation of at least two years is regarded as sufficient evidence, provided both parties agree. But to divorce more quickly than this currently requires one spouse to demonstrate ‘fault’ on the part of the other spouse – for example, because of alleged adultery.
The April 2022 changes will remove the requirement for one party to prove ‘fault’. Key features of the new system are:
- Divorce papers can be filed by one or both members of a couple; this has to be done online by default;
- Where one party files for divorce, they then have 28 days to notify the other party; this notification should be by email by default, although a printed confirmation of the sent email should also be sent through the post;
- Twenty weeks after first filing, an application can be made for a ‘conditional order’ for divorce (currently called ‘decree nisi’) and after 26 weeks, an application can be made for a ‘final order’ for divorce (currently called ‘decree absolute’;
- Because divorce orders are granted on a ‘no fault’ basis, a party who does not wish the divorce to go ahead can generally do little to stop it unless proper procedure has not been followed.
- Financial matters are dealt with by a separate and parallel process which can sometimes continue after the final order has been granted;
The move to ‘no fault’ divorce has been widely welcomed and is designed to streamline the divorce process and to reduce the extent to which divorce is an acrimonious process with one party being required to demonstrate ‘fault’ if they want to move ahead with a divorce. But there are concerns that the new divorce law, coupled with the increased move to an online process which is already underway, could further undermine the effective sharing of pension wealth at divorce.
A new paper: “’You’ve got mail’ – the new divorce law and its potential impact on the sharing of pensions in England and Wales”, looks into this issue in more detail. The paper notes that:
- There are three main ways in which pension wealth can be taken into account as part of a financial settlement at divorce:
- Pension ‘sharing’ where a formal court order is required and where one spouse is awarded a share of the pension of the other spouse, ending up with a pension in their own right and in their own name;
- Pension ‘attachment’ or earmarking, where one spouse is ordered to receive a share of the pension of the other spouse when it comes into payment;
- Pension offsetting, where pension wealth is taken into account during the settlement but where one spouse agrees to accept a greater share of non-pension assets (eg a bigger share of a house) in return for foregoing a share of the pension; this process does not require a court order.
The paper points out that financial orders are only made in around 1 in 3 divorces, and not all of these financial orders include pension orders. This means that formal orders in respect of pensions only apply in a minority of cases. Whilst it is possible that in the remainder of cases pensions are being fully and fairly shared by offsetting against other assets, there are many reasons why this is often not likely to be the case.
- Divorcing spouses may under-estimate the potential value of pension wealth; for example, where one spouse has long service in a Defined Benefit pension scheme, these pension rights may be worth far more than the family home, but this point may not be well understood;
- Divorcing couples may be looking for a swift divorce, especially if attempts are being made not to escalate the temperature of poor relationships, and there may be little focus on areas such as pensions which can be complex and technical and require specialist knowledge;
- Especially where children are involved, the party with the lower level of pension wealth (usually the wife) may be more focused on other priorities such as somewhere to live and financial security and support for children and may be less focused on ensuring that pension wealth is properly included in any settlement.
All of these are problems of the current system, and research indicates that divorced women often end up with very low levels of pension provision in retirement as a result.
However, the authors raise the concern that the new divorce process could make matters worse. In some cases, a spouse may receive notice that a divorce application has been made just a few months before the court is asked to grant the first divorce order. They may be dismayed to discover that there is little or nothing they can do to stop or delay the process if the other partner is insistent on going ahead. They will have to deal with a range of practical issues including care of any children, impact on living arrangements and short-term financial support post-divorce. Against this backdrop, taking time to make sure pension rights are included in any settlement and properly valued may be a low priority. They may also be reluctant to raise pension issues for fear of being seen to be ‘obstructive’ or ‘difficult’, in a new system designed to reduce conflict and the need to prove fault.
The authors conclude their paper by calling for much greater research and monitoring into what happens during the divorce process with regard to taking account of pension wealth, and for close scrutiny by the Ministry of Justice into whether attitudes and outcomes on pensions change as a result of the new divorce process.
Commenting, LCP partner and former pensions minister Steve Webb said:
“One group currently at high risk of retirement poverty is divorced women. In large part this is because relatively little attention is often given at the time of divorce to a financial settlement which gives proper weight to pension wealth. It is entirely understandable that divorcing couples focus on other matters, but the risk is that people simply do not understand the value of pensions. Whilst there is much to commend the new divorce law, it would be very unfortunate if a by-product was that even fewer divorces were accompanied by a fair sharing of the couple’s overall wealth, and in particular of pensions”.
Co-author Rhys Taylor, a family law barrister specialising in pensions on divorce said:
“I very much welcome the new divorce law, but the family justice system needs to be astute to avoid the law of unintended consequences. So often pensions are the last thing anyone really wants to think about, especially on divorce. Care needs to be taken to ensure that the fair distribution of pension wealth on divorce is not overlooked in this brave new era.”
Steve Webb is a partner at LCP. Between 2010 and 2015 he was Minister of State for Pensions, overseeing the design of the new state pension system and the successful implementation of automatic enrolment. Prior to joining LCP in 2020 he was Director of Policy at mutual insurer Royal London.
Rhys Taylor is a barrister at The 36 Group, Gray’s Inn, London. He is a member of the Family Procedure Rule Committee, a committee member of the Family Law Bar Association and a member of the Pension Advisory Group. He is co-author of “Pensions on Divorce: A Practitioner’s Handbook” (Lexis 3rd edition, Hay, Hess, Lockett and Taylor). Rhys is also a Recorder.