Pensions on divorce - 'Moving Target Syndrome'

A friend of mine recently got married in Venice. I was lucky enough to be invited, and it was an amazing event. Perversely, since coming back, it feels as though all I have looked at are divorce queries. Not an omen, I hope.

While dealing with one case, I also stumbled across the most recent set of statistics on marriage and divorce in England and Wales from the Office of National Statistics (ONS).

The main statistic to jump out at me was that the mean age at divorce has increased from around 38 in the mid-1980s to around 45 in the mid-2010s, and those aged between 40 and 49 are now the most prolific divorcers.

This is also an age cohort where people are entering a crucial phase in their retirement planning in the lead-up to the minimum pension age of 55.

And those individuals facing divorce in their mid-40s (and those advising them) will be dealing with larger figures in terms of personal wealth, assets and pension savings than they would have in their 30s.

Given the greater wealth held by older divorcers, it’s important to get things right first time, particularly where pensions are involved.

‘Moving Target Syndrome’

The most common method of dealing with a pension on divorce is a Pension Sharing Order (PSO). Under a PSO, the court will order that a share of a pension arrangement belonging to Spouse A be transferred to Spouse B. The monetary value of the share, known as a ‘pension credit’, is then calculated by reference to a percentage contained in the annex to the PSO.

Pension sharing is not always a swift process. The rules allow the court to carry out its valuation process up to a year before the date of petition. This is the valuation from which the percentage is initially calculated.

But the PSO will not come into effect until the later of the decree absolute or 28 days after the PSO is granted.

The pension provider may then require other documentation such as transfer paperwork. And it’s not uncommon that even at this stage the former spouse may not know where they want to transfer their pension credit.

Finally, the provider then has a four-month implementation period in which to settle the PSO. They will need to revalue the pension scheme to calculate the monetary value of the pension credit, and the rules allow them to use a valuation from any date within that four-month period.

So the mechanics of the process mean that the scheme administrator might not calculate the actual monetary value of the pension credit until much further down the line. At which point, the valuation may be quite different to the valuation used during the court proceedings.

This can be further exacerbated if the member is in a self-invested scheme, such as a SIPP or a SSAS, which allows the member to invest in a range of investments, some of which may be more speculative and liable to fluctuate in value.

The end result is that the former spouse might receive a markedly different amount to the figure originally intended, and this can seriously distort the value of the overall divorce settlement – an issue sometimes referred to as ‘moving target syndrome’.

Here are some figures to illustrate the effect.

Example 1 - After one year

Brad and Angelina have got divorced. Angelina is getting a share of Brad’s SIPP.

1 February 2015 – Initial valuation – Brad’s SIPP valued at £350,000
15 December 2015 – PSO granted for 50% (£175,000) based on initial valuation
20 December 2015 – Decree absolute granted
10 January 2016 – Documents sent to pension provider
20 February 2016 – Valuation day – SIPP valued at £290,000
26 February 2016 – Transfer of £145,000 to Angelina’s pension (i.e. 50% of £290,000)

In this scenario, Angelina was expecting a pension share worth £175,000. However, she only receives £145,000.

In some cases, and for whatever reasons, the paperwork for a PSO might not be sent to the provider until several years after the divorce. This can magnify the effect of moving target syndrome.

Let’s assume that Brad had made some very speculative investment choices since the initial valuation. Several years later and his SIPP has gone down to £200,000 when the pension credit is calculated. This leaves Angelina with a pension share of only £100,000.

What can you do to mitigate this?

Historically, it was possible to draft the order so it read, “such percentage as will give effect to a pension credit of £XXXX”. This aimed to fix the pension credit at the value initially agreed on. Thanks to the High Court case of H v H [2009] EWHC 3739 (Fam), however, this is no longer possible.

It therefore comes down to being as practical as possible. Firstly, aim to use a valuation from a date as close to the court proceedings as possible. This will mean that any other calculations as part of the overall divorce settlement will take this more up-to-date valuation into account rather than a figure from several months previously.

Next, you should aim to get the case processed as soon as possible. The rules state that PSOs must be completed within a four-month implementation period. However, rulings from the Pensions Ombudsman have made it clear that providers must still act as soon as they are reasonably able to. In other words, they cannot leave it to the last minute. As such, it is probable that the provider will want to process the PSO as soon as they can.

Depending on their own internal processes, it may also be possible to ask the provider to use a valuation towards the beginning of the implementation period.

If you are advising the former spouse, it may be prudent to arrive at a plan early on in terms of where to transfer the pension share. If you are advising the member, the former spouse’s plans may or may not be under your control! However, you can still consider whether it is appropriate to switch some or all investments into a less volatile asset class.

All of these aim to reduce the likelihood of the valuation being allowed to change significantly between the start and end of the process.

Example 2 – Reduce the delay

Let’s take another look at the figures. In this situation, Brad’s adviser obtains a valuation a couple of weeks before the court proceedings.

20 November 2015 – Initial valuation – Brad’s SIPP valued at £300,000
15 December 2015 – PSO for 50% (£150,000) based on initial valuation
20 December 2015 – Decree absolute granted
10 January 2016 – Documents sent to provider
20 February 2016 – Valuation day – SIPP valued at £290,000
26 February 2016 – Transfer of £145,000 to Angelina’s pension (i.e. 50% of £290,000)

In this scenario, Angelina has still only received £145,000. However, the other cash and property rights transferred into her name as part of the settlement will take this lower figure into account. Overall, Angelina receives what she was expecting and what the two parties had agreed on.

What else to bear in mind?

As a final option, it’s worth noting that PSOs operate slightly differently in Scotland. Under Scottish law, the pension credit can be expressed in the order as a monetary amount. This means that the former spouse will get the same figure at implementation as agreed at the outset.

While this delivers certainty for the former spouse, the member takes on all of the risk for any fund value fluctuations, which some might perceive to be unfair.

Example 3 – Scotland

Let’s imagine Brad and Angelina had moved to Scotland several years previously.

1 February 2015 – Initial valuation – Brad’s SIPP valued at £350,000
15 December 2015 – PSO granted for 50% (£175,000) based on initial valuation
20 December 2015 – Decree of divorce granted
10 January 2016 – Documents sent to provider
20 February 2016 – Valuation day – SIPP valued at £290,000
26 February 2016 – Transfer of £175,000 to Angelina’s pension

Angelina has received the £175,000 she was expecting at the outset. Brad’s fund value has dipped, however, and the end result is that he has lost 60% of his SIPP rather than 50%.

Overall, a PSO is a blunt instrument that sometimes struggles to cope with the nuances and complexities of modern retirement products. But, as with many areas of financial planning, it is an area where a little bit of knowledge may go a long way to ensuring that the process delivers an outcome that is equitable and predictable for both parties.

Technical Resources Consultant

After completing his post-graduate studies at Lancaster University, Martin spent two years working for a leading insurance company before joining AJ Bell in April 2007. Martin worked initially on the AJ Bell Investcentre product before moving to a technical role in 2009.

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