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Breaking up is hard to do when a pension is at stake

Attempts to legislate for a fair split of funds when couples divorce have become bogged down.
Divorce is by definition a very stressful experience, complicated by the financial worries modern break-up involves. Unfortunately the second reading of the Family Law Bill just before Easter will have increased stress levels still further. It should have tackled the thorny question of pension-splitting at the time of divorce. But the matter is still not at all clear and it seems likely that it will be at least a further two years before the result of a new round of consultations is known.

Pressure groups like "Fairshares" have campaigned for pension funds to be split at the time of divorce so that both partners have separate entitlements which they can then manage to suit their own requirements.

The Government has argued against the principle of splitting, mainly on the grounds of cost.

After a vote in the House of Lords last year, however, the Government appeared to have accepted the principle, only to cast fresh doubt on its intentions last week. Effectively it has delayed the introduction of the 1995 Pensions Act until July this year and postponed any decision on pension splitting for at least two years and maybe longer. In the meantime, divorce settlements will continue to try to trade off actual assets against future pension entitlements in order to reach a satisfactory settlement.

Until the situation is clarified Fairshares has advised anyone about to embark on divorce proceedings to wait until July before taking any action. After this date the group maintains that any new petition will be able to take advantage of the "earmarking" provisions, but this does not solve the problem of achieving fair and final financial settlements which include a proper treatment of the pension issue.

This has a long and complex history. The courts have been able since 1973 to order maintenance payments to an ex-spouse, payable from the former partner's income, including pension. However district judges have hitherto dealt with matrimonial pension rights only if the subject is raised before them in evidence. The new Pensions Act will oblige solicitors to bring the subject before the courts in all divorce cases where the pension is due to come into payment after April 5, 1997.

From July courts will also be able to "earmark" future pension rights and order a pension scheme to pay the relevant amount from the member's pension to the ex-spouse, including any lump sums associated with it. But only after he retires.

There are obvious drawbacks to this state of affairs, especially if the pension holder remarries or dies before retiring. It reintroduces the principle of delaying final settlements and reverses the thrust of the clean-break policy which has been the basis of legal guidance for the past decade. The adminstrative burden of keeping track of ex-spouses over a long period could also pose costly and difficult problems for pension fund trustees and administrators.

For example, pension schemes often provide an element of life assurance to cover the member if they die before retirement. Such a lump sum will often provide the difference between achieving a reasonable standard of living or struggling on a limited budget.

Once a spouse becomes an ex-spouse, however, the pension fund administrators could ignore them completely and any benefit payable under this heading will pass directly to the estate of the deceased former spouse.

Although there still seems to be agreement in principle to provide legislation to enable the basic theory of pension-splitting at the time of divorce, the Government has now decided to publish a Green Paper, hopefully by the summer, which will set out further options on how this can be done. The implementation of these could still be some years away.

The most important issue is fairness - whatever the power struggle within the marriage. Equally, the division of a pension or any other major asset, should be carried out as fairly as possible. This means giving as little chance as possible that either partner can do anything in the interim negotiation period to endanger the final "fair" outcome.

The longer this interim period and, more relevantly, the longer the delay to the Government's decision-making process, the bigger the chance of corruption - assets can all too easily be dissipated, especially by a bitter and stressed individual who is ready for a fight.

Many people are astonished to realise that the value of the pension is often greater than the equity of their property, but not many realise how easily the assets in the pension can disappear (in one individual's favour), unlike the bricks and mortar equivalent. The new Income Withdrawal Plans are a good example - giving a pension policyholder the opportunity to strip large chunks of income from their fund, as well as some tax-free cash before the splitting takes place.

In the meantime Seymour Smith an association of lawyers, pension experts and actuaries, has launched a personalised report service which provides a value for the pension of each partner which can be taken into account at the time of the divorce. These independent reports are based on sound legal and actuarial parameters and, importantly, they can form part of the crucial "court bundle" without any amendment. They draw attention to the financial assumptions as well as to potential pitfalls and shortcomings. Bearing in mind the number of people who also depend on legal aid, the report service also provides an alternative for cases where the amounts at issue are relatively modest. Not surprisingly, the reports have quickly been established as a standard in courts.

The reports may not be the definitive solution to solving the problems of complexity and legislation, but for many people who are suffering with the prospect of another two years of uncertainty, we think our efforts will go a long way towards reducing the stress and providing the essential guidance needed.

Ann Kosniowska is project director of Seymour Smith. Tel: 01203 697697.