Because of the complexity of the Welfare Reform and Pensions Bill, pension sharing is not expected to come into force until the end of 2000 at the earliest. Until then, divorcing couples, can use "offsetting" or "earmarking" as a means of accounting for pension rights in financial settlements on divorce or judicial separation.
In 1973, the Matrimonial Causes Act allowed courts to consider pension rights in divorce settlements, but courts could only offset the value of pension rights against other matrimonial property. For instance, a divorcing mother with children might keep the house and offset this against the husband keeping his pension.
Courts could not order pension schemes to pay divorced wives a pension, and it was often difficult to obtain accurate information about the value of the member spouse's (usually the husband's) pension.
The 1995 Pensions Act introduced provisions for courts to earmark the member spouse's pension so that payment of some or all of this pension could be made to the non-member spouse (usually the wife) on the member's retirement.
Earmarking orders can also be used to order payment to the divorced wife of some or all of the maximum lump sum available on the ex-husband's retirement and the payment of death-in-service benefits to the ex-wife on his death.
But earmarking poses a number of problems, particularly in how the pension benefits should be valued. Earmarking also precludes a clean break between the divorcing couple, as the ex-wife remains linked to her former husband until his retirement. Furthermore, the divorced wife forfeits any right to her ex-husband's pension on his death or if she remarries.
For a young divorcee, the likelihood that she will remarry is quite high and her financial settlement should account for this. A divorcee can also take out insurance against her ex-husband dying before her.
Another problem with earmarking orders is that many are poorly drafted because few matrimonial lawyers have pensions expertise. The wife should ensure that her husband's pension is correctly valued by taking specialist advice from a pensions lawyer or an actuary. Otherwise, she may find that the earmarking order is worthless because it is not in accordance with the pension scheme's rules.
Pension sharing, by contrast, will allow occupational pension scheme trustees to give a divorced wife a "credit" in her ex-husband's pension scheme at the time of the divorce, effectively making her a deferred member of the scheme while a debit is made against the ex-husband's pension to reflect this.
The divorced wife can then choose to leave the deferred pension in her former husband's scheme or transfer it to an occupational or personal pension scheme of her own. Where the divorced wife has no existing pension arrangements of her own, or where her ex-husband was a member of an unfunded scheme (for instance, a public-sector scheme), she will have to leave the benefits in her ex-husband's scheme.
Most pension benefits can be shared in this way, except the basic state pension, because a divorcee can already claim a state pension based on her former husband's national insurance contributions.
For pension-sharing purposes, the pension must be valued on "the cash- equivalent transfer value" (CETV), which values the pension as though the member were leaving the scheme at the time of the divorce. This method is not entirely satisfactory, as it does not take into account potential salary and promotion increases before retirement, any surplus or deficit in the scheme, discretionary increases, death benefits or guaranteed annuity options (the latter in personal pensions).
Although the CETV is the only figure that can be used in court, divorcing wives' lawyers can use their own figures when negotiating the financial settlement. Any administrative costs incurred by pension sharing will be passed on to the divorcing couple, either directly or via reduced pension benefits.
The ex-husband should consider topping up his pension to compensate for the debit made against his scheme benefits.
Pension sharing is not retrospective, so it cannot be applied to any divorce settlements effected before the Welfare Reform and Pensions Bill becomes law. There is also no compulsion on divorcing couples to use pension sharing. Some may find earmarking or offsetting more appropriate.
"This is an area where people must take great care. Their long-term standard of living is at stake," says Jane Marshall, pensions and divorce specialist at law firm Hammond Suddards.