The perils of pensions in a Scottish divorce: part 2 by Beverley Addison

pensions

Back in August 2015 my colleague Denise Laverty reported on the appeal judgment in a case called McDonald v Mc Donald.

Unsurprisingly Annie McDonald did indeed appeal and the Supreme Court has now ruled that the ‘period of membership’ to be used when apportioning pensions for the purposes of divorce should be  the whole period of the membership rather than just the  period of ‘active membership’. After a string of appeals, during which Scotland’s courts held that only the period of active (contributing) membership which should be taken into account, the decision provides some much needed clarity on an issue which has divided family lawyers for a number of years.

Background

Let’s briefly recap the history of the case. Thomas McDonald worked as a miner for British Coal. He joined their Pension Scheme on 11 December 1978. He married Annie McDonald on 22 March 1985. Five months later, on the 10 August 1985, he retired early on grounds of ill health and began to receive his pension.

The couple were married for 25 years and separated on 25 September 2010. As a result, Thomas’ pension scheme only received contributions for five months of their 25 year marriage For the remaining years Thomas was still a member of the scheme but a pensioner member as he was receiving his pension.

The dispute between them was what ‘period of membership’ counted for pension apportionment. Was it only the five months during which contributions were made to the scheme, or was it for the whole period of the marriage where Thomas continued to be a member, albeit only as a receiver of pensionable benefits?

The lower courts all found in favour of Thomas. However the Supreme Court has now decided that Annie McDonald’s interpretation of the legislation should be preferred.

The Decision

This appeal raised questions the interpretation of statute, both in relation to the 1985 Act and The Divorce etc. (Pensions) (Scotland) Regulations 2000 (“the 2000 Regulations”).

The apportionment of pensions has a prescribed formula for calculating how much of a pension value is attributed to the period of the marriage. It is contained within the 2000 Regulations as:

“A x B/C where – A is the value of these rights or interests in any benefits under the pension arrangement which is calculated, as at the relevant date, in accordance with paragraph (2) of regulation 3 above…; and B is the period of C which falls within the period of the marriage of the parties before the relevant date and, if there is no such period, the amount shall be zero; and C is the period of the membership of that party in the pension arrangement before the relevant date…”

Thomas’ interpretation would have valued his interest in the pension benefits which fell to be matrimonial property as £10,002. Annie’s interpretation would value it at £138,534 – quite a difference!

There are four reasons why the Supreme Court decided that “membership” should not be confined to active membership of a pension scheme:

  1. Interpreting the Regulations in this confined way involves adding words which are not there. The Supreme Court held that the drafters of the 2000 Regulations were clearly aware of the different categories of membership, as can be observed from the differentiation made between categories of membership in Regulation 3, and their choice not to differentiate in Regulation 4 between classes of membership. Accordingly, if they had intended ‘membership’ to refer only to active membership then the regulation would have said so.
  2. The 2000 Regulations apply to both occupational pension schemes and personal pension schemes. The definition of “active membership” in section 124(1) of the Pensions Act 1995, on which Mr MacDonald sought to rely, was held to make no sense in relation to personal pension schemes. It must be assumed therefore that Parliament intended the Regulations to operate sensibly in relation to differing pension schemes.
  3. The reading of the word “active” or “contributing” into regulation 4 cannot be supported by referring to the focus in section 10(4) of the 1985 Act on the acquisition by the parties of assets during the marriage, but before the relevant date. It was held that Section 10(5) of the 1985 Act deals specifically with pensions, and the opening words of section 10(4), which defines ‘matrimonial property’, state that the definition provided in section 10(4) is “subject to subsection (5) below” regarding pensions. This means that Parliament specifically chose to deal with pensions differently, by making a separate section in 10(5). It follows from the creation of that separate provision that the definition in section 10(4) could not be considered to apply to pensions and, therefore, the senior Inner House of the Court of Session erred in its reliance on it.
  4. Lastly, it was held that is not persuasive that “membership” in regulation 4 must mean active membership in order to give meaning to the statement that the cited factor B can be zero. They explained that if those drafting the wording of factors B and C in Regulation 4 intended to confine “membership” in such a way that would be a very indirect way to do so. They considered that there is no hint of such an intention in the words of the Regulations.

The court explained that their decision does not mean that the value of an interest in a pension must be shared equally. Section 9(1) of the 1985 Act of course contains other principles which will inform a court’s decision and judges continue to have the powers of Section 9 open to them to adjust which percentage would justify a ‘fair sharing’ of the entire matrimonial pot. Special circumstances may persuade the court to award an unequal sharing of the matrimonial property, but only on a case-by- case basis.

What does this mean for me?

If you are in the process of separating then the decision could have a huge impact on the division of your assets, particularly if they include a pension which has been valued based on ‘active membership’ only. The difference in the valuations of the pension in the McDonald’s case was almost £120,000. The Supreme Court has finally given family solicitors clarity on how pensions should be apportioned. Their decision will no doubt be welcomed by many whose separated spouse is the pension member as there will also be numerous spouses who will rue the day that Annie McDonald took her fight to the Supreme Court. If you have any concerns about how this decision may impact your financial settlement you should contact a family law solicitor as soon as possible.

 

Beverley is a trainee solicitor and part of the Family Law Team at BTO Solicitors who are based in Edinburgh and Glasgow. She has spent 18 months of her traineeship specializing in family law and will remain with the family team at the end of her traineeship in August. She has experience of both the Sheriff Courts and the Court of Session and has been involved in complex financial disputes and child custody matters.

 

Image by Magnus D via Flickr under a Creative Commons licence

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