The pension world has long been seeking a solution to the problem of rights for the 180,000 couples who divorce each year. Pensions sharing is now being offered as an alternative to offsetting and earmarking
Every year, 1.5 million people get married, but despite their dreams of spending an idyllic life together, four in 10 of all marriages end in divorce. Government research projects that the trend in divorce will increase and by the year 2010, 70% of all marriages will end in the courts.
The greatest increase is among those aged 45 and over: the rise in the rate of divorce among this segment has risen by a third over the last decade. Many of them have been married for more than 20 years, with at least one spouse building up substantial pension provision.
A pension is often the largest asset held by someone aged 45 and over. They may have had a career in the civil service or stayed with one employer all their working life.
For many years, the industry has been seeking a solution to the problem of how to treat pension rights on divorce. Prior to December 2000, courts and lawyers negotiating divorce settlements used one of two options.
The first was to add the value of the pension entitlements as a tasty ingredient to the melting pot of other matrimonial assets, which could include investments, the house, or a business. In such a case, the courts could 'offset' the value of these entitlements by awarding one partner a larger share of the other assets in return for giving up any rights to a share in the others pension.
Option two is commonly referred to as 'earmarking'. This allows wives (and, in some cases, husbands) to receive a share of their ex-partner's pension, which is earmarked for them in advance. This means that they would get a proportion of any pension when their ex-partner retires, with the proportion fixed at the time of divorce.
Earmarking has not been a great success. Its big disadvantage is that it leaves the poorer partner with nothing if they remarry or if their ex-partner dies before retirement. This has meant that almost no one has taken it up.
A new alternative to offsetting and earmarking is now available for the 180,000 couples who divorce each year ' pensions sharing. Pension sharing represents a clean break at the point of divorce. Unlike offsetting, it will also result in both parties securing for certain an element of pension income at retirement.
In England and Wales, all pension assets belonging to the couple are taken into account on divorce. In Scotland, only those benefits built up during the period of marriage are taken into account.
Although pension sharing is only one way of dividing the pension assets, all schemes to which the regulations apply must include the provisions within their rules. The table above shows which schemes are affected.
So how does pension sharing work in practice? Here's an example: Mr and Mrs A are divorced. Mr A is a member of an occupational pension scheme. A pensions sharing order is made that states that the pension benefit held by Mr A must be taken into account. The basic procedure is shown in the chart on the left.
Are there opportunities for intermediaries? The answer is a resounding yes. The Law Society estimates that up to 50,000 couples a year may take advantage of pension sharing and intermediaries need to ensure that they are geared up for the opportunities available with pension sharing.
This includes opportunities for providing advice to:
l Family Solicitors
l Providing advice to Trustees
Trustees will need advice and guidance on highlighting necessary amendments to scheme rules, and helping to implement procedures to follow when informed of a possible divorce. They will have to work within set procedures and need to be aware of the potential fines that will be levied by Opra for failing to comply with the requirements.
If they fail to provide information after receipt of order or provision, the penalty is:
l £200 per individual trustee per breach
l £1,000 per corporate trustee per breach
If they fail to implement the order, potential penalties are:
l £1,000 per individual trustee per breach
l £10,000 per corporate-trustee per breach
Intermediaries can help advise trustees on whether they should offer ex-spouses scheme membership as an alternative to an external transfer value.
Trustees will also need advice on the charges they may require the divorcing couple to meet. They will also need help in deciding how best to communicate with scheme members.
Pension sharing covers two main areas of expertise ' pensions and law. Very few people are experts in both fields, so solicitors will also need advice and guidance.
Family solicitors will need practical help and guidance in understanding all the various forms of pension and how they operate in practice.
For pensions sharing to work effectively, the specialists need to work together and now is the time for intermediaries to develop strategic alliances where additional business opportunities can be investigated.
Pensions sharing not only allows advisers to establish professional connections but also relationships that may lead to other business beyond any resulting transfer or pensions restructuring exercise.
Both the husband and the wife will need initial guidance on the options for pension sharing on divorce. If pension sharing goes ahead with a transfer value payable, then spouses of those in private funded schemes will also need specialist advice on what type of arrangement to transfer into, as well as selecting the most suitable provider.
Remember that for every pension credit there will be a pension debit. Those subject to a debit will be in urgent need of advice to ensure the pension shortfall is planned for and rectified as necessary.
Finally, once the transfer has been completed, both the ex-spouse and the member may seek further advice on financial matters. In their different ways, both should consider how to make up lost pension rights and identify future needs such as savings, protection, investment and estate planning.
When it comes to selecting a provider to help exploit the opportunities offered by pensions sharing, advisers should look for a company that is a recognised transfer specialist. Ideally, it would need to provide
l A competitive contract
l A comprehensive transfer analysis system to ensure the client gets the best option available
l A wide range of investment choices, including external fund managers
l Marketing material to allow intermediaries to begin discussions with solicitors and trustees
With a clear understanding of how pension sharing works, advisers can now start to exploit the opportunities that this new legislation offers them and their business.
l By 2010, 70% of all marriages will end in divorce.
l Pension is often largest asset of someone aged 45 and over.
l Up to 50,000 couples a year could take advantage of pensions sharing.
l Pension sharing provides many opportunities for intermediaries.
'Damage is done at the moment the pension is transferred...'
'Visibly trawling for prospective clients'
‘Effectively the norm’
20 years experience in multi-asset