Don’t tick the box: T v T (variation of a pension sharing order and underfunded schemes) [2021] EWFC B67

BACKGROUND

The parties had cohabited from 1992 and married in 1995. They had two children together, aged 25 and 20. H was the commercial director of a company whilst W worked as a hospital administrator.

The parties separated in 2013. On separation the husband (‘H’) moved out of the family home, where the wife (‘W’) remained. Decree Nisi was pronounced in 2013 and Decree Absolute awaited the outcome of the financial remedy proceedings.

The parties’ original financial remedy proceedings culminated in a final hearing in front of District Judge Thomas in Bromley in 2015. The judge’s order had the following headline points:

• FMH transferred to W.
• H to retain his own property purchased after separation.
• 40% of H’s company pension - with a CE value of £826,125 - would be shared with W. H and W would retain their other pensions.

DJ Thomas’ decision to award W 40% of H’s company pension was described by the judge as ‘fairly broad brush’, seeming to be intended to reflect the fact that W retained the whole of the FMH, meaning that H should be slightly compensated by retaining more of his pension. The judge noted that no one had sought to impugn this decision.

JUDGMENT TO ORDER

The judge noted that it had taken unusually long for the judgment to be converted into an order, with the latter not being sealed until May 2016, seven months later.

The judge noted that, during this time, neither party applied for Decree Absolute.

Problems then arose in respect of completing the pension sharing annex. Having submitted the original annex, the parties then received a response from the pension administrators who asked the solicitors to tick the box indicating an external transfer ‘as the Trustee of the scheme does not permit internal transfers’. This box was duly ticked and the annex was returned to the administrators.

The order did not come into effect at this time though, since Decree Absolute had not been pronounced.

THE APPEAL

H attempted to appeal DJ Thomas’ order later in 2016 (albeit not the pension sharing order), and these proceedings were compromised via an order of HHJ Redgrave. This order expressly permitted to apply for Decree Absolute. Regardless, neither party pressed for Decree Absolute.

DEVELOPMENTS IN THE COMPANY PENSION SCHEME

Over the course of late 2016 / 2017 H’s company pension was revalued twice, bringing the CE up to c. £1.6m (as opposed to the c. £826,000 relied on at the final hearing in 2015). The judge noted that from this point H began to perceive that W was going to receive more than she ought to.

Around the same time the company decided to reduce CEs substantially for the purposes of external transfers on the basis that the scheme was underfunded. Accordingly in June 2017 the valuation for the CE of an external transfer from the scheme went down from c. £1.6m to c. £720,000, meaning that W would receive a pension credit worth only c. £290,000.

W became concerned that this revaluation of external transfers would mean her losing out. She had been given the impression by the company’s representations in 2016 that she had no choice but to accept an external transfer. However, although this information had been true at the time the company had made the representation, it had ceased to be true by December 2016 when the company decided to reduce CEs for external transfers.

In fact, the judge noted that, despite having taken advice from solicitors and counsel on this point, W was not actually thereafter bound to accept an external transfer as a result of the company’s new policy. Based on this misapprehension of the law (explored more below), W made an application in July 2017 asking for “a Declaration of the Court that the 40% share of the Company [name] Pension Fund in the Applicant’s favour (and 60% in the Respondent’s favour) also applies to the uplift in the value of the Company [name] Pension Fund …”

The judge considered that this application was misconceived and wrong in law. W then applied for Decree Absolute. Shortly afterwards H applied successfully for a stay on this pronouncement. The judge noted that H, like W, did not seem to be aware of the possibility of an internal transfer of the pension credit.

H then applied for a variation of the pension sharing order, which had the effect of preventing the pension sharing order from taking effect until the application had been determined (pursuant to MCA 1973, s.31(4A)(b)). Until then the lack of Decree Absolute had prevented the same outcome. The Decree Absolute was pronounced in December 2017. The judge issued a cautionary note that, had H died at any point between then the most recent hearing, W would have had no entitlement to either widow’s benefits or a pension sharing order [29].

VARIATION APPLICATION

The judge noted two curious features of the case as it developed thereafter: firstly, W’s application of July 2017 for a declaration appears to have been largely ignored and, secondly, DJ Thomas had dispensed with the need for a FDR.

The judge also criticised H for not having disclosed, over the next three years and numerous hearings, a further change of policy from the pension administrators, who had reversed their previous policy of reduced CEs on external transfers in April 2018.

The parties (albeit mostly H) had pursued the completion of a new pension report to consider the impact of the company’s supposed pension deficit following the original revaluation of external CEs. The judge criticised this decision (and implicitly the direction by the court to obtain the same in an order of November 2018), noting that it was “misconceived ab initio” and irrelevant in any case, since (admittedly unbeknownst to W until March 2021) the company had changed its policy and started funding external transfers fully again. In any event, the expert selected for the report declined the instruction - a decision which the judge commended.

Leading up to the final hearing H set out his case in a statement in which he argued that DJ Thomas had offset the pension in order that W would receive the “capital value of the pension” as at the time of the hearing, which amounted to c. £330,000. He argued that the pension sharing order should be varied downwards to 17%, so that W would receive only this amount and not the uplift caused by the revaluation(s).

Further information prior to the final hearing was obtained from the pension administrators, who clarified that:

• the company had ceased paying reduced CEs on external transfers. This policy was unlikely to return in the short term;
• in any event, the law requires an internal transfer to be offered to an ex-spouse if the alternative is to take an external transfer on a reduced basis;
• the most recent CE for H’s pension was c. £2.4m;
• the variation in the CE since 2016 was largely driven by the discount rate used to calculate the present value of the benefits, which was linked to market gilt yields.

With the benefit of this information W made an open offer to settle on the basis that H’s application would be dismissed with costs. H did not accept that offer.

APPLICABLE LAW

Pension sharing

The judge set out the law applicable to pension sharing orders, noting that this case was a prime example of what Baron J had called ‘moving target syndrome’ in H v H [2010] 2 FLR 173, and who had noted that pension sharing orders must be expressed in percentage terms, and not as ‘such sum as will give such percentage’. The judge noted that this dicta is binding and that a pension sharing annex should go no further than expressing a percentage. The main reason for this is that the CE is likely to change between the original valuation and the implementation of the pension sharing order [41]-[43].

He then explained that, when a pension scheme declares itself to be underfunded, meaning that it does not have sufficient funds to meet its full obligation to all members of the scheme, it must decide if it wishes to pay out only reduced CEs on external transfers. However, it cannot force an ex-spouse to accept an external transfer on the basis of a reduced CE and must offer them an internal transfer without any reduction, pursuant to the Welfare Reform and Pensions Act 1999, schedule 5, paragraph 1(2) and The Pension Sharing (Implementation and Discharge of Liability) Regulations 2000, SI 2000/1053, regulation 16. If the ex-spouse still wants an external transfer, it will be available to them on the basis of a CE reduced proportionately with the extent of the underfunding (The Pension Sharing (Implementation and Discharge of Liability) Regulations 2000, SI 2000/1053, regulation 16) [44].

Variation of pension sharing orders

The judge noted that the court has jurisdiction to vary a pension sharing order under MCA 1973, s.31(2)(g), providing that the application is made before the implementation of the PSO and before Decree Absolute is pronounced. The judge nevertheless commented that such circumstances would be very rare in practice [45]-[48].

The judge then considered MCA 1973, s.31(7) and, by analogy, various authorities considering variation applications in relation to capital orders. The judge focused on the decision of Bodey J, sitting in the Court of Appeal in Westbury v Sampson [2002] 1 FLR 166. In this judgment Bodey J had determined that the re-opening of the overall quantum of lump sum orders by instalments was possible - both as to timing and quantum - but that the power to vary the quantum should only be used “sparingly”, and would only be considered when “anticipated circumstances have changed very significantly, and/or for cogent reasons rendering [the original order] quite unjust or impracticable” [50]-[53].

The judge noted that this statement of the law had received obiter approval from Lord Wilson in Birch v Birch [2017] UKSC 53. Notwithstanding Mostyn J’s recent consideration of this issue in BT v CU [2021] EWFC 87, in which he held that capital orders by instalment would not be variable as to quantum unless all of the Barder conditions applied, the judge proposed to follow Bodey J’s “really quite strict” test as set out in Westbury [54]-[55].

ANALYSIS

The judge determined that neither party’s circumstances had changed very much since 2016. Against that backdrop, the case would stand or fall on the issue of the change in the CE of H’s pension.

The judge concluded that there were three main reasons why the change in CE did not justify any variation:

• H’s approach appeared to misunderstand that a CE of a defined benefit pension is an actuarially assessed figure representing what sum of money which would be needed to to produce externally the income which the fund is obliged to provide for a scheme member during their retirement. This number is likely to change over time by consequence of changes in the financial markets, particularly in respect of gilts. Indeed, this is what had happened, with the consequence that, were W to receive a sum equivalent to the CE as at 2015, she would actually lose out.
• H’s 60% share of his pension had increased in value (even if this increase was potentially illusory) commensurately with the increase in the value of W’s share. No injustice would be done to H by W receiving more.
• H’s actions were the main cause of delay in implementing the original pension sharing order, which had in turn led to the moving target syndrome being so pronounced in this case.

Accordingly, the judge dismissed H’s application for a variation, as well as W’s application for a declaration.

COSTS

The parties’ costs were c. £130,000 for W and c. £175,000 for H. The judge considered that the fact of these costs being incurred was “a shaming indictment for the legal system”, particularly since the legal teams appeared “to have had limited understanding of the issues with which they were dealing” [39].

The judge considered that H had taken an “unreasonable view of the case from the outset and pursued it to the bitter end. I have rejected this and he has entirely lost.” The judge therefore decided to make a costs order against H of £100,000 [69].

POSTSCRIPT

The judge went on to deal with the issue of pension sharing annexes, which he noted had had a limited public profile despite having been dealt with in the PAG Report of July 2019 [74].

The judge focussed on the fact that the pension administrators had written to W’s solicitors to ask them to tick the box for an external transfer, despite the fact that the decision whether or not to do so is one of serious financial importance on which an ex-spouse in W’s position ought to take careful advice. The judge speculated that, had the pension sharing order been implemented in 2017 in this case, it is not clear that W would have been offered her legal entitlement to an internal transfer. In this situation, she might have incurred a substantial loss on an external transfer simply on the strength of a box being ticked [75]-[78].

The judge concluded his judgment by underlining the advice of the PAG report in relation to this section of pension sharing annexes: “Family Lawyers would be well advised in the meantime not to tick either boxes in section F” [80]-[81].