Pension Sharing in England After a Singapore Divorce
How to implement pension sharing arrangements of English-based pensions after a divorce in Singapore. A discussion of the applicable law and procedure in England to the enforcement of Singapore orders concerning pensions. Pitfalls for the unwary and practical solutions.
Once upon a time, international divorce was a relative rarity. Nowadays, it is commonplace. With foreign travel and work, the chances of a case with an international dimension landing on your desk has increased dramatically. The complexity of international cases, often involving assets around the globe, triggers in turn the important questions of international implementation and enforcement of local Court orders and agreements.
Pensions, and in particular the sharing of benefits between parties to a divorce, is a classic example of where a seemingly straightforward concept can raise unexpected issues in an international context. Throwing the United Kingdom’s withdrawal from the European Union (Brexit) into the equation, from the perspective of English law, just complicates the situation further.
Imagine the increasingly familiar scenario of an English couple who moves abroad for work purposes. Both parties are still of working age. One or both of them has pension rights accrued whilst working in England. They separate and divorce proceedings are initiated in your jurisdiction. As part of the financial discussions ancillary to divorce you will need to consider the pension benefits that each party has, both domestic and foreign, and how your local court will deal with those benefits. What are the available options when the pension benefits are situated and administered outside of the jurisdiction of your local court, specifically in England?1 For the purposes of this article it is assumed that the couple has sufficient links to England. There are three legal systems in the United Kingdom: England and Wales is of course a single jurisdiction for family law purposes; Northern Ireland is a separate legislative entity (but broadly comparable to England and Wales) whilst Scotland is a separate jurisdiction and has its own pension sharing legislation. The Channel Islands and the Isle of Man are not part of the United Kingdom and also have separate jurisdictions.
It may seem an obvious solution just to agree to split the pension benefits and obtain a local order to that effect. But before congratulating yourself on achieving an order and a job well-done, here is the wrinkle in that plan: English pension schemes will only implement pension sharing orders made by an English court and will not recognise, implement or enforce a foreign court order sharing a pension nor will they act upon agreements reached by parties on divorce (whether domestic or overseas).2 The writers have encountered only one scheme that has indicated a willingness to implement a foreign pension sharing arrangement without an English order. It is always worth double checking to avoid unnecessary action in England. This can come as an unwelcome surprise to the unwary foreign practitioner. So what can be done if:
- You realised this only after the event of obtaining a local order requiring a split of the pension(s); or
- You are clued up about the lack of cooperation of English schemes and you are in the throes of negotiating a deal involving a division of the pension(s)?
- You could just wait until the spouse with benefits (ie, pensioner) retires and then oblige him/her to pay a proportion of their pension income to their former spouse. Maintenance/alimony could be paid until the pension payments kick in. However, this could be very unattractive if retirement is a far-off prospect as it leaves the parties linked financially. Equally, the death of the pensioner before payment commences would leave the other spouse high and dry unless there is cast iron insurance in place.
- An obvious route to adopt to avoid practical difficulties with the English scheme would be offsetting whereby one party pays the other a lump sum or property sufficient to compensate for the value of the pension. Such a solution would not require any order from the English court, as it involves a cash or property adjustment in the local jurisdiction. It presupposes the availability of sufficient capital.
- The parties could make use of the liberalisation of access to certain English pensions created by the Taxation of Pensions Act 2014.3 Chapter 30. This statute introduced fundamental changes in the way in which benefits in defined contribution (eg, money purchase) pension schemes could be accessed. The position was, and remains, that 25 per cent of the pension fund could be withdrawn tax-free. However, from 6 April 2015, the 75 per cent balance of a defined contribution pension scheme may be withdrawn as to any amount by one of two means, either flexi-access drawdown or an uncrystallised funds pension lump sum. In each instance, the sums withdrawn after the 25 per cent tax-free lump sum are taxed at the individual’s marginal rate of income tax. So, it would be possible for the spouse with benefits to agree/undertake/be ordered to withdraw from the English pensions such sum(s) as would give effect to the court’s intentions, from their 55th birthday, being the earliest date upon which access is possible in normal circumstances. This option is not available for defined benefit (eg, final salary schemes). Access also triggers tax implications so it may not be a cost effective or sensible solution. Expert financial advice would be required.
- There may be convoluted reciprocal enforcement measures available in England. This would be dependent on there being maintenance orders or money judgments capable of reciprocal enforcement and liquid assets in England to attack, with no certainty that this would include pensions. However, this would be a high-risk strategy, unknown in the writers’ experience and potentially very expensive to attempt. No-one wants to be a test case for success or failure. In any case, in normal circumstances, there is a straightforward statutory mechanism available.
Which Brings Us to “Part III”
The answer lies in the operation of Part III of the Matrimonial and Family Proceedings Act 1984 (MFPA 1984),4 Chapter 42. which permits an application to be made to court for financial provision after an overseas divorce.5 See section 12 of the Matrimonial and Family Proceedings Act 1984 (“MFPA 1984”).
The menu of orders open to the Family Court in England under this statute, which are almost identical to the powers of the Court had the divorce itself progressed in England, include pension sharing and pension attachment.6 See section 17(1) of the MFPA 1984.
In addition to allowing the court to make orders in England in circumstances where inadequate provision has been made to one party in another jurisdiction (of limited applicability in reality), Part III also allows the English Court to transpose or translate into English law an agreement or intention from a foreign Court where that foreign order is not otherwise capable of implementation or recognition. Typically, in the writers’ experience, Part III is employed to secure a pension sharing order in England against an English-based pension scheme, where the scheme trustees will not recognise or comply with an order from a foreign Court and instead insists on an English order.
Before delving into the intricacies and workings of Part III, it is perhaps helpful to take a pause and provide an overview of how pensions are commonly treated in England on divorce.
Under the family law of England & Wales, there are three basic approaches to dealing with pensions on divorce: pension sharing, pension attachment and offsetting.
- Pension sharing is a mechanism by which part (anything from 1 to 100 per cent) of the pension is transferred to the party without pension rights, creating a separate and indefeasible pension for the benefit of the latter.
- Pension attachment on the other hand is a specialised use of periodical payment orders (eg, maintenance) and lump sum orders which are directed against the pension provider to ensure that part of the pension or pension lump sum payable on retirement or death is paid directly by the pension provider to the party without pension rights. It is a less popular remedy than pension sharing because of the inbuilt uncertainties which surround it (eg, the premature death of the pensioner prior to retirement).
Neither pension sharing nor pension attachment can be achieved other than by a court order, which may of course be made by consent. The English Court is also unable to make both pension sharing and pension attachment orders against the same pension.
- Finally, offsetting utilises conventional lump sum orders and property adjustment orders against non-pension assets to compensate the party without pension rights for the loss of the ability to share in the pension rights of the pensioner. Despite the existence of pension sharing, it is still one of the most frequently employed remedies, reflecting the fact that, on divorce, parties often have other pressing needs, such as housing or debts. Where offsetting is to be used, it is standard practice to instruct an actuary to advise upon the appropriate offset figure to reflect a number of factors, such as accelerated payment, taxation (in the sense that a pension is part taxable and part non-taxable, whereas an offset lump sum is tax‑free) and the removal of risk.
It is important to note that pension sharing is only available on divorce or nullity. Unlike pension attachment, it cannot be employed on a legal (judicial) separation.
So, Back to Part III
There are certain fundamental requirements for an application under Part III:
- There must have been a divorce overseas; and
- The foreign divorce must be capable of recognition in England (rarely an issue); and
- The party seeking the order under Part III must not have remarried. If one party has remarried then the other can make the application, including against their own pension(s). If both parties have remarried, then the Part III remedy is no longer available and they would have to resort to other options.
The main obstacle is the jurisdiction. To permit the English Court to exercise its powers under Part III, the applicant must satisfy the Court that it has jurisdiction to entertain the application. The rules are complex but, in summary, are founded on either party’s domicile or habitual residence, the latter for at least a year before the application.7 See section 15 of the MFPA 1984. Clearly, where one or both parties has been living abroad for many years, this may not be viable. Previously, this would all but end the Part III journey in England, leaving the parties to try and recast the foreign order. However, a solution was devised to establish an additional basis to secure the jurisdiction of the English Court by utilising the European Union (EU) Maintenance Regulation.8 Council Regulation (EC) 4/2009 of 18 December 2008 on jurisdiction, applicable law, recognition and enforcement of decisions and co-operation in matters relating to maintenance obligations.
The EU Maintenance Regulation comprises a comprehensive set of jurisdictional rules to govern whether a EU Member State can entertain applications concerning “maintenance”. Without descending to detail, “maintenance” is not limited to alimony/periodical payments from one party to another; it governs issues relating to a party’s “needs” which can include capital awards (eg, a lump sum order or a transfer of property order).
If the conventional habitual residence or domicile criteria for jurisdiction cannot be satisfied, then it is likely that jurisdiction could be secured instead by virtue of Article 7 of the EU Maintenance Regulation coming to the rescue,9 See section 15(1A) of the MFPA 1984. which is essentially a “forum necessitatis” mop-up clause. It states:
Where no court of a Member State has jurisdiction pursuant to Articles 3, 4, 5 and 6, the courts of a Member State may, on an exceptional basis, hear the case if proceedings cannot reasonably be brought or conducted or would be impossible in a third State with which the dispute is closely connected.
The dispute must have a sufficient connection with the Member State of the court seised.
To take advantage of Article 7, the applicant would have to show:
- No court of a Member State has jurisdiction under other Articles – likely if the parties have no connection with any other EU countries;
- A degree of exceptionality – usually satisfied as there is no other way in which the English Court could deal with the case;
- That the pension scheme will only cooperate with an order from the English Court, not the foreign Court or the court of any other Member State – illustrating that proceedings cannot be brought elsewhere; and
- “Sufficient connection” – eg, the pension scheme is situated and administered in England.
Providing these points are satisfied, the application should have excellent chances of success. However, a word of caution. It is important to note that the EU Maintenance Regulation only governs matters relating to “maintenance”. In relying on Article 7, the Court would also need to be satisfied that the pension sharing order was required for the recipient’s “needs” or “maintenance”. It is standard practice, therefore, for specific wording to be inserted into the foreign order to this effect. Before the foreign order is finalised, a specialist English family lawyer should review the proposed wording of the order to ensure, as far as possible, that it will satisfy the English Court’s requirements, and mitigate against the English Court refusing to accept jurisdiction thus avoiding any delay or cost in rectifying the foreign order.
Once the jurisdiction is clarified, the Part III application itself is a two-step process, firstly requiring the permission of the Court to make the application and secondly the substantive application itself. However, as these applications involving English pension schemes are commonly a purely procedural step to implement a foreign order, they are by their very nature consensual meaning that the two-step process can be amalgamated into one. In particular, the English Courts are also increasingly live and amenable to the discrete, but necessary, nature of these applications, meaning they are often addressed “on paper” without any court hearing, which in turn helps to reduce costs.
So, in theory, at least there is a viable route to allow for English pensions to be shared following a foreign divorce. But however consensual the process there are pitfalls along the way. In particular, it must be noted that:
- Care should be taken to establish where the pension scheme is based. Is it actually in England?
- An English pension sharing order must be expressed as a percentage (up to two decimal points) of the cash equivalent value of the scheme. A cash value in sterling or the foreign equivalent cannot be specified.10 In contrast, a fixed sum can be specified in Scotland.
- It is not possible to direct the pension scheme to share only a proportion of the pension (eg, the marital acquest). If this is the intention, then actuarial advice in England should be sought to establish what percentage against the entire scheme should be applied to achieve the desired outcome.
- Pension values are a moveable feast and the value may alter (up or down) between the order being obtained and the scheme ultimately implementing the order and slicing off the recipient’s share, which could be over four months later. The actual amount transferred could therefore be very different from that discussed in earlier negotiations.
- Hefty charges can be levied by certain pension schemes to implement pension sharing orders – in some cases over £2,000. Costs generally should be discussed and agreed as part of the application.
- Not all schemes will permit the pension sharing recipient to invest their share internally in the scheme. Many insist on an external transfer of the pension funds. The recipient spouse should therefore take financial and taxation advice as to the investment options in England and abroad sooner rather than later.
Where the parties are aware of the need for an English order, there is no substitute for taking advice from a specialist English family lawyer and getting the ducks in a row to maximise the prospects of a successful application. Then, as soon as the foreign divorce has been finalised (of course with the EU Maintenance Regulation compliant wording incorporated), immediate steps can be taken in England to prepare and lodge the necessary paperwork.
The ramifications of Brexit and the United Kingdom’s withdrawal from the EU are unknown. Brexit could conceivably impact upon parties’ situations and their options in that the jurisdictional basis of Article 7 is dependant currently on EU law. Whether this will be incorporated into the United Kingdom’s domestic law following Brexit in March 2019 remains to be seen. The safest course of action, if an English order is contemplated, is to action the necessary English application sooner rather than later and well before March 2019.
Footnotes [ + ]
|1.||↑||For the purposes of this article it is assumed that the couple has sufficient links to England. There are three legal systems in the United Kingdom: England and Wales is of course a single jurisdiction for family law purposes; Northern Ireland is a separate legislative entity (but broadly comparable to England and Wales) whilst Scotland is a separate jurisdiction and has its own pension sharing legislation. The Channel Islands and the Isle of Man are not part of the United Kingdom and also have separate jurisdictions.|
|2.||↑||The writers have encountered only one scheme that has indicated a willingness to implement a foreign pension sharing arrangement without an English order. It is always worth double checking to avoid unnecessary action in England.|
|5.||↑||See section 12 of the Matrimonial and Family Proceedings Act 1984 (“MFPA 1984”).|
|6.||↑||See section 17(1) of the MFPA 1984.|
|7.||↑||See section 15 of the MFPA 1984.|
|8.||↑||Council Regulation (EC) 4/2009 of 18 December 2008 on jurisdiction, applicable law, recognition and enforcement of decisions and co-operation in matters relating to maintenance obligations.|
|9.||↑||See section 15(1A) of the MFPA 1984.|
|10.||↑||In contrast, a fixed sum can be specified in Scotland.|