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Most clients breathe a sigh of relief when they obtain their Decree Absolute.
Pension sharing and the moving target syndrome
Most clients breathe a sigh of relief when they obtain their Decree Absolute and financial settlement which can often include a Pension Sharing Order. They could be forgiven for thinking that the complicated bit is done. Unfortunately there are many issues in relation to the implementation of the Pension Sharing Order that need to be anticipated and planned for.
On divorce the court does not deal with the pension income – it divides the capital value of the pension often known as the “Cash Equivalent Value” or CEV. In negotiations the parties often discuss monetary solutions – e.g. that from a pension fund of £800,000, one party should receive a pension credit of £400000 being one half. The problem is that the legislation does not permit a pension sharing order to be expressed as a monetary sum – it must be expressed as a percentage of the fund – i.e. in the above example 50%. The difficulty can arise when the CEV of the pension alters between the date of the pension sharing order and the date on which the pension company actually implements the order and divides the fund.
The pension company can choose any date within four months of receiving the Court Order, Decree Absolute and all relevant forms in which to implement the order. At that point they will revalue the pension fund and that is where the problems can begin if they have not been anticipated. It is not unusual for the fund value to change substantially in a few months and this is sometimes known as moving target syndrome. In an occupational pension scheme for example the person with the benefit of the pension may receive a promotion which sharply increases the value of their fund, or in the case of an armed forces scheme they may achieve a milestone of continuous service which can substantially increase the pension value. In a private scheme there can, particularly since the recession be substantial fluctuations in the value due to stock market movements. The effect of all this can be that the person who was expecting to receive a fund with a value of a certain amount can find that their pension has been reduced (or indeed increased) due to unexpected movements in the fund value.
So, what can be done to avoid this?
Care must be taken to ensure that there is an up to date fund value before concluding a settlement if at all possible. This minimises the risk of substantial fluctuations before the order is implemented
Orders should be implemented as quickly as possible to ensure that the time for fluctuations is as short as possible
It is also possible to agree alternative lump sum arrangements to make good in capital terms any loss from the pension fund due to market fluctuations
In a private scheme it may be possible to transfer the fund into less risky assets to protect against sudden fund fluctuations but financial advice should always be taken in relation to this
Where the pension is in payment and the parties are dependent on the income, care should also be taken to make sure that the maintenance arrangements are continued until the pension order is implemented as this can take some time to be done.
So, the watchword for avoiding the problems so far as possible is planning and careful professional advice
Liz Allen is a partner and Team Leader for the Devon Family Team at Stephens Scown Solicitors. She specialises in financial and business divorce settlements and is regularly identified as a leader in her area of law by independent guides to the legal profession, the Legal 500 and Chambers and Partners, as well as being named on the 2010 Citywealth Leaders List, an international guide to the most highly regarded figures in private wealth management. See their website
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