For family practitioners, advising on pension division in divorce settlements is one of those areas where we can easily stray out of the relative comfort zone of other advice that is regularly given in financial applications upon divorce. To improve clarity and understanding, the Pensions Advisory Group [PAG] Report of 2019 provides an essential guide, interpretation and summary on pension sharing, pension offsetting and pension attachment orders.

Pensions On Divorce Expert (PODE) and Procedure

One of the most important aspects of the PAG report was to provide more detailed information with regard to the requirement for a ‘pensions on divorce expert’ [PODE], who tend to be actuaries or financial planners. As with all experts, their credentials should be checked carefully. Any fundamental mistake is likely to be very costly.

Formally, permission should be sought in order to adduce a report from a PODE following the usual FPR Part 25 procedure. However, in practice, both parties can often agree to jointly instruct a PODE and usually share the cost. This is largely a result of the streamlined procedure that the Financial Remedies Courts have attempted to encourage over recent years.

Select the Right Hearing

A First Appointment [FA] is now expected to accelerate the process, if at all possible. However, there is a welcome trend amongst family solicitors to ‘front-load’ as much of the exchange of information as is possible. Indeed, there are now occasions where a Form G will express the preference for the FA to be considered as a Financial Dispute Resolution [FDR] hearing when the parties agree. The obvious advantage is savings in legal costs. The back stop of the Final Hearing [FH] clearly remains. Indeed, the risk in both costs and an ‘unwelcome outcome’ means that 75-95% of FDRs result in settlement of the proceedings, mostly because, barring s25 statements and updating disclosure, little of any other evidence is to be adduced at an FH. 

Pension Valuation & Cash Equivalent Transfer Value (CETV)

Pensions per se can be a significant asset in the marital pot that has to be apportioned, by agreement or court determination. Hence, it is advantageous to acquire a valuation for the FA/FDR stage of the case, the most basic form of calculation being the Cash Equivalent Transfer Value [CETV] from the relevant pension provider(s). Using basic arithmetic, the CETV can be used as a ‘set off’ sum against other assets, most usually the Former Marital Home [FMH].

When is a PODE report necessary?

It is generally accepted that a pension pot [can be more than one pension] with a CETV in excess of £100,000 necessitates a PODE report. However, this is fact-dependant, such as if one or both pension pots are a significant proportion of the assets. The cost of reports is generally in the region of £1,500-3,000. Parties tend to agree to share the cost and understand that the case cannot reach a conclusion without such expert evidence. Compared to the inevitable expense of an FH, such reports are often seen as essential and a prudent use of money. 

Key considerations in PODE reports

PODE reports can be 20-30 pages long. However, a form of executive summary is normally included near the beginning of the report. Providing clear and precise instructions to the PODE as to the focus of the report [agreed between the parties] often saves the need for further questions of the expert, and the associated time and costs therein. The two aspects that the PODE should seminally consider are the ‘Cash Equivalent’ and ‘Income’ comparisons, helpfully set out in tables. As a generality, the older the parties, the more the income aspect becomes important, whereas for younger parties, cash equivalence and its distribution forms part of the relative positions for settlement or court determination.

State Pensions & Divorce   

PODE report should contain an analysis of the parties’ state pensions in parallel with their private ones. Due to any differences in age and contribution [e.g., employed versus self-employed], these assets should not be ignored when detailed analysis of is required. Parties are usually familiar with obtaining such valuations online and, in any event, should be included in the simpler CETV calculation that avoids a PODE report.

Pension sharing, offsetting & attachment orders

The current standard is the Pension Sharing Order [PSO], where a percentage is applied to individual private pensions after a calculation is made. This means that, in effect, a new pension is created for the recipient party and the donating party has his/her pension reduced to the resulting percentage. There is inevitably an administrative cost which can be a few thousand in some examples. It is for the parties or court to decide how this is paid between spouses. A PSO Form P1 is required and is separate from the main Final [Omnibus] Order. The alternative, as already mentioned, is ‘Offsetting’, as described by the PAG report as ‘the right to receive a present or future pension (being) traded for present capital’, i.e., let the other party keep their private pension(s) in their entirety but being compensated for this from other assets available for distribution. Pension Attachment Orders [PAOs] are now an increasing rarity as it requires the party with the specified pension to ensure payments to the receiving party and is thus not in the spirit of the ‘clean break’ of finances upon divorce that the court will seek; s25A MCA 1973.

Pension Pitfalls & Considerations

Pensions are time sensitive assets. Even the best of PODE reports can never determine, with absolute certainty, what will happen to wither private or state pensions in the future. However, their expert advice has to be relied upon. This is why pensions are taken as a separate form of asset compared to the rest of the financial landscape, as conveniently conveyed in the ES2 Form. A general rule is that Cash Equivalence is achieved when the parties are relatively young, the pension(s) does/do not represent a significant proportion of assets and the CETV is clear. Income-based PSOs mostly occur when parties are near retirement, the pension proportion of assets in more and a defined benefit scheme [e.g., final salary scheme] arises in one or more of the pensions; HHJ Hess [co-chair of PAG] in W v H (divorce financial remedies) [2020] EWFC B10. 

Lastest Updates – The PAG 2 Report (2024)

The second PAG report was published in January 2024 and followed the earlier publication of the Galbraith Tables, which had endeavoured to approximate Offset values, similar to the Duxbury Rules, which seek to provide a calculation of a lump sum required for a clean break. However, it is worth noting that PODE valuations are expert evidence and so not easily circumvented by such tables. Usefully, PAG 2 amends its predecessor to formally recognise the period of cohabitation prior to marriage and then emphasises that the most current of pension values are used. Similarly, emphasis is placed on any consideration of ‘need’ [in a s25 context] and how this extends into retirement. The incidence of tax is also considered in PAG 2, which potential future changes being considered, as the current standard of a 25% tax-free pay out at a specified age may not be such certain advice to give in the future.

Conclusion

For family law practitioners, understanding the complexities of pension division is cruical for securing a fair financial outcome for clients. The latest PAG 2 Report, along with expert advice from a PODE, ensures that pensions are properly valued and divided, whether through person sharing orders, offsetting or alternative arrangements.

For expert guidance on pensions in divorce settlements, contact us today to discuss your case with a specialist family law barrister.

Written by Senior Consultant Barrister, Dr Alexander Khan.

Law is correct as of 27th February 2025. Whilst every effort has been taken to ensure that the law in this article is correct, it is intended to give a general overview of the law for educational purposes. Readers are respectfully reminded that it is not intended to be a substitute for specific legal advice and should not be relied upon for this purpose. No liability is accepted for any error or omission contained herein.