The UK pension sharing system often results in poor outcomes for divorced women due to its complexity and low uptake. Practical issues like timing delays, unresponsive ex-spouses, and fluctuating pension credit values further complicate the process. Below, we explore these challenges, together with the key takeaways for those in charge of administering pension schemes. We have also sought the expert insights from ten other countries from around the world, included on the right hand-side of this page.
The current system for pension sharing has been operating in the UK for 25 years. Although it offers a clean break between the divorcing parties it is still the case that there is a gender pension gap whereby women in retirement generally have less pension than men. Divorced women appear to be particularly disadvantaged ,as they have often not secured sufficient pension wealth at the point of the divorce. We set out below how pension sharing works and some of the complexities which may be resulting in poor outcomes for women, together with comments from other jurisdictions to see how they treat pensions on divorce.
What is pension sharing?
Although pensions must be disclosed on divorce, and they are often the largest asset after the family home, the uptake in pension sharing is often low. This may be due to the complexity of the system and couples managing their own divorces without talking to a lawyer, especially since "no fault" divorce was introduced in the UK in 2022.
Pension sharing splits a pension arrangement between two parties following a divorce. It creates a "pension credit" (which is a specified percentage of the member's "cash equivalent" rights) in favour of the ex-spouse and a "pension debit" against the member of the pension scheme. This gives rise to a number of practical issues.
Timing
- Once the pension sharing order takes effect, the trustees of the scheme have four months to implement it, unless they haven't received all the information required by the regulations.
- The trustees need to keep the Pensions Regulator informed of any delays and request an extension if needed, otherwise they could be subject to fines.
- Any delays could result in a complaint being made to the Pensions Ombudsman.
Unresponsive ex-spouses
- Trustees are not obliged to give the ex-spouse rights within the same scheme as the member, and usually prefer not to as it can create complications.
- Ideally, the ex-spouse will nominate a scheme or arrangement to receive their pension credit. But sometimes this doesn't happen.
- Whilst trustees can technically choose an external arrangement if one is not nominated, schemes are often reluctant to accept the transfer without consent from the ex-spouse.
Valuing the pension credit
There can be several months between the initial valuation of benefits for the purposes of the court and the actual implementation of the pension sharing order. The cash equivalent of the pension credit may therefore increase or reduce during this time.
Other potential complications
- As pension sharing orders take time to sort out, members may be overpaid as their pension should be reduced from the date the order takes effect. Trustees can seek to recover overpayments.
- Practical difficulties can also arise if, for example, the member or ex-spouse dies before the pension sharing order has been implemented, or where the scheme begins to wind up or enters the UK pensions lifeboat, the Pension Protection Fund.
Takeaways for those in charge of administering pension schemes
These are just some of the issues that can occur when implementing a pension sharing order in the UK. There are no current indications that the law on pension sharing on divorce is likely to be amended. So, until that happens, these practical problems will continue to cause issues for trustees and members alike.
Those administering pension schemes should consider the following steps to help ensure efficient implementation of pension sharing orders:
- have an agreed process in place for implementing pension sharing orders to avoid any delays resulting in fines and/or member complaints;
- review this process from time to time to ensure it remains "fit for purpose";
- communicate clearly with members and ex-spouses, including regular communications and follow-ups where appropriate; and
- ensure administration procedures are designed to minimise the chance of overpayments and that they include a process for recovering any overpayments made.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
