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Pensions
Update [2008] Fam Law 539
illustrated how the determinations of the Pensions Ombudsman provide
excellent source material on the practical workings of pension sharing
orders. In particular, Shepherd v Trustees of the Air Products Pension Plan (2006) 21
September, ref Q00278, [2007] Fam Law 550 established the principle
that, where a pension sharing order is made against a pension in
payment, that pension will be reduced from the date the order takes
effect (being the later of the date of decree absolute or 7 days after
the expiry of the relevant appeal period).
In practical terms, this means first that the scheme may seek
to recoup any overpayment made to the member at the former higher rate
after the date the order takes effect giving rise to a need to advise
the client to make provision for the repayment of any overpayment and,
secondly, that care needs to be taken to ensure that any maintenance
payable to the person with the benefit of the pension credit which is
intended to terminate upon the implementation of the pension sharing
order in fact terminates on the date when the pension sharing order
takes effect.
Pike
The facts of Shepherd
were largely replicated in Pike
v Teachers’ Pension Scheme (2008) 26 March, ref 26355.
Under the terms of a consent order, the husband and wife had
agreed that the wife should benefit from a pension sharing order as to
38% of the husband’s pension in payment under the Teachers’
Pension Scheme and that the husband would continue to pay maintenance
to the wife by way of an undertaking at the rate of £335 per month
“until the pension sharing order was implemented”.
The pension sharing order took effect on 17 March 2004.
Nonetheless, the husband continued making the maintenance
payments to the wife until December 2004.
His pension was reduced from the former rate of £13,789.14 per
annum to £8,549.27 per annum in January 2005.
The pension scheme wrote to the husband on 17 January 2005
seeking repayment of £2,978 being the overpayment of pension benefits
between 17 March 2004 and 17 January 2005.
The wife declined to repay the overpayment requested of the
husband by the scheme. The
husband commenced the Internal Dispute Resolution Procedure within the
Teachers’ Pension Scheme and then referred the matter to the
Pensions Ombudsman.
The husband argued that the pension scheme had,
by indicating that the draft consent order was “acceptable” to
them, raised a defence of estoppel in his favour against the recovery
of the overpayment. It was
alleged that the scheme induced the husband reasonably to believe by
written representation that the scheme knew and accepted that he would
be paying the wife maintenance payments and that the scheme should
have made it clear that they would not be able to comply with the
consent order and that the payments under the pension sharing order
would be backdated. The
Ombudsman rejected the estoppel defence determining that in his view
the husband could not reasonably have relied on the statement that the
documents were “acceptable” to mean that he could proceed without
risk of something going wrong in the way that it did.
“He could reasonably have assumed the Teachers’ Pension
thought that the documents, if finalised in the same form, would give
them what they needed to carry out the split.
He should not have taken it to mean that he should regard it as
acceptable to him.”.
However, the husband also complained that the
pension scheme could have been more proactive in the implementation of
the order. The Ombudsman
found that the scheme contributed to a delay of 1½
months without which the implementation period would have begun on or
about 1 May 2004 and therefore ending on 31 August 2004 (rather than
January 2005). Whilst the
Ombudsman did not accept that the scheme could be held responsible for
maintenance payments to the end of the implementation period as
determined by him (31 August 2004), different considerations applied
beyond that point. He determined that it was or ought to have been
foreseeable that delay in implementing the pension sharing order could
have had financial consequences for the husband.
Even if the agreement to pay maintenance was ill-advised, the
maximum loss which the husband ought to have suffered related to the
4-month implementation period for which the scheme should not be
liable. By contrast, the
payments of maintenance made in September, October, November and
December 2004 resulted from the delays in implementation found by the
Ombudsman. Accordingly,
the Ombudsman reduced the overpayment repayable by the husband by £1,340
net repayable over 4 years, being the period set by the scheme which
the Ombudsman considered to be fair.
The Ombudsman noted that he could not see that
the husband had any grounds on which to pursue recovery of the
overpaid maintenance from the wife.
Whilst the maintenance in question in Pike
was payable pursuant to an undertaking, one wonders whether an
application might have been made by the husband under the Matrimonial
Causes Act 1973, s 33 which provides for repayment of maintenance due
to a change in the circumstances of the payer or payee since the order
was made. The power to
order repayment is distinct from the power to vary under the
Matrimonial Cause Act 1973, s 31 and relates to the period prior to
any continuing variation order.
It is to be noted that the Ombudsman stressed
that, where a pension is in payment, implementation should so far as
the scheme was concerned have included actually making the necessary
adjustments and not merely treating a particular date as the
implementation date and writing to the parties to indicate what the
adjustment was.
In Shepherd,
an estoppel defence was also rejected.
The only difference of significance between Shepherd
and Pike is that in Shepherd,
whilst the Ombudsman accepted that the husband had been paid his
pension at the higher rate for one month more than was strictly
necessary, the overpayment was not reduced because of delay amounting
to maladministration.
Slattery
Slattery v
Principal Civil Service Pension Scheme (2008) 8 August, ref
27870/1 concerns a short point as to whether a pension sharing order
applies to benefits received as a result of retiring under an early
retirement scheme, in this instance, the Approved Early Retirement (AER)
Scheme. The pension
sharing order was made on 22 January 2002 as to 50% of the husband’s
pension rights under the Principal Civil Service Pension Scheme (PCSPS).
Shortly after the order was made, the scheme advised the
husband that the pension debit would not affect benefits paid under
the Civil Service Compensation Scheme (CSCS), of which the AER formed
part. In February 2005,
the husband advised the scheme that he might retire on AER terms and
was advised that, if his pension came into payment early on AER terms,
the pension debit would apply immediately.
On 15 September 2006, the husband signed an agreement under
which his employment was terminated by way of AER.
The husband contended that the pension he had
received since retirement under the AER scheme on 3 November 2006
should not be subject to pension sharing under the pension sharing
order until his 60th birthday on 9 November 2009.
To support this proposition, he argued that payments received
as a result of having retired early under the AER scheme came not from
the PCSPS but from the CSCS and were therefore a separate entity to
the pension he would receive from age 60. The CSCS rules indicate that
compensation is given in different forms depending on the event that
has caused the person to leave the Civil Service before normal
retirement age. If the
event is redundancy (whether compulsory or flexible), the person’s
benefits are preserved under the PCSPS, but an annual compensation
payment is paid under the CSCS until retirement age when the annual
compensation payment ceases to be replaced by payment of the preserved
benefits under the PCSPS. If,
however, a person’s contract of employment is terminated as a result
of retirement under the AER scheme, that person does not receive an
annual compensation payment, but instead is entitled to receive an
unreduced early retirement pension from the PCSPS.
Although the husband argued that the payments he received on
early retirement were offered to him as an inducement to leave the
Civil Service and should be considered as compensation from the CSCS,
the Deputy Ombudsman determined that this did not change the nature of
the payment which is early payment of PCSPS benefits triggered by
application of the CSCS. The Ombudsman determined that benefits
payable under the AER scheme, even though part of the CSCS, were
pension benefits under the PCSPS and were therefore to be treated as
benefits from an occupational pension scheme for the purposes of the
Welfare Reform & Pensions Act 1999.
However, it is to be noted that payments under the Compulsory
and Flexible Early Retirement (CER and FER) give rise to an annual
compensation payment of the type mentioned above which may well fall
outside the pension sharing mechanism, although it was unnecessary for
the Ombudsman to decide the point.
The husband further argued that the CETV as at 30
January 2002 included amounts in respect of a pension at age 60, a
lump sum and a widow’s pension, but did not include an early
retirement pension as this could not have been known about, and thus
factored in, at the date of the calculation of the CETV.
It was also argued by the husband that his AER pension could
not be subject to pension sharing as his entitlement to it arose after
the date of the pension sharing order.
The Ombudsman rejected these arguments indicating that the
husband had misunderstood the mechanism for reducing the member’s
benefits as a result of the pension sharing order.
Under the Welfare Reform & Pensions Act 1999, s 31, the
amount deducted under a final salary scheme, such as the PCSPS, would
not be the percentage pension share of the accrued pension at the date
of divorce. Instead, the
scheme actuary calculates what the deferred pension given up at the
date of divorce is worth at retirement.
This figure is the hypothetical “negative deferred pension”
which is then deducted from the member’s full pension assuming that
there was no pension sharing order in place.
Thus, the death in service benefit will not be reduced because
such benefit does not form part of the hypothetical pension.
The use of this formula is intended to prevent schemes from
enjoying a windfall at the expense of the member.
Example
H is aged 50 and has a
current pensionable salary of £27,000.
He has accrued 20 years of service at the date of the hearing
in a n/60ths scheme.
Cash equivalent (CE)
is £80,000; court makes a
pension sharing order in favour of W for 45% of CE.
Pension debit/credit
is 45% of £80,000 = £36,000.
When H retires at age
60 (with 30 years’ accrued service) at a final salary of £45,000,
his pension will need to take account of the negative deferred pension
representing £4,050 (20/60 x £27,000 x 45% = £4,050) increased in
line with any required revaluation to the date of retirement. After
such revaluation, the negative deferred pension increased to £6,000
by H’s retirement.
H’s reduced pension
is:
30/60 x £45,000 = £22,500
- £6,000 (negative deferred pension) = £16,500.
A scheme actuary is
prevented from calculating the pension as if the member had given up
45% (9 years’ worth) of the rights to 20 years’ pensionable
service at the time of the divorce.
Reduction of
member’s pension 9/60 x £45,000 = £6,750.
Final pension £22,500
- £6,750 = £15,750.
In this example, the
windfall to the scheme at the member’s expense would be £750 per
annum until the member dies.
The pension benefit is set in place from the date
of the pension sharing order, but is triggered when the benefit comes
into payment whether that is early, at normal retirement date or after
normal retirement date. A
CETV is calculated, albeit based on certain assumptions, to reflect
current or future benefits from the scheme.
Future events, such as circumstances giving rise to early
payment, could not be factored into the CETV and, for funded schemes,
will fall as a cost to the scheme concerned. The husband’s payments
from the scheme were being received early as he took AER.
They are nonetheless benefits from the scheme and have thus
been taken into account in calculating the CETV and fall to be reduced
in accordance with the Welfare Reform & Pensions Act 1999, s
31(1)-(3).
Whilst this decision turns on its own facts, it
does relate to a major pension scheme and may have relevance in other
situations involving early retirement.
It is clear that the result may well have been different had
early retirement arisen in differing circumstances, eg redundancy. |