Fiona Hay MCIArb takes a look at the changes made by PAG2.
26th Feb 2024 | Blog
PAG2 was launched on 16th January 2024. Those who had become familiar with the original document may be interested to know in what respects PAG2 differs from PAG1.
A list of all the changes can be found (a) on the Nuffield Foundation website and (b) in a comprehensive article in the Financial Remedies journal – Financial Remedies Journal: The PAG2 Guide – What Has Changed?. Many of the changes are predictable alterations in the light of new case law (such as W v H [2020] EWFC B10) and new legislation (such as no-fault divorce).
Readers however may be interested to know whether the document suggests any significant changes to the approach of dividing pensions on divorce. In fact, there are no dramatic changes but there are some changes of emphasis and important expansions in Part 4 and Part 6 and Part 7 now includes reference to the Galbraith Tables.
Part 4 – Treatment of pensions in ‘need-based’ and ‘sharing’ (non-needs) cases
Parts of this section have been re-drafted; the important changes are:
(i) New emphasis on the utilisation of s.25 criteria to arrive at a conclusion as to whether the case is a needs or sharing case. Of import is the analysis of the parties’ income needs in retirement which is a s.25 factor.
(ii) Throughout PAG2 the text has been re-drafted to make it clear that the date for apportionment calculations to commence is the date of seamless cohabitation (GW v RW [2003] EWHC 611 (Fam) and Co v Co [2004] 1 FLR 1095). The ambition is to avoid unnecessary actuarial calculations apportioning from the date of the marriage.
(iii) There is a new section on short marriages – in short marriages needs may need to have been relationship generated to justify sharing of non-marital pension.
This author would suggest that the tenor of PAG2 is to be even firmer than PAG1 on the inappropriateness of apportionment in needs cases. The short-marriage section is a counterbalance in the case of short marriages.
Part 6 – Dealing with pensions fairly on divorce
Part 6 has been expanded in sections to provide more comprehensive advice about some features (such as the impact of crystallised and uncrystallised benefits, the requirement in relation to making the same percentage orders against AVCs and the main pension, and an expansion of tax advice in relation to Defined Benefit schemes).
The main substantive difference in this critical section is the discussion on and reference to the debate about whether pensions should be divided by income or capital. This debate has come firmly to the fore since the judgment of Moor J in CMX v EJX [2022] EWFC 136 –
- “Turning to pension sharing, my attention was drawn to the decision of Nicholas Francis QC, sitting, at that point, as a deputy High Court Judge in SJ v RA [2014] EWHC 4054 (Fam) where he said:-
“Why should someone receive more just on the basis of gender? There may have been an explanation when rules required the purchase of an annuity. However, to give the wife more than the husband, on account of either age or gender would seem to me to be unacceptable discrimination unless it is a case which is governed solely by needs. If a person should receive more of a pension fund under the modern rules simply because she (or he in the case of a marriage where the husband is much younger) is likely to live longer, then such an approach would logically extend to all capital assets. Moreover, European Union judgments and rules are rapidly outlawing discrimination on account of gender. In cases where distribution is being made on a basis which is not guided by need it is, in my judgment, incorrect to distribute a pension fund on the basis of equality of income…” - I could not agree more. If assets are to be divided equally, they should be divided equally. In general, there is no justification for awarding more to one party because they are younger or have a longer life expectancy. Both parties should share the fruits of the marriage equally. Moreover, in my experience, the only thing that can be said is that life hardly ever goes to plan, whether it be one party living far longer than expected or another remarrying immediately. It follows that I have become very troubled by directions that ask a pensions actuary to calculate a division on the basis of equality of income in retirement. Apart from the fact that such reports tend to be very expensive, the simple fact is that such a direction almost enshrines the Duxbury paradox into practice. It cannot be right, in general, that the younger you are, the greater your award. In any event, it has no place whatsoever in equal division cases.
The High Court is very unlikely to be dealing with a true needs case and the dicta of Nicholas Francis QC (as he then was) and Moor J are relevant to sharing cases. PAG2 acknowledges that there remained a conflict of views within PAG as to the utilisation of income calculations in sharing cases. At 6.24:
“Whilst there are different views within PAG on the subject, it is certainly not the case that the pursuit of equal incomes should be regarded as ‘the holy grail’. The debate between an equality of income and an equality of capital value remains unresolved at the time of writing. Indeed, Francis J, co-chair of PAG, is one of those who has a general preference for equality of capital value”.
The same section draws attention to the observations of Mostyn J in the forward to Hay, Hess and Lockett (second edition):
“There is however one area of controversy. I have read with great interest […] the discussion about the tension between equality of division and equality of outcome when making a sharing order. For my part I am firmly in the former camp as the latter exercise must surely bring into account the inestimable benefit of actually being alive when the other party is dead! In my book it is an equal outcome for the husband to receive £20,000 annually for 10 years and for his younger wife to receive £10,000 for 20 years. But I acknowledge that my view is not shared by all and we may have to await a decision from a higher court to resolve the issue. Both sides of the divide are very fairly put by the authors of this edition.”
Reference is made to an article written by Mathieson in rebuttal of the suggestion that the younger party necessarily needs more of the CE to provide equal income: What Does Equality of Pension Capital Mean? [2023] 2 FRJ 128. In his article George Mathieson observes that in many cases the younger party may in fact need less capital as the pension asset is invested for longer. This must be balanced against the fact (as PAG2 observes drawing on At A Glance) that younger wives close to retirement will often require more capital to provide them with equality of income. This therefore feeds back to the central debate. Is it fair for a younger party to receive more of an asset because they are to live longer?
How does this analysis assist those relying on PAG2 for guidance in relation to division by capital/income in a sharing case? This author would suggest that in a big money case it must now be clear that division by CE (or, just possibly, by another capital value if the CE is really unreliable) is adequate; no income calculations are required. In a middle money case it may be appropriate to have both calculations carried out. The parties and the court will then have the material to have a meaningful debate about which type of division is fair in the particular case.
Part 7 – Pension Offsetting
PAG2 has introduced the Galbraith tables as an offsetting valuation methodology:
Galbraith Tables: an approximate approach to calculating an actuarial value based on a fixed methodology which assumes medium investment risk; the tables are arrived at by amortising a lump sum to zero on typical life expectancy using a medium level of risk for the investment return assuming a drawdown approach for pension income;
PAG2 also sets out the caveats that must be applied if using Galbraith instead of a bespoke PODE valuation.
[The Galbraith tables are]
• intended to provide a starting point for putting an approximate value on defined benefit pension rights where the CE does not appear to represent an appropriate value but the parties do not wish to obtain (or pay for) a full pensions report. This method is only intended to be used as a starting point and is not a substitute for obtaining an expert valuation from a PODE.
• Use of these options by practitioners is subject to a number of important health warnings, in particular, the following points should always be noted where method v) is being considered:
• the user needs to have a competent understanding of the complexities of defined benefit pensions. This means ensuring that the pension multiplicand (amount) is selected correctly and properly understood, the implications of retirement age options on pension value are considered, and the revaluation and pension increase rules adopted by the scheme have been appropriately reflected in the choice of factor used. If these tables are used inappropriately, there is the risk that the value placed upon pension rights may differ materially from what the appropriate valuation should be, and particular care should be exercised by users;
• in most cases and particularly where the value of defined benefit pension rights is material (CE in excess of £200,000), use of these tables is less suitable than obtaining a valuation of the pension rights by a competent PODE; in cases where the value of pension rights is under £200,000, it should be noted that the valuation results produced by the tables may differ (possibly materially) from a valuation calculated by a PODE, noting that the latter will usually reflect current market conditions whereas the Galbraith Tables are only expected to be reviewed periodically and hence will not reflect recent movements in the financial markets;
• the methodology used for [Galbraith] does not allow for annuity purchase and this may produce valuation results which may differ materially from other methods used by PODEs
• use of Galbraith may not be preferable to using the CE in all circumstances and practitioners will need to consider whether the facts of the case justify departure from using the CE where a PODE is not being instructed.
This is a summary of some of the main changes made to Sections 4,6 and 7. For a comprehensive description of all changes the reader is referred to the Nuffield Foundation website or the above-mentioned article (by Taylor and Cobley) in the Financial Remedy Journal.
Fiona Hay – February 2024
