Insolvent Pension Scheme Sharing on Divorce
Published / Last Updated on 27/10/2022
Pension Sharing on divorce was introduced in December 2000 by Welfare Reform and Pensions Act 1999 thereby replacing Pension Earmarking.
Pension Sharing Order
In simple terms, if a pension fund is included within any financial agreement on divorce, the Court can issue a Pension Sharing Order to be served on a pension scheme to share the pension between parties.
- Defined Contribution (DC) pension schemes such as Workplace Pensions, Private Pensions and Investments Linked Money Purchase company schemes will have a Pension Sharing Order attached sharing a proportion e.g., 40% or indeed the whole fund 100% to be transferred to a pension scheme in the name of your spouse.
- Defined Benefit (DB) pension schemes will require the Cash Equivalent Transfer Value to be calculated and in the same way, DB schemes will have a Pension Sharing Order attached sharing a proportion e.g., 40% or indeed the whole fund 100% to be transferred to a pension scheme in the name of your spouse.
What if the Pension Scheme is Insolvent?
- Defined Contribution (DC) pension schemes are covered by the Financial Services Compensation Scheme (FSCS). The FSCS is funded by levy on all pension, investment, mortgage, insurance and financial adviser businesses. If your pension company fails the FSCS will cover 100% of your pension with no upper limit but if a SIPP provider fails, £85,000 compensation may be available as your pension funds will not be invested with the SIPP provider but will be still invested inside a fund. Pension sharing orders can still be issued.
- Defined Benefit (DB) pension schemes are covered by the Pension Protection Fund (PPF). The PPF is funded by levy on DB scheme trustees. 100% ‘compensation’ is payable for those at or above the normal retirement age of the scheme and 90% if you are below the normal retirement age of the scheme. NB: This is not a specific fund value, this is a % ‘compensation’ so no cash equivalent transfer value is available.
Pensions Act 2008
The Pensions Act 2008 created the Pension Protection Fund (PPF). In 2011, three sets of regulations dealt with the issue of pensions and divorce, defined benefit schemes and when they become insolvent and move to the PPF.
- The Pension Protection Fund (Pensions on Divorce etc: Charges) Regulations 2011.
- The Pension Protection Fund (Pension Compensation Sharing and Attachment on Divorce etc) Regulations 2011.
- The Divorce and Dissolution etc. (Pension Protection Fund) Regulations 2011.
Compensation Sharing Order for Divorce on or after 06/04/2011
The above regulations gave the Courts in England and Wales (not Scotland/Northern Ireland) the same powers to issue pension sharing orders but as the PPF is not a fund, it is ‘compensation’ then:
- PPF cannot issue a pension sharing transfer value as there is no fund value, it is compensation.
- The Courts therefore issue a Compensation Sharing Order.
- If pension income was already being paid out, the PPF will share income payments between parties as directed by the Compensation Sharing Order.
- If the pension is a deferred benefit i.e., pension benefits are not yet in payment the PPF will allocate the % share of benefits and revalue deferred benefits increasing with Consumer Prices Index (CPI) inflation to a maximum of 2.5% pa until normal pension age of the scheme is reached and then start paying pension benefits in the appropriate shares.
