I have recently been instructed as a single joint expert on a number of divorce cases that involve one party having a pension promise from an Unfunded Unapproved Retirement Benefits Scheme (UURBS).
Although an UURBS can resemble an occupational pension scheme, we usually treat it in isolation from all of the parties’ other pensions, with its own solution for the provision of equality of income if that is what is required.
We take this approach because an UURBS is fundamentally different to an HMRC registered pension scheme (or State pension for that matter) in terms of its:
Hence, it would be wrong, in our opinion, to simply put an UURBS into the ‘mix’ with the parties’ other pension schemes. To give an example, if after pension sharing has occurred, one party were—to a large extent—be reliant on the UURBS for the majority of income, whereas the other party was solely reliant on registered pension schemes for income, there would be a mismatch in the default risk. The second party would benefit from all of the various protections offered to registered pension schemes such as the Pension Protection Fund, whereas any pension paid by the UURBS is only backed up by the party’s employer.
Having differing levels of risk (including default risk) in divorce cases is not unusual but with an UURBS in the mix, matters become a lot more complicated and we would say very subjective. This is because it is not just the current default risk of an employer that matters with an UURBS (remember it is unfunded), but also what this may be at the time the pension comes into payment and thereafter during the remaining lifetime of the party.
Furthermore, the strength of the relationship between the employer and the party—what we could call the ‘covenant’ between them—may well be a factor in assessing this level of risk.
So, in our view, any assessment of the pension promise under an UURBS will be very subjective, and the resulting capital value placed on the pension promise from the UURBS would need to be treated with considerable amount of caution. This not only impacts on pension sharing but also on offsetting.
With this in mind, we usually seek confirmation from the UURBS’s sponsoring employer that they would be willing to accept a Pension Sharing Order over the party’s pension promise. In a number of cases, we are told this is not possible and perhaps such an initial response is not unexpected. However, upon subsequent challenge (and perhaps with some persuasion from the employee) the employer may realise that legally it is possible to make such an Order over an UURBS pension promise. As a consequence, the ex-spouse is admitted as a beneficiary of the arrangement in his or her own right, as investing a pension credit outside of the scheme will not normally be permitted (again remember an UURBS is unfunded, and any pension credit that is transferred-out would be treated as a contribution to a new approved pension scheme, such that it would be tested against the Annual Allowance).
If however, the employer remains adamant that they will not accept a Pension Sharing Order then it may still be possible to ensure equality over this arrangement in a discrete manner can be achieved, by some other legal mechanism / order—possibly via an attachment order.
Including an UURBS in the mix of divorcing parties’ pensions could also lead to a large and maybe unexpected tax bill for the second party on retirement. If one party’s pension promise in the UURBS is not shared with the other party in some way and as a consequence, the second party receives a lot larger pension credit from the registered pension schemes than would otherwise have been the case, it may then be possible that he or she will incur a significant LTA tax charge on retirement. In contrast, the first party’s pension promise in the UURBS would not be taken into consideration for LTA tax purposes. In other words, if the registered pension schemes have to take all the strain of pension sharing, a significant LTA tax charge for the second party could arise on retirement.
In conclusion, there are a number of solutions for sharing an UURBS pension promise in divorce cases but simply including this in the mix with the parties’ other pensions and hoping that what turns out will be fine, rarely works.
Jonathan Galbraith
Head of Mathieson Consulting Limited
