Pension scheme membership and matrimonial property – Supreme Court ruling gives clarity

  • Insight

03 August 2017

The Supreme Court has given clarification on the extent of which periods of a spouse’s pension scheme membership forms matrimonial property.

In the case of McDonald v McDonald, the Supreme Court determined that it was all periods, whether active or deferred, of pension membership that formed matrimonial property.

The law

The Supreme Court’s decision involved some complex statutory interpretation of the Family Law (Scotland) Act 1985 and the associated regulations, the Divorce etc. (Pensions) (Scotland) Regulations 1996 (SI1996/1901) and the current 2000 Regulations (as amended), and assessment of the valuation and apportionment of pension rights.Essentially, the Supreme Court was being asked to look at the formula for valuing pension rights – often an important part of matrimonial property - and decide what portion of that was in fact matrimonial property. 

The facts

The couple in this case had been married for 25 years.  The husband had contributed to a pension for a number of years before he got married and for only a matter of months during the marriage. He then took early retirement on ill health grounds.  He stopped contributing to the scheme and being an “active” member, and then received payments from the pension scheme as a “pension” member.
 
The pension continued to grow during the marriage, although he was no longer an “active” member or making payments into it.    At the time he stopped contributing to the pension, it had a value of around £10,000 for matrimonial property purposes. 

By the time the parties separated it was worth around £138,000.  The husband argued that it should only be the part of the pension when he contributed to it as an “active” member which should form matrimonial property. The wife argued it was the whole value of the pension as at the date of separation which should apply.

The Supreme Court’s decision

Initially, both the sheriff and the Inner House of Court of Session decided it was the period of the pension while the husband was contributing to it which would form matrimonial property, i.e. the lower sum.  When it came before the Supreme Court, the court had to interpret the provisions of the Family Law (Scotland) Act 1985 and the application of the 2000 Regulations. 

There is clear provision under section 10(5) of the 1985 that any benefits under a pension arrangement which is referable to a period of the marriage forms matrimonial property.  There is qualification to that provision in regulation 3 of the 2000 Regulations. Regulation 3 sets out mandatory rules for the calculation and valuation of those pension benefits, depending on the type of membership and whether or not the person is, among other things, an active or deferred member. It should be noted that Regulation 3 deals solely with how the benefits are calculated, and not how they are viewed in terms of matrimonial property. 
 
The portion of the pension benefits which form matrimonial property is set out in Regulation 4 of the 2000 Regulations as a fraction of the total value of the pension (B ÷ C where B = years of marriage of the pension and C = the years of membership of the pension during the marriage). No reference is made in Regulation 4 to different types of pension scheme membership.The sheriff and the Sheriff Appeal Court had interpreted Regulation 4 to read the word “active” into Regulation 4 so that it meant years of active membership.

However, the Supreme Court took the view that this interpretation was wrong and it should not be limited to a time when the pension member was contributing to it as an “active” member.  The Supreme Court noted that there was recognition of different types of membership in Regulation 3 for valuing a pension. However, the court decided that had it been the legislative intention to differentiate between deciding what types of membership could represent matrimonial property, Regulation 4 would have said so. There is no reference to differentiation between classes of membership in Regulation 4.  Furthermore, the interpretation of the 1985 Act did not support the inclusion of such words.

Therefore, the whole period of membership of the pension during the marriage and as at the date of separation was held to form matrimonial property, irrespective of the type of membership and whether the member was still contributing to it. The decision of the five Supreme Court judges was a unanimous one. 

Outcome

The higher value of the pension will now be used, and the case has been referred back to the original sheriff to give effect to the Supreme Court’s ruling.  This means that, after a diversion through several appeal courts, the original sheriff court now has to decide on dividing up a bigger pot of the matrimonial property. 

Comment

One might anticipate that Mrs McDonald stands to gain from a straight half share of the higher value of the pension.   Not so. 
The court will have a discretion in deciding how to divide the new and increased pot.  Although the starting point is that a fair share of matrimonial property is normally an equal share, there is scope within the 1985 Act to allow the court to share matrimonial property in unequal proportions.
   
Indeed, section 9.1 of the 1985 Act recognises certain circumstances in which the court can be flexible in how it shares the matrimonial property. There is also flexibility under section 10 of the 1985 Act to enable the court to recognise special circumstances and depart from the equal sharing of matrimonial property.
 
Some of the obvious examples under section 9 are where a spouse gives up a career in order to raise a young family, which can result in their earning capacity being reduced as well as an ability to build up their own pension rights.   Another example, often cited, is a party having the care of a child under 16 after the divorce asking the court to give them a higher share of the matrimonial property, rather than just a straight half.

In turn, section 10(6) looks at particular circumstances, such as the source of the funds used to acquire the matrimonial property not being derived from the income or efforts of the persons during the marriage.
An obvious example would be, as in the present case, where a husband had a pension he paid into before the marriage, but where payments stopped after the marriage. The pension still exists and grows and the growth will have a value as matrimonial property. It could be argued, however, that the actual value that is matrimonial property should not be divided equally as the source of funds which allowed it to grow came from the contributions before the marriage. Therefore, the husband could argue that he should receive more than a half share with his wife being entitled to significantly less. 

It will be interesting to see the use and value of these sections and provisions and their application by the Sheriff in the new decision in McDonald v McDonald……

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