Earmarking

Article by Richards Butler

The Pensions Act 1995 gave Divorce Courts the power to "earmark" (i.e. divert) pension benefits due to a scheme member to the other party in a divorce. The Court can only touch the member's own benefit and his death in service and five year guarantee lump sums. It can't touch spouse's or children's pensions. Nor can it divert a member's benefits to children, only the other divorcing party.

However just how little a large number of divorce lawyers know about the workings of occupational pension schemes has come to light since earmarking became possible. Orders that are impossible to meet, including ones that "earmark" more than a member's pension or lump sum, are far too common.

As scheme trustees must be given notice of what the divorcing party plans to ask the Court for, trustees would be well advised to examine every draft order within the, albeit tight, 14 day response time. Trustees can challenge later but this will be more difficult.

Schemes can invoice members for the cost of handling the order. This has to be a separate invoice - it can't be deducted from a member's interest in the scheme. However, as Courts can make orders that are time intensive to implement - for instance, increasing at a percentage out of step with the rest of the scheme - this is worth taking into account. All "earmarking" costs have to be charged up front.

Earmarking orders are likely to cease on remarriage or death of the divorcing party, although orders over lump sums may not. Scheme managers must keep good records of orders and must notify a receiving arrangement on a transfer out.

However, although the Court now has these wider powers, the first major case on the subject, T -v- T (1998) suggests that judges might be unwilling to make earmarking orders where there are disputes about how assets are to be divided.

Mr Justice Singer's approach was that it was impossible to predict at the time of the divorce what the financial requirements of the parties would be when their pensions came into payment. Therefore there was no point making an earmarking order, particularly when it could be varied at any time on the application of the parties and there was no reason why earmarking orders should not be made at a date in the future when the parties' needs were more easily discernible. Instead he made orders over the existing property (the house and bank account) and a maintenance order from Mr T's salary. He did make an order in Mrs T's favour over Mr T's death in service benefit.

It seems therefore that earmarking orders will be encountered (at least in the short term) in divorce where the parties are close to retirement or are willing to agree to the division of pension by a consent order.

And then, once we've got used to this system, we can prepare for pensions splitting which will be with us in about 3 years!