Landmark pension decision

Landmark pension decision

27 July, 2017 by Gilson Gray in Blog

There was a great deal of buzz amongst Scottish Family Lawyers last night following the issuing of the Supreme Court’s decision in the case of McDonald v McDonald. Other than the fact that it is relatively rare for the Supreme Court to be asked to adjudicate on Scots Family Law, at first blush the case may not sound particularly interesting – at its core the case is about pensions and a formula. However, with pensions often being the second most, if not the most, valuable asset in Scottish family cases the impact of McDonald will be significant for many separating couples.

In Scotland, we seek to divide the matrimonial property. The matrimonial property is all assets acquired between the date of marriage and the date of separation except those assets which are acquired by way of third party gift or inheritance. Pensions are matrimonial property, insofar as attributable to the period of the marriage.
In practical terms therefore, a valuation (known as a CETV) of a pension is obtained as at the date of separation and then an apportionment is carried out to calculate what proportion of that value is attributable to the period of the marriage and therefore in the “pot”.

The formula applied is A x B/C where –

A is the CETV at the date of separation;
B is the period for which the individual has been a member of the pension scheme during the marriage until the date of separation; and
C is the total period prior to the date of separation that the individual has been a member of the scheme.

What has been in dispute amongst family lawyers for many years however, and what goes to the heart of McDonald, is what “membership” means.

When the case first came before the Sheriff at Edinburgh Sheriff Court, he held that only “active” periods of membership were relevant. In other words, the only relevant period of membership was the period during which the pension was actually being paid into. On appeal to the Inner House of the Court of Session, that Judgement was upheld by a majority of 2:1, but notably the dissenting view was given by Lady Smith; an extremely well respected Family Law silk prior to becoming a judge.
The difference that it made to the parties in McDonald is significant. If Sheriff Holligan and the majority in the Inner House were right, and only active periods of membership were to be taken into account, then the value of Mr McDonald’s pension that was attributable to the marriage and in the “pot” was £10,002. If instead, the whole period of membership (whether as an active member, a deferred member or a pensioner member) was relevant then the value of the pension attributable to the period of the marriage was £138,534.
The Supreme Court in issuing their Judgement yesterday disagreed with the Sheriff at Edinburgh and the Inner House and unanimously decided that the relevant period of membership was the whole period of membership. The nitty gritty of the Judgement relates primarily to statutory interpretation, and an analysis of that is perhaps unnecessary for understanding the import of decision. The McDonalds will not be the only separating couple this decision impact in a significant way.

The Supreme Court’s decision ends a very long-running dispute between Scottish family lawyers in respect of the correct interpretation of our primary Family Law legislation and supporting Regulations in respect of apportioning pensions.
However it is of note that the Supreme Court Judgement also addresses that just because the whole period of membership should be taken into account in calculating the value of the pension that is matrimonial property, does not mean that that value will then be divided equally.

The Supreme Court highlights that individuals in those circumstances will have arguments available to them in terms of other provisions of our Family Law legislation that it would not be fair and reasonable for the value of a pension to be divided equally between the parties. Therefore, while the McDonald decision may well bring an end to litigation on the correct interpretation of the formula for apportioning pensions, it seems inevitable that we will now see cases where unequal division is sought to be justified because the party concerned did not actively contribute to a scheme during the marriage. It may yet prove to be a case of the same game; different rules.

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