Changing the law to make pre-nuptial agreements legally binding could have major implications for pensions, according to industry commentators.

The Law Commission yesterday announced a consultation on potential options for reforming the laws governing pre-nuptial, post-nuptial, and separation agreements. As it stands, the law does not allow a couple to prevent each other from asking the courts to decide how their property should be shared in the event of separation.

The Commission is seeking views on whether the current arrangements provide the right basis for determining the effect of marital property agreements.

According to documents released with the consultation paper, if one of the parties in a divorce or dissolution applies to court to resolve a financial dispute, the court has wide powers to make financial provision for the parties and for any children of the relationship.

Powers extend to making an ancillary relief order requiring the parties to share a current or future pension.

However, the consultation paper asks whether couples should be able to enter into a binding agreement not to seek ancillary relief in the event of divorce or dissolution. The paper also asks that – if couples are to be able to enter into binding agreements – whether such agreements should be able to encompass all of a couple’s property or to contain only terms relating to preacquired, gifted or inherited property.

Partner at Sacker & Partners Janet Brown said that legislation enacted in 1999 and 2000 enabling pension sharing aimed to keep pensions on divorce simple. However, making pre-nups legally binding could complicate matters.

“If any legislation was enacted along the lines that a person can, in a pre-nup, protect assets including pension earned before they were married then the use of a pre-nup would allow couples in England and Wales to do what Scottish law cannily already does, and limit any pension sharing order to the benefits earned during the period of the marriage/civil partnership.

“However, messy is a word to describe the possibility of legally binding pre-nuptial agreements in a pensions setting, as the doubtful bride/groom/civil partner-to-be will be best advised to try and get into the pre-nup provisions about spousal support and the division of property including any pension on any future divorce/dissolution,” Brown said.

Partner at actuary firm Barnett Waddingham Danny Wilding said the value of pension rights is likely to become a major factor in drawing up pre-nups, if they are to be legalised in England and Wales.

This would be especially true for those marrying later in life, where the accrued pension could often have become one of the most valuable assets for a ‘high-net-worth’ individual.

“In such cases pensions may be specifically referred to in pre-nups which might direct future divorce courts to disregard pension rights built up prior to the period of marriage. Pension sharing orders given out by the divorce courts to pension scheme administrators would then in turn be expected to reflect any pre-nuptial terms – for example, a spouse’s share of a pension scheme member’s benefits may be limited to half of the pension earned during the period of marriage (as it is in Scotland already) rather than half of the whole accrued pension, as it is typically at present in England and Wales.

“A consequence of allowing for a pre-nuptial agreement may therefore be that a divorcing party may only become entitled to a small proportion of the value of their spouse’s pension. However, we would expect divorce courts would still have discretion to offset one marital asset against another, and one would hope they would seek to avoid making orders for very small pension shares,” Wilding said.

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