Concerns raised over pension impact of new divorce laws

Concerns have been raised that new divorce laws and processes could result in even fewer cases where pension wealth is fairly shared at the time of the divorce, with a report from LCP calling for greater research and monitoring into this issue.

New changes to allow couples to secure a no fault divorce will be brought in in April, which aim to help streamline the divorce process and reduce the extent to which it is an acrimonious process by removing the requirement for one party to demonstrate fault.

However, LCP has raised concerns that the new divorce law, along with the increased move to an online process, could undermine the effective sharing of pension wealth at divorce.

Its report, You’ve got mail – the new divorce law and its potential impact on the sharing of pensions in England and Wales, pointed out that financial orders are only made in around 1 in 3 divorces, and not all of these financial orders include pension orders, meaning that formal orders in respect of pensions only apply in a minority of cases.

Whilst it is possible that in the remainder of cases pensions are being fully and fairly shared by offsetting against other assets, the paper suggested that there are many reasons why this is often not likely to be the case.

This includes underestimating the potential value of pension wealth, lack of focus on the technical and complex area of pensions when looking for a swift divorce, or priorities being focused elsewhere, such as on children.

Whilst the report stressed that these problems are a result of the current system, it warned that the new process could make matters worse, noting that, in some cases, a spouse may receive notice that a divorce application has been made just a few months before the court is asked to grant the first divorce order.

It explained that, as they will be able to little or nothing to stop or delay the process, individuals may need to deal with a number of pressing practical issues, such as child care or living arrangements, with pension rights likely a low priority amid this backdrop.

It also suggested that individuals may be reluctant to raise pension issues for fear of being seen to be ‘obstructive’ or ‘difficult’, in a new system designed to reduce conflict and the need to prove fault.

In light of this, the paper has called for much greater research and monitoring into what happens during the divorce process with regard to taking account of pension wealth, and for close scrutiny into whether attitudes and outcomes on pensions change as a result of the new divorce process.

LCP partner and co-author of the report, Steve Webb, commented: “One group currently at high risk of retirement poverty is divorced women. In large part this is because relatively little attention is often given at the time of divorce to a financial settlement which gives proper weight to pension wealth.

“It is entirely understandable that divorcing couples focus on other matters, but the risk is that people simply do not understand the value of pensions.

“Whilst there is much to commend the new divorce law, it would be very unfortunate if a by-product was that even fewer divorces were accompanied by a fair sharing of the couple’s overall wealth, and in particular of pensions”.

Co-author of the report, Rhys Taylor, added: “I very much welcome the new divorce law, but the family justice system needs to be astute to avoid the law of unintended consequences.

“So often pensions are the last thing anyone really wants to think about, especially on divorce. Care needs to be taken to ensure that the fair distribution of pension wealth on divorce is not overlooked in this brave new era.”

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