Pension sharing on divorce: The implications of a landmark case

A recent Allan McDougall Solicitors case, McDonald v McDonald, has had important implications for how Scottish divorce legislation is interpreted.

It was a significant case concerning the period of pension scheme membership that should be taken into account upon the division of assets on divorce. The Supreme Court ruled in favour of our client, a retired British Coal employee’s former spouse.

This was in fact the first Scottish financial provision on divorce case ever to reach the Supreme Court. It had been twenty years since the last Scottish financial provision on divorce case reached the, then, House of Lords.

So, what were the facts of the case and what are the implications for how Scottish divorce law is interpreted?

The facts of the case

The parties were married on 22 March 1985 and separated on 25 September 2010. The former matrimonial home was sold and the proceeds divided equally.
 
Mrs McDonald consulted us in February 2011 seeking advice on her financial rights and obligations on divorce.
 
The law in Scotland relating to divorce, and in particular financial provision on divorce, is governed by the Family Law (Scotland) Act 1985. It sets out the process by which the court is to identify matrimonial property before moving on to determine the fair division of property. It treats as matrimonial property “the proportion of any rights or interests of either person…in any benefits under a pension arrangement which is referable to the period [during the marriage but before the relevant date]”. The ‘relevant date’ is the final date of separation.
 
Mr McDonald raised an action for Divorce at Edinburgh Sheriff Court. We lodged defences on behalf of Mrs McDonald seeking a pension sharing order on the basis that Mr McDonald’s British Coal Pension formed part of the matrimonial property to be taken into account in fixing financial provision.
 
Mr McDonald worked as a miner for British Coal. He joined the British Coal Pension Scheme on 11 December 1978. He sustained an injury in 1983 as a result of which he was ill-health retired and exercised his right to receive a pension income before his normal retirement age. He retired from active service on 10 August 1985.
 
The Divorce etc (Pensions)(Scotland) Regulations 2000, which apply to occupational pension schemes and personal pension schemes of all kinds, provide for the valuation of a person’s rights or interests in a pension arrangement for the purposes of the Family Law (Scotland) Act 1985, by reference to what is known as the ‘cash equivalent transfer value’ (CETV). The Regulations contain an apportionment formula to be applied to calculate the proportion of rights or interests referable to the period of marriage. The dispute in this case related to the correct interpretation of that formula.
 
The British Coal Pension Administrators provided a CETV of Mr McDonald’s pension interest as at 25 September 2010 of £172,748. On Mr McDonald’s interpretation of the apportionment formula, the value of his interest in the pension benefits which formed part of the matrimonial property was £10,002. On our interpretation of the apportionment formula the value of his interest in the pension rights which formed part of the matrimonial property was £138,734.
 
The case proceeded to a hearing at Edinburgh Sheriff Court in 2013, at which the sheriff found in favour of Mr McDonald’s approach. Allan McDougall Solicitors subsequently appealed to the Inner House of the Court of Session, the highest appellate court in Scotland. The appeal was heard by three judges of the Court of Session. By a majority of 2 to 1 the court, again, found in favour of Mr McDonald’s approach. We then appealed to the UK Supreme Court, the highest appellate court in the country. The case was heard by a panel of five judges in May 2017. On 26 July 2017 the court issued a unanimous decision in favour of Mrs McDonald. The proportion of Mr McDonald’s pension rights which form part of the matrimonial property is therefore £138,584, not £10,002.
 
The case will now be sent back to the sheriff to determine how the matrimonial property ought to be divided to ensure a fair distribution.

What are the implications for how Scottish divorce law is interpreted?

The Supreme Court’s decision has significant implications for divorcing couples calculating and dividing their assets.

The Supreme Court ruled that the period of membership in The Divorce etc (Pensions)(Scotland) Regulations 2000 is the period of membership of the pension arrangement, whether or not contributions were being made. This applies to both occupational and personal pension schemes..

However, the Court added that this does not necessarily mean that the value of an interest in a pension must be shared equally between the parties.  The legislation contains other principles which inform decision-making and introduce flexibility into the award of financial provision. There may be special circumstances for departing from the equal sharing of matrimonial property.

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