A pension is often a couple’s most valuable asset, more valuable in many cases than their home. The way a pension is divided during divorce is not straightforward. The way the law deals with public sector pensions in divorce is even more involved.

One of the reasons why dealing with public sector pensions in a divorce is more complex is that in 2015 the UK government tried to force funds to change their long-standing final salary schemes into career-average schemes. This impacted almost all public sector pension members retrospectively, not just those who joined their particular scheme after the change was made.

In terms of the impact on members, those closest to retirement were permitted to stay in their final salary schemes while others saw their pots ‘tapered’ with some of their pension remaining in the legacy final salary scheme and the rest moving into the new career-average scheme. Unfortunately, the vast majority were simply moved automatically into the new and less favourable scheme.

As a result, younger public sector workers – including government workers, NHS staff, teachers, fire fighters and police officers – will now have to work for longer to gain less from their pensions when they retire. Understandably, this has engendered a great deal of resentment among our public sector workers.

How are pensions dealt with in divorce?

In financial remedy proceedings, the court analyses each parties’ financial assets in a bid to divide them between them in the fairest possible way. Pensions are part of this process. They are usually split depending on who made the majority of the contributions during the marriage. The most common mechanisms with which to split a pension pot are a Pension Sharing Order, Pension Offsetting, or a Pension Attachment Order (also known as earmarking).

With public sector pensions, there are some specific issues to consider.

The main one is valuation. The cash equivalent transfer value (CETV) can often undervalue the true worth of a public pension’s benefits compared to private pensions. As such it is often a good idea to involve an actuary. They will be able to provide a more accurate valuation of the pension’s worth based on income benefits.

It is also highly advisable to seek expert legal advice, as public sector schemes tend to have their own guidelines, for example the scheme may not permit direct transfers to someone other than the named holder or there could be unique rules regarding retirement provisions or survivor benefits.

McCloud and Sargeant: The legal challenge to the fairness of the public sector pension reforms

When the changes were announced in 2015 members of the judicial and the firefighters pension schemes launched a legal challenge. Their challenge was successful and forced the government to appeal. The Court of Appeal dismissed the government’s arguments in the cases the Lord Chancellor and Secretary for State for Justice v McCloud, and the Secretary of State for the Home Department v Sargeant (2018) EWCA Civ 2844 calling the arrangements discriminatory based on age, particularly towards the younger members of a scheme, and called for the 2015 changes to be undone.

This landmark ruling is now known as the “McCloud judgment” and is frequently quoted in divorce cases involving public sector pensions.

In 2021 the government finally acknowledged the unlawful age discrimination highlighted by the McCloud ruling, introducing the Public Service Pensions and Judicial Offices Act 2022 in response. The Act requires government departments to make amendments to public service pension scheme regulations to redress the age discrimination identified in McCloud and compensate the affected members. This is known as the “McCloud remedy” and came into effect on 1st October 2023.

The McCloud remedy effectively gives members who have been affected by age discrimination a choice between claiming the pension benefits they accrued between April 2015 and March 2022 under the terms of their original final salary scheme or the new career-average scheme.

Why is McCloud relevant to public sector pensions in divorce?

The reason McCloud is relevant to divorces involving public sector pensions is that public sector schemes do not produce CEVs that make allowance for the ruling. This means that any valuation will not reflect any potential or future increase in the value of the pension.

As pension sharing and offsetting both require a high level of certainty over the value of the accrued pension benefits at the point of the divorce, this causes problems. A fair division cannot be made if there is a possibility the figures the court is working to are inaccurate.

That said, it is unlikely a divorce settlement will be put on hold for over 2 years whilst separated couples wait for the schemes to rectify matters following the introduction of McCloud remedy. This means pension sharing solutions need to be found that share both the risks and the benefits between the parties.

If you or one of your clients are involved in a divorce involving a public pension scheme and would like to discuss how best to approach its division with one of our experienced Financial Remedies team, please contact us today.