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IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE FDPR
His Honour Judge Horowitz QC
(On appeal from District Judge Green)
||Royal Courts of Justice
Strand, London, WC2A 2LL
||25th May 2006
B e f o r e :
THE LORD CHIEF JUSTICE OF ENGLAND & WALES
LORD JUSTICE THORPE
LORD JUSTICE DYSON
Mr N Francis QC & Miss A Campbell (instructed by Messrs Brookman) for the Appellant
Mr M Pointer QC (with Mr V Le Grice QC in his stead on 15th February 2006) & Mr S Webster (instructed by Messrs Gordon Dadds) for the Respondent
Hearing dates: 15th February 2006 & 27th March 2006
HTML VERSION OF JUDGMENT
Crown Copyright ©
Lord Justice Thorpe:
The Principal Issue.
- This appeal raises the question of how following a decree of divorce or nullity the court assessing the fair division of available assets in order to achieve a clean-break between the parties should treat pensions in payment.
- In modern times pensions have come to be an increasingly important ingredient within the range of financial investments made by prosperous families. Where one or both of the spouses have been high earners over a sustained period the pension entitlement may form a very substantial part of their overall financial security. The powers of the courts have had to be specifically enlarged in line with this economic development.
- The case of Brooks v Brooks  2 FLR 13 provided a partial solution to the problem. The court used its power under s.24 (1) (c) of the Matrimonial Causes Act 1973 to deal with a pension. This section gave the court the power to vary any ante-nuptial or post nuptial settlements made on the parties to the marriage for the benefit of the parties and or any children of the family. Brooks v Brooks laid down that in some circumstances a pension scheme fell within the definition of a nuptial settlement and that accordingly the court could vary the terms of the settlement.
- The pension scheme in Brooks v Brooks was an unusual one and Lord Nicholls observed in that case that:
"This decision should not be seen as a solution to the overall pension's problem. Not every pension scheme constitutes a marriage settlement … If the court is to be able to split pension rights on divorce in the more usual case of a multi-member scheme where the wife has no earnings of her own from the same employer, or to direct the taking out of life insurance, legislation will still be needed" ( 2 FLR 13 at 23).
- Consequently after Brooks v Brooks the powers of the courts to deal with pensions were increased by successive legislative enactments. Several new powers became available to the courts as methods of dealing with pensions in matrimonial proceedings.
- Section 166 of the Pensions Act 1995 amended the Matrimonial Causes Act 1973 by inserting new sections: sections 25B 25C and 25 D. The powers under these provisions were known as pension earmarking. The provisions were amended by the Welfare Reform and Pensions Act 1999 and they were renamed pension attachment orders.
- The 1999 Act also introduced a new financial order into the 1973 Act by Sections 21A, 24B, 24C and 24D. These sections enable the court to order that a spouse's pension be shared (or split) so as to provide a proportion of that pension to the other spouse. The recipient of a share then has a pension fund that is personal to him or her.
- The 1999 Act also abolished the remedy created by Brooks v Brooks, for proceedings begun after 1st December 2000, by excluding a marriage settlement in the form of a pension arrangement from the categories of settlement which are variable.
- These statutory developments raised the question of how pensions were to be valued, especially where the court intended to set off the value of a pension against some other asset the value of which was either transparent or established by expert evidence. As Judge Horowitz QC said in the judgment giving rise to this appeal:
"The problem of difference in the quality of assets distributed to or left with the parties becomes highlighted in the post White era where mathematical equality receives a higher emphasis than before. Unless the parties receive the same amount of cash or equal acreage the exercise will always involve measuring and equating different assets mediated through a money valuation. Money value thus performs its essential function as a medium of exchange."
- The development of a convenient and fair method of valuation of pensions concerned not only the family justice system and its practitioners but also the pensions industry. Accordingly the question was investigated and considered by a select committee of the House, the Social Security Committee. In their report of October 1998 at paragraph 47 they recommended that: "the courts should be given a limited discretion to cater for circumstances where serious anomalies would arise from the rigid use of a standard CETV of pension rights."
- Section 25D (2)(e) of the 1973 Act provides for regulations to be made for the value of any benefits under any pension scheme to be valued and verified for the purposes of financial provision orders.
- The first regulations made under this section were the Divorce etc (Pensions) Regulations 1996. We are not concerned with those regulations since in due course they were replaced by the Divorce etc (Pensions) Regulations 2000 and the Pensions on Divorce etc (Provision of Information) Regulations 2000 (hereinafter "the Information Regulations"). The 2000 regulations came into force on 1st December 2000 and revoked the 1996 regulations.
- Regulation 3 of the Divorce etc (Pensions) Regulations 2000 provides that:
"For the purposes of the court's functions in connection with the exercise of any of its powers under Part II of the Matrimonial Causes Act 1973, benefits under a pension arrangement shall be calculated and verified in the manner set out in regulation 3 of the Pensions on Divorce etc (Provision of Information) Regulations 2000 …"
- Regulation 3 of the Information Regulations provides the methodology for valuation, distinguishing between deferred members of an occupational pension scheme, active members of an occupational pension scheme and pensions in payment. For the purposes of the present appeal regulation 3 is the crux and accordingly I set out the parts of the regulation relevant to pensions in payment: -
"(1) Where an application for financial relief under any of the provisions referred to in section 23(a)(1), (ia), (iii) or (iv) of the 1999 Act (supply of pension information in connection with domestic and overseas divorce etc in England and Wales and corresponding Northern Ireland powers) has been made or is in contemplation, the valuation of benefits under a pension arrangement shall be calculated and verified for the purposes of regulation 2 of these Regulations in accordance with-
(d) paragraphs (7) to (9), if-
(i) the pension of the person with pension rights is in payment;
(7) Except in a case to which, or to the extent to which, paragraph (9) applies, the cash equivalent of benefits in respect of a person referred to in paragraph (1)(d) shall be calculated and verified in such manner as may be approved in a particular case by-
(a) a Fellow of the Institute of Actuaries;
(b) a Fellow of the Faculty of Actuaries; or
(c) a person with other actuarial qualifications who is approved by the Secretary of State, at the request of the person responsible for the pension arrangement in question, as being a proper person to act for the purposes of this regulation in connection with the arrangement.
(8) Except in a case to which paragraph (9) applies, cash equivalents are to be calculated and verified by adopting methods and making assumptions which-
(a) if not determined by the person responsible for the pension arrangement in question, are notified to him by an actuary referred to in paragraph (7); and
(b) are certified by the actuary to the person responsible for the pension arrangement in question as being consistent with "Retirement Benefit Schemes-Transfer Values (GN11)" published by the Institute of Actuaries and the Faculty of Actuaries and current at the date on which the request for valuation was received."
- With that introduction I turn to a brief statement of the background.
Factual and Procedural Background
- The parties were married on 5th December 1987. The wife had been married before and had a child from the previous marriage, Isadora (date of birth 20-12-85), who was adopted by Mr Martin-Dye subsequent to the marriage.
- The wife and her first husband had purchased a property called Green Lane Farm in October 1984. The parties lived there and improved the property during the course of the marriage.
- The parties had a child together, Frederick born on 26th November 1988.
- The husband petitioned for divorce on 24th April 2003 and Decree Nisi was pronounced on 20th August 2003.
- At the time of the hearing Isadora was awaiting her A-level results and holding an offer from Exeter University. Frederick was attending Cranleigh Public school. He was a keen go-kart racer. Frederick's motor racing activities were paid for by sponsorship provided by the husband's company Offspec Kitchens.
- The wife applied for ancillary relief on 30th May 2005 and the husband cross applied on 2nd June 2005.
- The husband was a commercial pilot working with British Airways. He took early retirement in 1998 on the grounds of ill health. The husband had a pension with BA which was already in payment at the date of the hearing of the applications.
- The parties' assets can be summarised as follows:
i) Green Lane Farm – a forty-one acre property comprising the former matrimonial home, 2 cottages, various stables and outbuildings from which the wife runs a livery business.
ii) Leander – a property in the husband's name
iii) Eton Design Ltd, a property holding company formed by the parties. The parties were equal shareholders in the company.
iv) Offspec Kitchens, a new business venture started by the husband, with a partner in January 2001.
v) Cars and chattels
vi) A policy held by the husband with the Prudential
vii) Various small investments
viii) Pensions: the husband's British Airways pension in payment, and the wife's pension with Friends Provident, also in payment.
- In the preparation of the ancillary relief applications the wife understandably emphasised that at the date of the marriage she was richer than the husband and had accordingly brought in greater assets. In countering that case the husband relied on inter alia the CETV value of the BA pension at the date of marriage. That was appropriate since at the date of marriage the BA pension was not in payment and in accordance with regulation and practice fell to be valued on the CETV basis. The actuary whom he instructed contended for a CETV valuation of about £170,000 at marriage, a figure reduced in the subsequent judgment of the District Judge to £123,000. Having claimed this credit in the contribution arena the contention by Mr Francis QC for the husband that the two pensions, by then in payment, should be excluded from the court's review was clearly inconsistent. That point Mr Francis readily conceded during the course of argument in this court. Accordingly it is not surprising that Mr Pointer QC for the wife insisted that pensions in payment were brought into the courts' calculations. The end result was a letter to British Airways that resulted in a response offering a CETV figure of approximately £940,000 for the husband's pension. We were not shown either the letter of request or, initially, the response from BA. I was therefore not impressed by the subsequent submission of Mr Le Grice QC (who appeared before us in Mr Pointer's stead) that what BA furnished was in truth a cash equivalent benefits figure under regulation 3(7) erroneously labelled a CETV figure. As Mr Le Grice conceded, in the absence of evidence the suggestion was mere speculation.
The Hearing before District Judge Green.
- So when the case came for a week long trial before District Judge Green in the Principal Registry the two pensions in payment appeared in the schedule of available assets with a combined CETV worth of £1,040,807.
- Before the District Judge both parties sought a clean-break. The husband's primary case was that the assets should be split equally with all the properties being sold and each party retaining their pension. He contended that the disparity in the pre-marriage contributions had become merged in the 16 or 17 year marital history. However Mr Francis drew attention to his fallback case, briefly stated in written submissions, providing for a pension sharing order to equalise future pension receipts.
- The wife sought a division of assets in the percentage of 62½:37½ in her favour and a Varma order for Freddie. She particularly sought the transfer of the husband's share in Green Lane Farm, both as the family home and as the site of her successful livery business. She accepted that Eton Design should be liquidated and the proceeds equally divided and that each party should keep their own pension. I emphasise that neither party primarily contended for a pension sharing order before the District Judge and both presented the two pensions as assets together worth over a million pounds. The valuation exercise required by the Information Regulations was not carried out and the District Judge was not referred to those Regulations by any of the counsel in the case. The outcome before the District Judge can be crudely summarised thus: she valued the assets at the date of the hearing at approximately £6.3 million, and concluded that a fair split would be 57% to wife and 43% to the husband. The wife's share included her pension at £100,317 and the husband's share included his pension at £940,490. In addition the District Judge ordered the husband to pay education expenses for the two children of the family amounting to £23,000 per annum.
The Appeal to Judge Horowitz QC.
- The husband filed a Notice of Appeal against the judgment of District Judge Green on 28th September 2004, substantially amended on 16th November 2004. The Notice challenged the treatment of the pensions in payment. It also attacked the District Judge's reasons for rejecting the application for a pension sharing order.
- The appeal was heard by HHJ Horowitz QC over two days commencing on the 14th July 2005.
- HHJ Horowitz QC gave judgment on 25th July 2005. The husband's appeal was dismissed.
- Mr Francis referred us to his written submissions for the appeal. They demonstrate that the second of the six issues he raised was "the proper way to treat pension assets, especially bearing in mind that they are in payment". The issue was elaborated over fifteen of the following paragraphs of his skeleton argument. Again the District Judge's rejection of the application for a pension sharing order was challenged.
- Judge Horowitz QC carefully recorded Mr Francis' oral submissions as follows: -
75. Mr Francis says that here the District Judge fell into fundamental error of principle. The pension should not have been treated as capital. Nor should it have been worked twice. By this he means that it is stacked in the husband's capital column and then used to identify the husband's income for himself and as a source of support for Freddie. The pension, he says, should have been used as an income stream. It is, he submitted no more a capital asset than the wife's livery business to which no-one sought to ascribe a capital value. On the other hand, the husband suffers injustice because his pension fund is treated as a CETV value as part of his 43% capital allocation, despite the fact that he cannot commute or spend it. Even if the pension is brought in, Mr Francis said, it should not be at CETV value. Mr Francis pointed out that as an ancillary relief capital asset, the husband's BA pension fund represented a poor bargain. His £940,000 pays £30,000 net. The 2005-2006 At a Glance quotes £518,000 as the Duxbury fund required to provide a level £30,000 net with the added advantage of freedom to cash in all or part of the notional portfolio at will."
- Judge Horowitz QC answered Mr Francis' case in paragraphs 85 to 89 of his judgment which I set out below: -
"85 I do not accept a calculation that excludes disparate pensions in payment as a valid presentation of the position of either party. The pension, especially the husband, represent payments referable to past salary taken as pension provision and now in a safe capital haven. Mr Francis refers me to dicta that warn against treating pension provision as equal currency to other assets. An example may be found in Maskell where on modest figures the husband was decades away from retirement and awarded £4,000 in capital on the basis of his future enjoyment of £32,000 CETV-worth of pension. Singer J made a similar observation in F v F at paragraph 14, again a case of future pension. Neither is an apt analogy for the present facts.
86 Mr Francis criticises the use of the CETV. He was unable in principle and by calculation to point to an alternative appropriately discounted figure. I note that a defensive suggestion made by a husband to discount the value of his pension not yet in payment by 25% was rejected by Bennett J in Norris –  1 FLR 1142 at para 69. A discount of a pension fund not yet in payment was similarly rejected by Nicholas Mostyn QC in GW v GW  2 FLR 108. Of course, the theoretical basis of the discount was in both of those cases different being founded upon the fact that the fund was not yet paying. I see no compelling logic to consider a discount founded upon the fact that payment has arrived.
87 Burying the pension off–schedule is, in my judgment, no solution. Mr Pointer says that CETV values are the prescribed currency, provided by the rules. That is a well made point. However, I accept that there may be some degree of force in Mr Francis' critical analysis of CETV values where a pension is used without full consideration as an element in a flexible search for equality. The answer to Mr Francis may, it seems to me, be found in an observation of Coleridge J in G v G  2 FLR who said at paragraph 47:
"After a marriage of this length and with the quality of each party's respective contributions, fairness dictates, in my judgment, that as far as possible they should leave the marriage on terms of broad financial equality. But equality does not necessarily mean precisely 50% of the value of a given assets schedule on a given date. It means leaving each side in a position of broadly similar financial muscle. The wife has a greater measure of security which, given her lack of earning capacity, is sensible. The husband has the greater income, earning capacity, capital growth potential and risk. Both will share, to differing degrees, in the future risks and potential rewards. I think that is a fair balance between them."
The principle contained in that passage is that a departure from equality may reflect the quality of the divided assets as well as the overall justice required by the circumstances of the case.
88 This is a case where the District Judge examined with care the impact of her order and departed from strict equality. She determined 57/43 in her discretion on consideration of all the factors. The wife did not succeed in relating the award to her initial contribution or extracting a lump sum from the husband. While she succeeded in her major objective of retaining Green Farm Lane, she did so at a price nearer to paper equality.
89 Those factors may include and in my judgment could include in this case factoring in the nature of an asset as an element in calibrating the precise percentage award. I do not consider that I should re-open consideration of the judgment below on the basis that the District Judge did not expressly address the characteristics of the pension fund Mr Francis relies upon. I am, however, clear that if I were to do so, I would arrive at the same or a very similar resulting terms of the assets awarded to each party."
- Clearly Judge Horowitz was right to reject Mr Francis' submission that the pensions in payment should be excluded from account. Although his rejection of Mr Francis' criticism of the use of CETV figures must be questioned, I emphasise that no one referred him to the Information Regulations. He was hardly assisted by Mr Pointer's submission "that CETV values are the prescribed currency, provided by the rules."
- An Appellant's Notice, seeking to appeal the decision of HHJ Horowitz QC, was filed by the husband on 9th August 2005. The notice raised a sufficient point of principle to justify a second appeal and permission was granted on 17th November 2005.
Submissions in the Second Appeal.
- Mr Francis filed two skeletons, one to support his permission application and the other to support his appeal. Nowhere did he refer to the Information Regulations. Only in paragraph 13 of his second skeleton did he cite Regulation 3(6) of the Divorce etc (Pensions) Regulations 1996. That was hardly helpful since those regulations had been revoked with effect from 1st December 2000.
- Thus it is the remarkable and regrettable fact the parties have engaged well known specialist counsel and incurred costs of over half a million pounds on two hearings in the court below which were distorted by the failure to cite and focus on the method of valuation of pensions in payment provided by the regulation in force. When the point was raised with Mr Francis in argument he at once acknowledged the error and frankly conceded that the responsibility was in part his. Mr Le Grice, who had prepared the respondent's skeleton for the appeal jointly with Mr Pointer and Mr Webster, was equally ready to accept some responsibility for the failure.
- Although I accept that to establish the procedure for and method of valuation requires a careful study of both Rule 2-20 of the Family Proceedings Rules 1991 and the Information Regulations, paragraphs 16.193 and 16.199 of the 18th edition of Rayden gives a clear and complete statement of the required practice.
- In the course of his oral submissions Mr Francis informed us that his client at the date of retirement had taken 25% of the fund in cash, in sum £130,000. That went into the family pot. However since the courts below had brought his pension into the account at the CETV value of £940,490, his pension in payment amounted to 35% of £2.7M, being his 43% share of the assets. Mr Francis' principal submission continued to be that the proper application of the District Judge's percentages for the division of the assets now entitled his client to receive a balancing payment of £646,325 rather than the figure of £146,179, which would be his client's due were his appeal dismissed. Mr Francis arrived at the higher figure by excluding both pensions in payment from the result. Mr Francis did not contend for a pension sharing order, although in reply it was clear that he recognised that a pension sharing order would follow from the acceptance of his principal submission.
- Mr Le Grice in his oral submissions did not challenge Mr Francis' submissions on the categorisation of pensions in payment. He sought to support the outcome below by a table illustrating the net effect of the District Judge's order. The table presented the husband as having a house worth £650,000 (the District Judge's assessment of his housing needs), residual cash of almost £400,000, his pension at the CETV value of approximately £940,000 and Offspec together with its loan account amounting to £715,428: in all £2,701,673. The schedule represents his income as a notional £15,830 return on residual cash, pensions £37,840, Offspec £40,000 (as found by the District Judge): in all £93,670 gross. The schedule shows the wife's capital worth of £3,581,288 made up of Green Lane Farm £3,104,000, residual cash £376,971 and pension £100,317. By way of income the document shows the livery business producing £73,500 £15,079 notional return on residual cash and pension £5,818: in all £94,397 gross. Mr Le Grice submitted that this schedule showed the reality and the essential fairness of the outcome, given that there was no challenge to the wife's entitlement to the greater share. Of course the flaw in this otherwise impeccable document is that it continues to introduce the pensions in payment as assets valued on the CETV basis.
- In first expressing my conclusions on the appeal I did not go beyond the failings recorded in paragraphs 36-38 above. Since the courts below had not ascertained the CEB valuations as required by Regulation 3 of the Information Regulations but had acted on CETV valuations the resulting discretionary allocation of assets could not stand.
- After the circulation of the judgments in draft to counsel the respondent's solicitors approached BA and obtained a fax in the following terms:-
"Further to your fax received earlier today we can confirm that the CETV mentioned in our letter to Brookman Solicitors dated 13 July 2004 was calculated with reference to the member's status in the scheme and therefore can technically be described as the Cash Equivalent of Benefits."
- That resulted in an application by Mr Le Grice to introduce fresh evidence and to reopen the appeal. As well as the recent letter from BA cited above the respondent also produced the letter from BA of 13th July 2004 which was the source of the CETV valuations used throughout the trial. Both letters clearly bear the same signature. The court fixed an oral hearing of the application on notice to the appellant. At the oral hearing Mr Pointer returned to the case to argue the application. His simple submission was that the draft judgment could not stand since the further evidence demonstrated that in reality the judgments below were reached on the basis of CEB valuations carelessly labelled CETV valuations. Although Mr Pointer's instructing solicitors had made no enquiry of Friends Provident, Mr Pointer suggested that the CETV valuation advanced for his client's pension was also in reality a CEB valuation.
- In response Mr Francis did not dispute the face value of the recent fax from BA. That may reflect the fact that his client is the pensioner and therefore better placed than the respondent to obtain evidence as to the value of his pension benefits.
- At the conclusion of brief submissions we admitted the fresh evidence.
- That evidence sheds very limited light on the process of valuation that produced the figures upon which the courts below worked. Whether strictly compliant with regulation 3, or at least consistent with regulation 3 we do not know. However the fresh evidence is sufficient to establish the possibility that valuation in accordance with regulation 3 would have produced equivalent figures. A mere disregard of the regulation would not in itself justify the appeal if the resulting error were only one of mis-description.
- In the light of the fresh evidence it is necessary to rule on the question of principle raised by paragraphs 3-6 of the grounds of appeal and elaborated in paragraphs 5-7 of the appellant's skeleton. In sum it is there submitted that the courts below erred in principle in debiting against the appellant's entitlement to 43% of the assets his pension in payment at the value supplied by BA. Pensions in payment, being different in kind to other available assets, should have been apportioned by means of a pension sharing order.
- The arguments in support are self-evident. A pension in payment is no more than a whole life income-stream akin to an annuity. It cannot be sold, commuted for cash or offered as security for borrowings. It has no capacity for capital appreciation. The benefit does not survive the death of the scheme member and thus cannot form part of his estate. Thus there are obvious distinctions between a technical value ascribed to a pension in payment and a market value ascribed to a realisable asset such as a freehold, a portfolio of shares or a work of art. These distinctions have been partially drawn in previous decisions of this court: see Cowan v Cowan  2 FLR 192 and Maskell v Maskell  1 FLR 1138.
- Before the District Judge this issue was almost submerged under a plethora of other contentions. However in his opening submissions for the husband Mr Francis wrote paragraph 3.5:-
"In each case the capital value of pensions has been left out, for the simple reason that both pensions are in payment and therefore only represent a source of income. If the court wishes to bring these into account in part or at all, the proper way to deal with them is to make a pension sharing order."
In the following paragraphs he defined the principal issues including:-
"4.7 The proper way to treat pension assets: are they simply to be added in as capital, or are they to be viewed as income producing assets (bearing I mind that they are in payment)?
4.8 Once the court has resolved all the above, what type of asset each should have?"
- In his final submissions to the District Judge Mr Francis contended that there were no grounds to depart from an equal share of the assets. He continued at paragraphs 17 b) and c):-
"This leads H to make a concession that goes beyond our open proposals. It seems to us that to seek to ringfence his pension is inconsistent with these arguments. The pension is an asset that H brought to the marriage. Indeed, W expressly seeks to give it a value now (although it's in payment) and then to treat that as capital to be offset against other capital resources.
If H acknowledges that the pension is an asset of the marriage to be equitably divided, this can be achieved by a pension sharing order to equalize pensions."
- In the accompanying schedule Mr Francis invited the transfer to the wife of a substantial portion of the BA pension so that the sum of the wife's existing Friends Provident policy and her portion of the BA policy would equal the remaining portion of the husband's policy.
- How did the District Judge deal with this issue? At page 7 of her judgment she says this:-
"In the husband's closing submissions he suggested, as far as I am aware, for the very first time in the long history of this ancillary relief dispute, that there should be a pension-sharing order. This is not something the wife has ever suggested as far as I am aware. My attention was not drawn to any to any documentation to prove that the notice requirements of Rule 2.70 had not been met or to any response to such notice. Neither had I been given any written or oral evidence as to the cost of a pension share arrangement in this case or a calculation as to the income each party might expect pursuant to any person sharing order. In other words the husband had left this suggestion until very late in the day and supported it with no evidence as to its cost or impact.
The husband's pension has a CETV of almost £940,500; the wife's pension is considerably smaller with a CETV of £100,300. My judgment takes into account any possible loss of pension benefits as a result of divorce. Each pension is already in payment."
- The only other relevant reference comes at the conclusion of her judgment when she announces the result in the following 2 paragraphs:-
"In the course of this judgment I have worked my way through all of the disputed facts, all of the circumstances of the case and all of the Section 25 factors. Weighing everything in the balance I have concluded that a fair outcome is to divide the parties global assets of approximately £6,326,000 in the proportions 57% to the wife and 43% to the husband, giving the wife assets totalling approximately £3,600,000 to include Green Lane Farm at approximately £3, 1000,000 net of costs and her pension at approximately £100,000. By keeping Green Lane Farm her needs for a home and a way to be self-sufficient and support the children are met.
By keeping his British Airways pension and his company, the husband's income needs for himself are met and he can afford his support of the children. Additionally, he will have sufficient other capital to meet his housing needs. The illiquid assets he receives are not "duffs". They do, can or should produce his income."
- With the advantage of hindsight I conclude that the judgment of the District Judge is flawed on two grounds. First in dividing the available assets between the parties she ignored the essential differences between saleable property and an income stream derived from an inalienable pension in payment. The District Judge's perception of these differences was hindered by the way in which the husband's case was presented and by the use of CETV labels, the meaning of which was not questioned. Second the District Judge's rejection of the husband's application for a pension sharing order was insufficiently reasoned. The evidential deficits were more technical than substantial. The District Judge conducts a quasi-inquisitorial trial and her duty is to consider the exercise of all the statutory powers available to the court. The option of a pension sharing order was raised in Mr Francis's opening submissions. If the District Judge felt unable to consider such an order without further information she might have raised that question at the outset.
- On appeal to Judge Horowitz QC the first issue raised in the written submissions was that the District Judge had secured to the wife the copper-bottomed assets and lumbered the husband with the risk-laden assets. His second issue was the treatment of pensions. Mr Francis' basic complaint was that the District Judge had fallen into fundamental error by adding CETVs of vested pensions to the value of other assets. A vested pension is not the same as a capital fund.
- I have already recorded Mr Francis' submissions on the appeal and Judge Horowitz's response.
- Again with the advantage of hindsight I conclude that Judge Horowitz was wrong to reject the appeal for two reasons. First I do not share his construction of the crucial paragraphs of the judgment of the District Judge (cited at paragraph 51 above) to demonstrate that she had factored in the nature of the assets as an element in calibrating the precise percentage award. As I read her judgment she first determined the percentage split by reference to contributions and other factors and then proceeded to divide the available assets between the parties in such a way as to secure the transfer of the husband's half-share in Green Lane farm in return for a comparatively small balancing payment. Even on Judge Horowitz's reading the District Judge erred in failing to recognise the true nature of the assets that she was factoring in. My second criticism is that Judge Horowitz failed to deal with Mr Francis' second submission, namely that the District Judge's reasons for rejecting the application for a pension sharing order could not be sustained. In my judgment those criticisms were well founded and constituted an independent ground of appeal.
- For the reasons stated above I conclude that the District Judge mis-directed herself and arrived at an erroneous conclusion. The appeal to Judge Horowitz failed to correct the errors. Before considering the consequences I express some general views, given that this appeal raises a point as to the proper treatment of pensions in payment which has not previously been considered.
- How then should pensions in payment be treated in clean-break cases? It is helpful to return to the provisions of section 25 of the Matrimonial Causes Act 1973. Section 25(2) requires the court in particular to have regard to: -
(a) "The income, earning capacity, property and other financial resources which each of the parties to the marriage has …"
(h) "The value to each of the parties to the marriage of any benefit which by reason of the dissolution or annulment of the marriage that party will lose the chance of acquiring."
- Section 25 (2) (h) previously made express reference to pension benefits because, prior to the arrival of powers to attach and to share, a major anxiety of wives on divorce was the loss of pension rights earned by the husband.
- Inevitably different methods of valuation have to be employed for deferred pensions, which include a limited right to draw down in cash, and pensions in payment which are no more than whole life incomes streams akin to annuities. Mr Francis cites the cases of Cowan v Cowan  2FLR 192 and Maskell v Maskell  1FLR 1138 which underline the special characteristics of pension funds. In the present appeal we are not dealing with deferred pensions and CETV. Our focus is upon pensions in payment and cash equivalent benefits. They are to be characterised as "other financial resources" within the section 25(2) (a) classification. For they do not sit comfortably in the category of "property", since they are unrealisable and non-transferable. Nor do they sit comfortably in the category of "income" because, although purely an income stream, the income does not derive from future endeavour but from past employment or contribution which will generally have been effected during the years of marriage.
- This case provides a useful example of this analysis. The "property" consists of the houses and the investments. The "income" is the receipts anticipated from the parties continuing endeavours, the wife in her livery business and the husband in his fitted kitchen business. The "other financial resources" are their respective pensions in payment.
- In the present case a clean-break order was inevitable. The court had a duty under section 25A to pursue that goal and both parties sought that outcome, only contesting the surrounding provisions. Therefore the court had two alternative ways of treating the other financial resources: either the pensions could be left undisturbed, compensating the wife for disparity, in that hers provided an income of £5,818 per annum gross whilst his provided an income of £37,840 per annum gross. That exercise is what is called offsetting by specialist practitioners. Alternatively, the judge could have made a pension sharing order, adjusting the apportionment of the capital property to reflect the effect of this.
- The District Judge adopted the former approach. She valued the parties pension rights and then treated these as equivalent in quality to the other property, concluding that it was fair that the wife should have 57% of the value of the total property and the husband 43%. In determining how effect should be given to this apportionment, she directed that the husband should retain the entirety of his pension rights and be credited as having received the value of these.
- I do not consider that this achieved a fair result. The quality of pensions in payment differs so significantly from that of the other property, that a result which left the husband with the vast majority of the former, as a major part of his share of the property, was not fair. A pension sharing approach should have been adopted.
- What then is to be done? The parties have already spent about £700,000 on the litigation to date. An order remitting the case for retrial is to be avoided at almost all costs. In my judgment this court can substitute a fair order for the flawed orders below by avoiding the route of offsetting, preferring the route of pension sharing. The starting point is the judge's conclusion that all the property should be divided in a way that would leave 57% of their value with the wife and 43% with the husband. Neither party sought to challenge this apportionment. This apportionment should be achieved as follows. The husband's pension rights should be shared with the wife in such a way as to bring the value of her own and the appropriate part of the husband's pension rights up to 57% of the value of the totality of the two pension rights. The remaining property should be shared in a manner which allocates to the wife 57% of its value and to the husband 43% of its value. This will require a substantial balancing payment to be made by the wife to the husband.
- I would accordingly allow the appeal to the extent of replacing the order made by the judge with an order that provides for the sharing of the all the property in this way. If agreement cannot be reached on the implementation of this order, the matter should be restored to this court.
- The difficulties that have been encountered in the present case should hopefully not recur. The Family Proceedings (Amendment) No: (5) Rules 2005 (SI 2005/2922) came into force on the 5th December 2005. Rule 118(F)(i) introduces Form P which should be used in every case where a pension is significant and where a pension sharing order might be made. It can be used on a voluntary basis if the scheme member signs to give his authority on the first page or can be ordered to be completed by the court, probably at the First Direction Appointment. The commencement date for this new practice is set by Rule 123, the effect of which, in my opinion, makes the new form available for use in any case where a Form A was filed after the 5th December 2005.
- The virtue of Form P is that it directs the attention of the professions to the information which is required for the just disposal of the claim, whether by consent or by order of the court. That information includes the value of the pension and the valuation method to be used.
- Where proportionate the court should be ready to act on the recommendations contained in paragraph 47 of the Social Security Select Committee Report for the instruction of an expert in a case that requires a bespoke valuation. In such cases it will usually be appropriate for the court to direct valuation by a single joint expert.
- Any completed Form P should be in the court bundle prepared for a FDR hearing and for any subsequent trial. In any case where there has been a bespoke valuation both the letter of instruction and the report should be included in the court bundle.
- The introduction of pension orders, both attachment and sharing, has required the resolution of a number difficult issues. Accordingly the Ancillary Relief Working Group of the Family Justice Council sometime ago established a pensions sub-committee to work with the pension industry and with Government officials in the resolution of these issues. The chairman of the pension sub-committee is Mrs Maggie Rae and I acknowledge gratefully the assistance that she has given in the preparation of this guidance as to the future.
Lord Justice Dyson:
- The essential facts relevant to this appeal can be stated quite shortly. The district judge found that the husband and wife started their married life together with assets of approximately £1.67 million, of which the husband had contributed about 18% and the wife about 82%. By the time of the hearing, they had by their joint efforts amassed an estate worth about £6.3 million. The approximate values of the principal capital assets were Green Lane Farm (£3.1million), Leander (£310,000), Eton Design Limited (£1,175,000), Offspec Kitchens Limited (£530,000), the husband's BA pension in payment (£940,000) and the wife's Friends Provident pension in payment (£100,000).
The judgments below.
- The district judge aggregated all these sums and concluded (p 32) that weighing everything in the balance:
"a fair outcome is to divide the parties' global assets of approximately £6,326,000 in the proportions 57% to the wife and 43% to the husband, giving the wife assets totalling approximately £3,600,000 to include Green Lane Farm at approximately £3,100,000 net of costs and her pension at approximately £100,000. By keeping Green Lane Farm her needs for a home and a way to be self-sufficient and support her children are met."
- At page 17 of her judgment, the district judge said:
"I must make a proper allowance for the impact in this case and in this marriage for the unequal assets each party brought to it. It is one of the circumstances of the case; it is a reason for a slight departure from equality. However, I do not see this task as a simple arithmetical exercise. I have weighed all the other section 25 factors in the balance before coming to my conclusion about a fair distribution."
- The valuations of the pensions in payment were described as "cash equivalent transfer values" ("CETVs"). But evidence obtained since the hearing of this appeal shows that the value of the husband's pension was in fact a cash equivalent of benefits ("CEB") calculated in accordance with regulation 3 of the Pensions on Divorce etc (Provision of Information) Regulations 2000. There is no reason to suppose that the value of the wife's pension was not calculated on the same basis. The confusion generated by the use of the CETV nomenclature has now been set at rest: on the material now placed before this court, I am satisfied that the values of the pensions have been properly computed.
- The net effect of the district judge's order was that the wife's income needs would be sufficiently met by the income from the livery business at Green Lane Farm together with her pension and a notional return on her residual cash; and the husband's income needs would be sufficiently met by his income from Offspec Ltd, together with his pension and a notional return on his residual cash. It is clear that the district judge contemplated that the wife would keep Green Lane Farm.
- The husband appealed against the district judge's decision on a number of grounds. These included a challenge to the way in which she had dealt with the pensions. The husband did not challenge the district judge's apportionment of 57:43 as such. But he did contend that the pensions should have been excluded from the value of the parties' capital assets because they are fundamentally different in kind from the parties' other assets. He further argued that, by including the CETV values of the pensions in the computation of capital and also taking account of the pension payments when considering income, the district judge had been guilty of double counting. There were other grounds of appeal with which we are not concerned.
- The submissions addressed to the judge have been essentially repeated in this court. Mr Nicholas Francis QC submits that a pension in payment is not the same as other capital assets. In particular, unlike other capital assets it is not transferable and is a vanishing fund which ceases to exist on the death of the recipient. In these two respects at least, it is fundamentally different from other assets. The district judge was wrong in principle to "mix currencies" in the way that he did. The pensions should have been treated as income streams. The husband's pension was no more a capital asset than the wife's livery business to which no-one had ascribed a capital value.
- The judge rejected this criticism of the district judge's approach. He noted (para 78) that the courts had been alert to the need to avoid "excessive distortion" resulting from the difference in quality of the assets to be distributed. He referred in particular to illiquidity and risk as being two areas of potential distortion or unfairness. The judge said (para 85) that he did not accept that a calculation that excluded disparate pensions in payment was a "valid presentation of the position of either party". He distinguished cases where it has been said that pensions should not be treated as equivalent currency to other assets. The judge's reasons for dismissing the challenge to the district judge's approach are contained in two paragraphs of his judgment:
"88. This is a case where the District Judge examined with care the impact of her order and departed from strict equality. She determined 57/43 in her discretion on consideration of all the factors. The wife did not succeed in relating the award to her initial contribution or extracting a lump sum from the husband. While she succeeded in her major objective of retaining Green Lane Farm, she did so at a price nearer to paper equality.
89. Those factors may include and in my judgment could include in this case factoring in the nature of an asset as an element in calibrating the precise percentage award. I do not consider that I should re-open consideration of the judgment below on the basis that the District Judge did not expressly address the characteristics of the pension fund Mr Francis relies upon. I am, however, clear that if I were to do so, I would arrive at the same or a very similar result in terms of the assets awarded to each party."
- Mr Valentine Le Grice QC seeks to uphold the decisions below. He submits that the approach adopted by the district judge and the judge was conventional and unexceptionable. The non-pension assets were aggregated to a sub-total; and the capital values of the pension funds then added to create a grand total. In this way, the court was able to see the difference between the realisable resources and the deferred assets comprised in the pension funds. The parties' overall resources were compared. He acknowledges the different nature of pension funds and recognises that it is incumbent on judges to bear that distinction in mind in their appraisal of resources. He submits, however, that there is no reason to suppose that the judges did not do just that in the present case.
The proper treatment of the pensions in the present case.
- The district judge did not explicitly state that, in arriving at her 57:43 split, she gave any weight to the fact that the pensions were different in kind from the other assets. The only factor that she expressly identified as justifying her "slight" departure from equality was the unequal value of the assets that were brought by the parties to the marriage. Her statement "I have weighed all the other section 25 factors in the balance" does not give me confidence that she calibrated her percentage award by factoring in the different nature of the pensions. The submission on behalf of the husband that the pensions should be left out of account because they were different in kind from the other assets was an important submission. He was entitled to a reasoned response from the district judge and the judge if this submission was to be rejected. In my judgment, he did not receive one. The district judge did not state whether she accepted that the pensions were different in kind from the other assets or whether, if she did, she considered that the difference required any, and if so, what adjustment to be made to the percentage distribution of the assets, and if not, why not. For his part, the judge gave no explanation as to why, if he were engaged on the exercise de novo, he would have arrived at the same or a very similar result.
- The question for the court was how to distribute the parties' assets fairly having regard to the matters specified in section 25(2) of the Matrimonial Causes Act 1973: see White v White  1 AC 596, 604H. Fairness requires the court to take account of all the circumstances of the case. In my view, it may be appropriate in some circumstances to aggregate the value of pensions in payment with all the other assets of the parties and make a distribution of the resultant value that is fair in all the circumstances. There is no rule of law that prohibits such an approach. Our attention was drawn to Maskell v Maskell  EWCA Civ 858,  1 FLR 1138. In that case, the judge had said:
"If one looks at this as a comparatively long marriage … one could then see £26,000 and the £6,000 endowment policies, £32,000, going to the mother. The father has his £40,000 pension fund, plus the £4,000 endowment, so £44,000, less the debts of about £8,000, so that brings him to £36,000. So there is a rough equivalent."
- At para 6, Thorpe LJ said:
"That passage seems to be fundamentally flawed, for the judge is making the seemingly somewhat elementary mistake of confusing present capital with a right to financial benefits on retirement, only 25% of which maximum could be taken in capital terms, the other 75% being taken as an annuity stream. He simply failed to compare like with like. I have a grave anxiety that the district judge made the same mistake…."
- But I do not read Thorpe LJ as saying that, as a matter of law, it is never open to the court to aggregate the value of pensions with that of other assets and distribute the resultant total value between the parties. Examples of where such an approach might be appropriate could be where the parties have pensions in payment which are of approximately equal value and/or where the value of the pensions is small in comparison with that of the other assets. It will all depend in the particular circumstances of the case.
- In the present case, the value of the husband's pension (if included as part of his assets) represented approximately 35% of his assets. The value of the wife's pension (if included as part of her assets) represented approximately 3% of her assets. Moreover, the husband's pension was approximately ten times more valuable than the wife's pension. In these circumstances, it seems to me that a failure to treat the pensions as different in kind from the other assets, without at any rate making a significant adjustment to reflect the difference, was bound to lead to unfairness. The proportion of the husband's assets that would vanish on his death was far greater than the proportion of the wife's assets that would vanish on hers. That in itself was a factor which meant that it was unfair to treat the pensions as having the same character as the other assets. Furthermore, not only were the other assets transferable, but they also had the potential to increase in value over time, whereas the income stream represented by the pensions remained just that: a constant income stream whose nominal value remained fixed, but which was likely over time to become less valuable by reason of inflation.
- It might have been possible for the district judge to make an adjustment in the husband's favour to reflect the fact that the pensions in payment were in truth no more than an income stream which would cease on death and that his pension was so much more valuable than hers. The problem with this approach is that it is difficult to see how the adjustment would have been calculated. No formula was suggested in argument. Percentage adjustments cannot simply be plucked out of the air. Mr Le Grice submits that it is sufficient if the judge bears in mind the different nature of pensions when conducting his or her appraisal of the parties' resources. I find such an approach as unsatisfactory as it is lacking in transparency.
- It seems to me that in a case such as this the better course is to take the pensions out of the assets altogether and to make a pension-sharing order. This reflects the reality that the pensions are in truth non-transferable income streams and are quite different in kind from the other assets owned by the parties. In my judgment, it is artificial to say that the pensions are capital assets valued at £940,000 (husband) and £100,000 (wife). The reality is that the sole value of their pensions to the parties is that they produce gross incomes of £37,840 and £5,818 respectively. In my judgment, the judge below, in effect, mischaracterised the pensions as being, or being equivalent to, capital assets.
- It follows in my view that the appeal should therefore be allowed. The question that arises next is whether this court can substitute a pension-sharing order. In view of the enormous costs already incurred, I would be reluctant to remit the matter for a further hearing. There has been no challenge to the 57:43 apportionment of the capital assets. I agree with Mr Francis that it does not necessarily follow from the fact that the fair distribution of capital assets is 57:43 that the same distribution of the combined pensions should be adopted. It seems that neither party submitted below that, if a pension-sharing order were made, the combined pensions should be apportioned in a different ratio from that determined by the district judge. It is true that before this court Mr Francis suggested a 50:50 split of the pensions, but he gave no reason to justify a departure from the district judge's apportionment. I think that it is fair to apply the 57:43 ratio to the pensions for the purpose of determining the pension-sharing order. There is no obvious alternative.
- It is said by Mr Le Grice that such a course would destroy the balance of the district judge's carefully structured decision, an important element of which was her wish to ensure that the wife kept Green Lane Farm so that the wife's needs for a home and self-sufficiency were met. The net effect of allowing the appeal in the way that I have described will be to require the wife to make a much larger balancing payment to the husband than under the order made by the district judge. The judge referred to a balancing figure of £766,753 (para 84). Mr Francis refers to a payment of £646,325 instead of £146,179 under the order of the district judge. I am unable to identify the precise figure. The district judge made no finding as to what the effect would be on the wife's ability to stay at Green Lane Farm if a pension-sharing order were made in any particular ratio. So far as I am aware, she had no material on which to decide whether the wife would be able to stay at Green Lane Farm if a pension-sharing order were made in any particular ratio. There is nothing in her judgment to indicate that she decided to aggregate the pensions with the other assets in order to ensure that the wife was able to retain Green Lane Farm. At para 84 of his judgment, the judge recorded that it was conceded on behalf of the husband that the wife should retain Green Lane Farm, but that she might have to borrow against the property to fund the balancing payment that would have to be made if the appeal were successful. In his skeleton argument for this appeal, Mr Le Grice submits that, if the appeal were allowed even to the limited extent of introducing a pension-sharing order in the ratio of 57:43, the wife would have to sell Green Lane Farm.
- If I were satisfied that the probable effect of allowing the appeal to the extent that I have indicated would be that the wife would have to sell the property, then (with considerable reluctance) I would have concluded that the matter should be remitted to the district judge for reconsideration. But the wife has placed no material before this court which persuades me that such an outcome is probable. It is not clear whether she placed any such material in either of the courts below. If that were the probable outcome of a pension-sharing order, I would have expected one or both of the judges below to have made a finding to that effect. The effect of a pension-sharing order in the ratio 57:43 would be to increase the wife's income. Moreover, if she needed to borrow money to fund the balancing payment, Green Lane Farm would provide more than adequate security.
The double-counting point.
- Finally, I come to the so-called double-counting point. Since I have concluded that the district judge was in error to treat the pensions as capital, the double-counting point falls away: she should have treated them as income.
- For the reasons that I have given, I would allow this appeal to the extent that I have indicated. The pensions should be the subject of a sharing order in the ratio of wife 57%: husband 43%.
Lord Phillips CJ:
- I agree that this appeal should be allowed to the extent indicated and for the reasons given by Thorpe LJ and Dyson LJ.
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