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You are here: BAILII >> Databases >> England and Wales High Court (Family Division) Decisions >> WS v WS [2015] EWHC 3941 (Fam) (11 December 2015) URL: https://www.bailii.org/ew/cases/EWHC/Fam/2015/3941.html Cite as: [2015] EWHC 3941 (Fam) |
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version
of the judgment to be published on condition that (irrespective of what is contained in the judgment) in any published
version
of the judgment the anonymity of the children and members of their
family
must be strictly preserved. All persons, including representatives of the media, must ensure that this condition is strictly complied with. Failure to do so will be a contempt of court. 2015] EWHC 3941 ( Fam) | ||
IN THE HIGH COURT OF JUSTICE
FAMILY
DIVISION
2015 |
B e f o r e :
____________________
WS | Applicant |
|
| - and |
||
WS | Respondent |
____________________
Robert Peel QC instructed by Alexiou Fisher Phillipps for the Respondent
Hearing dates: 7-11 December
2015
____________________
VERSION
OF JUDGMENT
Crown Copyright ©
HIS HONOUR JUDGE LORD MESTON QC:
JUDGMENT
Introduction
WS
for financial remedies under the Matrimonial Causes Act 1973 following the dissolution of the parties' marriage.
very
recent suggestion of a pension attachment order, it is common ground that there should be a 'clean break'. It is also common ground that the matrimonial property should be divided equally, there being no argument to suggest that any departure from equal sharing would be justified in the circumstances of this case. As the case has developed there have been fewer factual disputes of relevance. With the assistance of experts' reports the
value
of the property and business assets available for distribution are largely agreed, with only some relatively minor disputes as to
value.
Background
WS
(the wife) is 56 years of age. Mr
WS
(the husband) is 61 years of age. They began cohabitation in 1983 and were married on 18th May 1985. There are 2 children of the marriage, a daughter who is almost 25 years old and in employment; and a son who is just 21 years old and at university. There is no dispute as to the parties' remaining responsibilities towards their son.
vesting
of bank shares. In a recent statement she explains that reorganisation within her company has meant that her role has ceased and that she has given notice of her retirement in February 2016.
She hopes then to acquire perhaps 2 further non-executive directorships. It therefore appears that she has future earning potential, albeit probably not at the same level as hitherto.
She is presently living in rented accommodation in Hampstead.
ventures
in Britain and abroad.
family
to America, and on their return in about 1996 they acquired the final
family
home High Trees Farm, with about 60 acres.
family's
financial affairs being built up in that way over 30 years is that the wife is left with a
very
substantial earning capacity, while his ability to earn is tied up in the capital assets.
family
appears to have enjoyed a high standard of living and to have acquired the assets now available for distribution. The wife has been able to maintain a high standard of living which includes renting a property in Switzerland and acquisition of a yacht.
The proceedings
various
agreements by the parties. One agreement was for the sale on the open market of 6 of the properties (with a provision that either party might seek to purchase any of the properties at open market
value).
Another agreement was as follows:
"The parties agree that neither of them will seek a pension sharing order, but instead will invite the court to consider offsetting in its approach to the difference between their respective pension provisions based on cash equivalentvalues".
Parker J refused an application by the husband for an expert pension sharing report and refused permission to appeal from that decision.
The remaining directions made by Parker J were designed to obtain evidence to assist in the efficient realisation of the assets.
2015
it was recorded that the parties agreed that the following issues then appeared to be in dispute:
(a) Thevalue
of residential properties subject to a report by Savills
(b) Which assets should be retained by either party.
(c) Whether a discount should be applied to the net asset
value
of CDP Ltd/Avon Trust Ltd if either party retains the shares.
(d) The methodology for offsetting between the parties' pensions.
(e) The
value
of certain assets.
The assets and liabilities
values
it is unnecessary to reproduce in full the schedules of assets. Apart from pensions the assets are as follows:
(a) There are property assets worth a total of £4,333,437 net of mortgages, costs of sale and CGT. This includes High Trees Farm worth £3,500,000 before deductions. The mortgage to Lloyds Bank (formerly the Bank of Scotland) is £1,000,000 which is repayable as to half in December2015
and half in December 2016, although an extension of the first repayment has been agreed until February 2016.
(b) There are joint accounts and investments of £47,613.
(c) The husband has bank accounts and investments (less liabilities) amounting to £1,973,228. This is subject to an adjustment in respect of the husband's outstanding legal fees to £97,954, and to a dispute as to
value
of the husband's in a
venture
in Canada called Lecare.
(d) The wife has bank accounts and investments (less liabilities) amounting to £2,557,098.
(e) The parties' partnership known as High Trees Farm & Consultancy was shown in the schedule as worth £50,000 based on the husband's Form E, although the husband says that this represents fencing, machinery and
vehicles
now worth £30,000.
(f) The husband's interest in Avon Trust Ltd is
valued
at £724,759, and the wife's interest at £439,750, both after CGT. The husband has a director's loan to Avon Trust shown as £228,500.
(g) The husband's interest in CDP Ltd is
valued
at £1,519,008, and a director's loan of £400,000.
value
relate to:
(a) Lecare. The husband's Form E stated that he was owed £100,000 representing C$160,000 advanced to Lecare. An answer to a questionnaire indicated this to be the last part of an undocumented loan to a jointventure.
The husband now suggests that £50,000 would be more correct. However in his latest statement and in oral evidence he referred to having recently advanced a further C$87,000. Having heard the husband's evidence about this
venture
there seemed no reason to assume that he could not, in time, recover his original investment and there seems to be no sufficient evidence to justify halving the figure he originally put forward. It should continue to be treated as worth £100,000.
(b) The farm partnership assets. The husband argues for a reduction of £20,000 to £30,000 which the court was asked to endorse based on the husband's knowledge of the equipment concerned. Plainly there is no independent support for either the original or the suggested revised figure. However I will accept the husband's revised figure.
The open offers
family
assets. In cross-examination he was pressed as to why he had changed his position, in particular as whether or not the main assets should be sold. Although he suggested that in some respects the market had moved and said that he did not want to be forced into what he called "a fire sale", it seemed that he was largely motivated by an emotional attachment to the property and business and by a wish to give the children a chance to retain them.
2015
the husband put forward a different offer. While still proposing the sale of High Trees Farm, he sought the retention of CDP. He also sought the incorporation of Court Farm Barn into an agreement previously recorded for the retention and development of land known as Summerfields. By letter of 15th October
2015
this offer was withdrawn pending further disclosure although the outline of his then proposals was confirmed.
2015
the husband through his solicitors made an offer proposing 2 alternatives. Option A provided for the husband to keep High Trees Farm and CDP and Avon Trust and for him to pay a lump sum of £750,000 within 3 months and a further lump sum of £750,000 within a year. Option B provided for the sale and equal division of High Trees and CDP and for the wife to pay the husband lump sum payments amounting to £1,125,000 less any drawings by the husband from his loan accounts from the date of the letter.
family
home and business".
2015
the wife through her solicitors rejected Option A on the basis that £1.5 million was too low a sum to compensate her. She confirmed her agreement to the structure in Option B whereby the former matrimonial home and the companies were to be sold and the proceeds of sale divided equally. On that basis the only substantial question for determination was the calculation of a lump sum payable by the wife to the husband to offset the difference in their pension provision.
value
of non-pension assets and £300,000 to offset the difference in pensions, making a total of £486,513. The husband's Option B offer involved a lump sum payment to him by the wife of £1,125,000 which was not specifically broken down. On that basis under Option B the parties appeared to be about £640,000 apart.
vice
versa.
The arguments for the wife
(a) The lump sum of £1.5 million contained within Option A is far too low and would leave the husband with much more than half of the assets.(b) The wife is concerned that the husband's tendency to prevaricate and his expressed difficulties in coping, particularly since the breakdown of the marriage, could lead to delay and problems in his raising and paying the lump sum (particularly if it was to exceed the £1.5 million offered). In evidence she expressed particular concern about the deferral of part of the lump sum, and about the difficulty the husband now found in making business judgements.
(c) The husband had previously agreed to the sale of High Trees Farm and to realisation of the business assets
(d) High Trees Farm is a large, seven bedroom property with outbuildings set in 50 or 60 acres, and exceeds the husband's reasonable needs for accommodation. Indeed it was described in the opening note on behalf of the husband as "substantial and sprawling" and as requiring significant effort and cost to maintain in a good condition. The same note continued: "It is no secret that H finds it an enormous burden to continue to run the house and maintain it in good condition; he has had no assistance from W in this regard (either practical or financial)."
(e) CDP Ltd is a property investment company with a portfolio of commercial units which does not produce an income for the parties, the rental income being used to pay off borrowing.
(f) There is no sufficient basis for any or any significant discount of the
value
of CDP Ltd on the basis of illiquidity or that it is risk laden.
The arguments for the husband
value,
that until sale it would need to be kept in good condition, and that the extent of the PPR exemption would need to be negotiated.
family
was together as the potential risk/reward was underpinned by the dependability of W's income. It is less liquid than other assets in the sense that any sale would have to be conducted in a
very
careful manner, over an appropriate timescale and with no guarantee of outcome." The experts had provided advice as to how best to maximise proceeds from the company and/or its properties. Again it was suggested that such sales would be far from straightforward and would require considerable time and effort.
various
figures were debated as to the effect of Option A (disregarding pensions) and I have looked at these again. On a conservative calculation Option A would leave the husband with assets worth about £5,130,765 more than those with the wife, requiring him to find at least £2,500,000 to make up the difference by an equalising payment subject to any pension offset payment due from the wife to the husband.
2015
and described as provisional "indicative terms". These proposed a replacement of the £1,000,000 presently charged on High Trees Farm to be lent on an interest-only basis for 3 years, and a loan of £2,000,000 to CDP Ltd which after payment of the company's existing indebtedness of £1.4 million would leave £600,000 available, part of which, it was suggested, could be extracted by means of repayment of the outstanding director's loan. In addition it was said that the bank's representative had also indicated in a later conversation that the bank "would probably extend an additional loan facility of £500,000 to CDP". The remainder of any lump sum requirement would have to be funded from the husband's liquid capital
Pensions
values
of the pensions, there has been considerable difficulty in putting a
value
on the disparity as well as disagreement as to how any offsetting payment from non-pension assets should be calculated.
valuable
than the wife's, but both parties have other sources of income and remaining earning capacity.
value
for her Morburg Bank pension as a Cash Equivalent (CE). [There is a full explanation of this terminology in the notes to the Pensions on Divorce etc. (Provision of Information) Regulations 2000 in the
Family
Court Practice
2015,
pages 2870-1].
value
for the wife's pension which was given in the wife's Form E as £2,433,969. More recently (on 26th October
2015)
the Trustee of the Pension Scheme has provided an updated CE statement (expressed to be a 'CETV') giving the figure of £3,064,154. This increase has been explained by the pensions' administrator as primarily due to the decline in the long bond yield. On behalf of the wife it is submitted that this increase is perverse and illustrates the artificiality of using CE
values,
because in this case the CE
value
given for the wife has increased by about £600,000 between the two statements although the wife is that much older and she has been receiving her pension entitlement. Moreover, whatever the CE
value,
it can never be equivalent to, or converted to, cash in the wife's hands. It is submitted that CE
values
represent the rights accrued under a pension scheme and are used to calculate the benefits only in the context of their transfer to another scheme, and in particular for the purposes of pension sharing orders in the matrimonial jurisdiction. In this case there is to be no transfer of pension benefits from one scheme (i.e. the wife's) to another scheme. It is submitted that the CE
value
is of little or no use for calculating an offset payment.
2015)
the wife highlighted the differences between the pensions. She cannot cash in her pension but can only take income which ceases on her death, whereas the husband can withdraw his funds and, subject to payment of tax, can invest them as he chooses. Conversely, in his statement of the same date the husband pointed out that whereas her pension was index-linked and guaranteed for life, his is subject to the
vagaries
of the market and investment decisions.
view
appears to have been based on the advice of a consulting actuary contained in a letter of 12th November 2014. Accordingly, as recorded in the order made last year by Parker J the court has been asked to consider offsetting, i.e. in the context of this case a payment or allowance in favour of the husband from non-pension assets to cover the disparity between the parties' pension positions, it being acknowledged that the wife's defined benefit pension scheme from Morburg Bank is more
valuable
than the husband's money purchase scheme.
value
of the wife's pension given in 2013) said that actual cost of buying an equivalent benefits through an annuity was approximately 50% more than the stated Cash Equivalent.
v.
Martin-Dye [2006] EWCA Civ 681, [2006] 2 FLR 901 both parties had pensions in payment by the time of the hearing at first instance before the district judge who decided that a fair division of the assets would be provision of 57% to the wife and 43% to the husband. The pensions in payment had been put before the court as assets with a combined CETV of £1,040,807. On appeal the husband challenged the district judge's treatment of pensions and rejection of a pension sharing order. The appeal was dismissed. On the husband's second appeal to the Court of Appeal Thorpe LJ (at para [54]) found that the judgment of the district judge was flawed on two grounds. First, in ignoring the essential differences between saleable property and an income stream derived from an inalienable pension in payment, the district judge having been hindered by the presentation of the husband's case and by the unquestioned use of CETV labels. Secondly, in rejecting the husband's application for a pension sharing order without sufficient reasons.
"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 technicalvalue
ascribed to a pension in payment and a market
value
ascribed to a realisable asset ".
He went on (at para [61] to say that pensions in payment and cash equivalent benefits were to be characterised as 'other financial resources' within section 25(2)(a):
"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."
Thorpe LJ said (at para [63]) that in a case in which a clean break order was inevitable the court had two alternative ways of treating the pensions: either they could be left undisturbed, compensating the wife (in that case) for disparity by offsetting, alternatively the judge could have made a pension sharing order. Thorpe LJ held that in the case then under consideration a pension sharing approach should have been adopted so that the husband's pension rights should be shared to give the wife 57% of the
value
of their combined pension rights.
"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 reaching that conclusion Dyson LJ had rejected (at para [87]) a submission that it might have been possible for the district judge to have borne in mind the different nature of pensions when conducting his or her appraisal of the parties resources and to have made an adjustment to reflect that. He considered that it was difficult to see how the adjustment would be calculated and that such an approach was unsatisfactory as it lacked transparency.
v.
Martin-Dye to prefer pension sharing there was no further guidance or discussion as how to calculate the
value
of an offset payment when that might be appropriate. If a pension in payment is not to be treated as a capital, but rather classified as "other financial resources" (per Thorpe LJ) or as income (per Dyson LJ), and if (as submitted on behalf the wife in this case) it is incorrect and artificial to use the CE
value,
the court is left to find some other principled basis for calculation. Obviously there is considerable scope for debate about the relevance of factors such as life expectancy, future taxation and fund investment policy and the
various
assumptions to be made.
Vaughan
v.
Vaughan[2007]
EWCA Civ 1085,[2008] 1 FLR 1008 at para [25] Wilson LJ recognised the difference between in kind between disposable capital and the capital
value
of pension rights, but said that the latter was often a
very
significant component of the parties' future economies.
v.
RA [2014]
EWHC
4054 (
Fam)
the parties each had pension investments similar in nature, the wife's funds being significantly smaller in
value
than those of the husband. The wife argued for a pension sharing order to provide her and the husband with unequal income which, given that she was younger and female, would have provided her with a greater share of the combined fund
values.
Mr Nicholas Francis QC (sitting as a deputy High Court Judge) said at para [84]:
"I would regard such an approach as unfair and anachronistic in a case where assets exceed the parties' needs. The recent well-publicised changes to pension regulations will mean that pension investments arevirtually
to be treated as bank accounts to people over 55, as these parties are . In cases where distribution is being made on a basis which is not guided by need it is, in my judgment, incorrect to distribute a pension fund on the basis of equality of income and there is no need for actuarial reports in the overwhelming majority of such cases. I should expect the court is to be most reluctant in the future, in big money cases, to provide permission for actuarial reports on the basis of how to effect equality of income. Moreover I suspect that annuities will, in the overwhelming majority of cases, become a thing of the past."
Family
Law [2012]
vol.
42 page 1234 which posed questions without suggesting answers. The difficulty in finding a suitable method for calculation has again
very
recently been demonstrated in an article to be published in
Family
Law this month (December
2015)
entitled "Apples or pears? Pension offsetting on divorce". The article starts with a quotation from the decision of Sir Peter Singer in JS
v.
RS [
2015]
EWHC
2921 (
Fam)
"[74] I am aware from my general reading that there is at present debate but as yet no conclusion on precisely this topic of appropriately arriving at an offsetting figure. I am not aware from my own knowledge nor have I researched what the competing methods might be. I am thus left in the unsatisfactory position where I must alight upon an amount which will necessarily be arbitrary if, that is, H is indeed to receive as part of the overall distributive process consideration for the fact that during this marriage unequal pension benefits have arisen."
value
is often wholly misleading as to the true
value
of a defined benefit scheme. There was a discussion of the potential use of the Duxbury algorithm to calculate the sum required. The article contained criticism of the decision of Mr Francis QC in SJ
v.
RA (referred to above) for failing to make any distinction between defined contribution and defined benefit schemes (unjustified criticism in my
view).
It set out six suggested key factors to be borne in mind when considering different approaches to offsetting. This included (as a question rather than as a formulated factor):
"In the case of a defined benefit scheme or the replacement of benefits under a defined contribution scheme, should the offsetvalue
be the
value
to the member of that pension, or the
value
to the non-member of having an equivalent pension or share pension?"
view
that counsel's submissions would be sufficient to deal with the issue.
"[73] I shrink from the suggestion that a payment in excess of £200,000 should pass from W to H to compensate him for the potential loss in 20+ years of a lifetime income stream of (at today'svalue)
£5,300 annually subject to such tax consequences as may prevail at that time and for that uncertain term."
Accordingly the sum of £60,000 was ordered.
The competing submissions as to pension provision
(1) When considering offsetting it is important to see the exercise in the context of the application of the factors in section 25 of the Matrimonial Causes Act 1973 and the jurisprudence thereon. In this case the court is not concerned with needs because each party will have over £6 million before pension provision is taken into account. This is not a case in which pension provision is, or will, be the only or main source of retirement income.In this case (in particular if Option B is selected) the husband will have capital to buy a home, be able to keep the flat in London, retain and use his own acquired pension funds and receive income from his investments including the Kenyan business.
(2) Offsetting (at least in this case) involves "apples and pears", i.e. does not involve comparing like with like. One party is being required to pay a large sum of money to reflect the other party's loss in not receiving a future share of a pension in payment during the pension scheme member's lifetime.
(3) Any methodology will be based on factors and assumptions which almost certainly will not in fact arise as may be predicted.
(4) The Duxbury calculation has stood the test of time in matrimonial proceedings for capitalisation of future income requirements and should be used, particularly in a case in which a CEvaluation
is "illusory". The use of the Duxbury algorithm was strongly supported by Mostyn J in JL
v.
JL (No. 3) [
2015]
![]()
EWHC
555 (
Fam),
[
2015]
2 FLR 1220, referring to the decision of the Court of Appeal in H
v.
H (Financial Remedies) [2014] EWCA Civ 1523, [
2015]
2 FLR 447.
(a) The husband's pension fund of £970,696 providing a flat 2.5% net return of £24,267 p.a.;
(b) The wife's present net pension in payment being compounded at 2% p.a., rather more than the current RPI; and
(c) A discount for accelerated payment of 25%.
The 3 alternative calculations involved taking (i) the wife's pension income indexed at 2% in 25 years time (£83,015); (ii) the wife's pension income indexed at 2% in 12.5 years time (£64,811); and (iii) the wife's current net pension income (£50,600). To each of those figures was added the husband's notional pension income from his existing funds if providing a flat 2.5% net return of £24,267 p.a. The total pension incomes were then divided in half. The resulting figure, less the husband's £24,267, represented the net lost annual income for the husband if the pensions were to be aggregated and shared equally. What was described as the "net lost annual income" for the husband was then calculated as £29,374 if the 25 year figure was used for the wife's indexed income, as £20,272 if the 12.5 year figure was used, and as £13,166 if her current pension income was used.
a. Based on the CEvalue
the wife's pension is worth about £3.6 million, whereas the husband's is worth just under £1 million. To give the husband half of that difference would require payment to him of £1.3 million.
b. Alternatively, for the husband to buy an annuity to achieve a similar inflation proofed income would cost £3.4 million. Assuming he used his £1 million, to equalise the figures arithmetically and to give him 50% would require payment of £1.2 million.
c. Alternatively, if tax at 40% was deducted from the wife's pension CEvalue
of £3.6 million and from the husband's fund of £1 million, she would have £2.1 million and he would have £600,000. To equalise the figures and give him 50% would require payment of £750,000.
d. Alternatively, if the husband used his existing funds to buy an inflation proofed annuity it would yield £27,000 p.a. gross, some £65,000 gross less than the wife's pension income of £92,000 p.a. gross. To provide the husband with 50% of the difference, i.e. with £32,500 p.a. gross, by means of an annuity would cost £1.3 million.
version
of the calculations suggested by Mr Dyer on behalf of the wife. These figures were based on the husband obtaining a 1.5% net yield on his pension funds rather than 2.5%, it being submitted that conservative investment was appropriate for a person of retirement age. They were also based on the wife's pension net income rising to £66,000 when she ceases to be a higher rate taxpayer (although it is hard to predict when that might be). Finally they were based on an assumed Duxbury real rate of return of 2.5% gross, not 3.75% gross (despite the observations of the Court of Appeal in H
v.
H (Financial Remedies). Mr Peel argued that the court should be
very
careful before applying Duxbury methodology which involves assumptions about income yield, growth, inflation, and life expectancy. A Duxbury fund has to be actively managed and so can involve annual charges whereas the wife's pension income does not. In this case the court is not being asked to capitalise the periodical payments but rather to replicate part of a guaranteed, inflation proof pension income. Mr Peel's modification of Mr Dyer's calculations produced a range of figures from between £1,017,450 and £438,900.
variable
or capable of capitalisation under the Matrimonial Causes Act 1973 (pension attachment orders can be subject to future
variation
applications). It was recognised that such a proposal would only work if Option B operated. Under Option A the husband could not afford the likely lump sum required unless there was a significant pension offsetting amount.
Conclusions
varied, I can understand the wife's concerns about the problems, pressures and delays which may arise from Option A, particularly to the extent that it now relies on refinancing under the recently proposed arrangements with Handelsbanken which are still only in "indicative" form and somewhat imprecise, and (for the balance) relies on the husband's realisation of a substantial amount of his liquid assets.