As I live in the North East of Scotland, you may find it surprising that I am frequently asked to advise on divorce cases where one or both parties are on international pensions. as I said beforPensions can be an incredibly valuable asset, often outweighing the value of other marital assets. However, it is often overlooked, especially when pension funds are located abroad. With regard to French pensions, complex arguments can be encountered regarding the approach to valuation, especially when pensions are “public” rather than private.
Although I studied law in France as part of my undergraduate degree, I did not focus on French family law issues and am not qualified in French family law. However, I am fortunate to have good contacts in France who can help advise clients on French family law issues.
One of the main differences between UK pensions and French pensions is that French pensions cannot be shared. That is, they cannot be divided in this way Pensions can be shared in Scotland (or in England and Wales) upon divorce.
It is important to understand how pensions are handled in the UK when dealing with separation (and divorce) in Scotland to appreciate the difference with the French legal system. In Scotland, the vast majority of UK pensions can be shared with an ex-spouse upon divorce. This can happen following a Pension Sharing Order (PSO) by a Scottish court, or more commonly, via a Qualification Agreement (QA) between the parties made before the divorce.
Qualifying Agreements – What are they and when can they be used?
A Qualifying Agreement (QA) is a formal Scottish bipartite written agreement providing for the sharing of a UK spouse’s pension or pensions upon divorce. It can stipulate a percentage to be shared with the other spouse upon divorce or it can set a fixed amount to be deducted from the pension fund. It is common in Scotland to provide a fixed amount to be shared rather than a percentage.
The legislation stipulates what information the quality assurance should contain and the form in which it should be presented. It is necessary to include details of the parties as well as details of the fund to be shared and the destination of the pension balance. Some pension schemes will allow internal transfers so that the ex-spouse joins the same scheme as the current member but others will insist on an external transfer. Overseas transfers are more common.
After its completion, it must be sent to the Board and Session Books for registration as a quality assurance extract required for the execution of the Pension Share. When QA is registered, the onus is on the intended recipient of the pension share to ensure that the divorce is finalized as soon as possible thereafter. This is because the pension share becomes effective only upon divorce. A divorce does not need to be granted by a Scottish court.
There are strict time limits for posting a QA extract and issuing a divorce decree (or a similar order for divorce from a court in a different country) and the consequences of missing those limits can be devastating.
Pension sharing orders – what are they and when can they be used?
A spouse can apply for a Pension Sharing Order (PSO) in a divorce action and financial savings in Scotland in respect of UK retirement benefits. It is important to note that the party seeking the pension share in his favor must formally look to the PSO. Even if one of the parties wishes to share his pension with the other spouse to partially satisfy his claim, he is not eligible to apply for a political support operation against himself.
The formal desire for a pension sharing order can be formulated as a percentage of the pension or as a fixed amount.
How are the UK Pension Benefits in Scotland assessed and how are the amounts or ratios contained in quality assurance or sector support measures arrived at?
Where a party’s assets include UK retirement benefits, I would expect to see a cash equivalent transfer value (CETV) or cash equivalent value (CEV) of any pension benefits held on the date of separation whether the matter is under negotiation or litigation. If these pension benefits accrued in whole or in part before the parties were married, then the total comprehensive income must be divided to reflect the proportion that was accrued during the marriage. The division formula is contained in the legislation.
In simple terms, the CETV or CEV is the capital value of the spouse’s interest in the pension fund on the date of separation. This is calculated by the pension administrators and equals the cost of replacing those benefits. Where pensions are occupational schemes rather than personal pensions, there may be contributions by the employer as well as the employee. However, state pensions are not taken into consideration.
The value of CETVs, or CEVs, is usually taken into account when looking at how the net marital assets will be shared between the parties. Pensions do not have to be shared and their values can be offset against other assets either in litigation or negotiation. If there is sharing of pensions, the manner in which they will be shared will be agreed upon or determined by the court. The amount or percentage to be shared is usually ascertained by reference to the division of other assets.
Can the value of French pensions be capitalized or factored into a divorce in Scotland?
So far there is no authority on this point. However, I did obtain expert reports from an experienced actuary in Scotland, who had calculated the capital value of various types of French pensions in a litigation case. This actuary was able to apply a similar methodology to question valuation that would be used when dealing with pensions in the United Kingdom.
However, competing arguments have been made that the value of the AGIRC-ARRCO scheme which is sometimes described as a “compulsory supplementary pension” or French public pension cannot and should not be capitalized. There were various reasons for this, including that the pension could not be shared, and there was also reference to the death benefits that might be paid to the spouse or ex-spouse in the event of the death of the member. Reference was also made to the proposed reform of the pension system in France.
A distinction was made between the different types of pensions in this case. A RECOSUP pension, which is described as a private plan or an Epargne Retraite Plan (PER), in which the member and the employer participate. While it was not acceptable for the interest rate to be capitalized in this way, it was recognized that in the “asset community” system (the default system applied to divorce in France if the parties did not choose a different arrangement before marriage) the annuity was not divided between them but rather valued or calculated.
These arguments may need to be determined by the Scottish courts in the future. What is clear in the meantime is that advice should be sought in both jurisdictions and the best forum to deal with financial issues arising from the separation should be considered, if either can be used.