THOMAS CLARK MCDONALD AGAINST ANNIE FLOCKHART MOFFAT NEWTON OR MCDONALD

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EXTRA DIVISION, INNER HOUSE, COURT OF SESSION

[2015] CSIH 61

XA22/14

 

Lady Smith

Lord Malcolm

Sheriff Principal Abercrombie QC

 

OPINION OF LADY SMITH

in the appeal

by

THOMAS CLARK MCDONALD

Pursuer and Respondent;

against

ANNIE FLOCKHART MOFFAT NEWTON or MCDONALD

Defender and Appellant:

Pursuer and Respondent:  Malcolm; Thorley Stephenson SSC

Defender and Appellant:  Speir; Allan McDougall

11 August 2015

Introduction

[1]        This appeal concerns a wife’s claim for a pension sharing order under section 8(1)(baa) of the Family Law (Scotland) Act 1985 (“the 1985 Act”).  

[2]        The issue is: what proportion of the value of her husband’s rights or interests in the British Coal Staff Superannuation Scheme is referable to the period of their marriage which subsisted before the date they separated (see: Section 10(5) of the 1985 Act)?

Background
[3]        The pursuer used to work as a miner. On 11 December 1978, he joined an occupational pension scheme, namely the British Coal Staff Superannuation Scheme (“the scheme”).

[4]        On 22 March 1985, he married the defender.  In 1985, he was found to be unfit to continue working as a miner due to having sustained a leg injury.  The effects of his injury were such as to disable him from performing the duties of that employment and he thus acquired the right to retire from British Coal on grounds of ill health and to start receiving a pension income considerably earlier than normal retiring age and without having had to survive until normal retiring age; at that time he was 32 years old and had only completed 6 years and 243 days of pensionable service.  He decided to exercise that right.  He stopped contributing to the pension scheme on 10 August 1985 and became entitled to receive a pension income, for life, from that date.  He has received pension income since then.

 

The British Coal Pension Scheme

[5]        The pursuer has, in terms of the scheme, been a member of it since 11 December 1978 and remains a member, “member” being defined as “any person whether or not in Eligible Employment and whether or not for the time being a Contributor to the Scheme who is entitled to any benefits thereunder”.  “Contributor” is defined as “a Member who is for the time being making contributions from his salary to the Scheme …” (see: The British Coal Staff Superannuation Scheme (Modification) Regulations 1994 SI 2576 of 1994, paragraph 48).  In the period between 11 December 1978 and 10 August 1985, the pursuer was, accordingly, a contributor and a member. Thereafter he was a member in receipt of income benefits under the scheme.

[6]        The pursuer’s right to receive pension income as from August 1985 arose under the provisions of rule 22 of the British Coal scheme. That rule, in effect, provides for acceleration of pension rights that would otherwise not arise until normal retiring age with the amount payable being calculated in accordance with the provisions of that rule read together with rule 21,  which allows  for an additional benefit to be paid to a member who retires on ill health grounds. 

[7]        Whilst there is no need to consider the precise details of rules 21 and 22, as the provisions of the British Coal pension scheme demonstrate, occupational pension schemes may provide for a range of benefits including for pension income to be payable early in the event of ill health retirement , for additional benefit to be payable in the event of such retirement and for a pension to be paid to a surviving spouse whether the member was a contributor at the time of death or was, at that time, in receipt of a pension income.

[8]        Unlike the position in some cases, there is no dispute about the date on which the parties ceased to cohabit. It is agreed that, on 25 September 2010 (“the relevant date”), the parties separated.  British Coal provided a figure for the notional value of the pursuer’s pension rights that had, as at the relevant date, accrued in the scheme, known as the “cash equivalent transfer value” (“CETV”) : £172,748.38.   According to the schedule attached to a letter from the British Coal Staff Superannuation Scheme dated 5 April 2012 (Appendix page 6), that figure reflected not only the capitalised value of a pension then in payment - a guaranteed annual pension of £9,582.72 plus a bonus annual pension of £2,301.60 - but also a spouse’s pension payable to a surviving spouse on the pursuer’s death at a rate equal to approximately two thirds of the pension he was receiving at the date of his death.

 

[9]        The value of the pursuer’s interest in the scheme had increased over time.  On a straight line arithmetical basis – as was used by the sheriff in accordance with what was agreed by parties in a Joint Minute - the following figures can be deduced.  On the date of the parties’ marriage (22 March 1985), it was £34,014.38 and on the date that the pursuer retired (10 August 1985), it was £44,016.38.  Accordingly, it increased by £138,734 between the date of the marriage and the relevant date,  by £10,002 between the date of marriage and the date of the pursuer’s retiral and by £128,732 between the date of retiral and the relevant date.  The last of these figures is, I consider, of interest; it demonstrates that the capital value of the pursuer’s pension interests increased to a significant extent after he retired. To put it another way, he acquired that increase in value during the period between retiral and the relevant date.

 

Financial provision on divorce

[10]      The court’s power to make orders for financial provision on divorce first arose in 1976, under the terms of section 26(2) of the Succession (Scotland) Act 1964, whereby it was empowered to make such order as it “thinks fit having regard to the respective means of the parties to the marriage and to all the circumstances of the case.” That section was repealed by the Divorce (Scotland) Act 1976 and replaced by section 5(2) of that Act; it was in virtually identical terms.  The court had a wide and unfettered discretion.  These statutory provisions afforded no real guidance nor were they indicative of any significant underlying principles beyond perhaps a recognition that it was impossible to provide, in advance, for what would be a just outcome in all possible sets of circumstances.  The outcome depended, essentially, on the individual judge’s view of what was “fit” – which could and did vary -  and the only types of order available were those for a periodical allowance (until death or remarriage of the payee) and/ or a capital sum.

[11]      In 1981, the Scottish Law Commission published its Report on Aliment and Financial Provision (Scot Law Com No 67, 1981) in which it made recommendations for clarification of the relevant principles, extension of the court’s powers as to the types of order it could make and restrictions on the use of long term periodical allowances.  Their recommendations largely found their way into the Family Law (Scotland) Act 1985 (“the 1985 Act”), the essential provisions of which, whilst they have been expanded in some respects, have not been altered or departed from.  It may be thought to be indicative of it being generally accepted that justice is able to be achieved through the application of these provisions that they have subsisted for so long.

[12]      The following provisions are relevant for the purposes of this appeal:

“8  Orders for financial provision.

(1)  In an action for divorce, either party to the marriage may apply to the court for one or more of the following orders—

...

(baa)    a pension sharing order.

…

(2)  Subject to sections 12 to 15 of this Act, where an application has been made under subsection (1) above, the court shall make such order, if any, as is—

(a)   justified by the principles set out in section 9 of this Act; and

(b)   reasonable having regard to the resources of the parties.

(3)  An order under subsection (2) above is in this Act referred to as an “order for financial provision.”.

…

 

9   Principles to be applied.

(1)  The principles which the court shall apply in deciding what order for financial provision, if any, to make are that—

(a)  the net value of the matrimonial property should be shared fairly between the parties to the marriage;

(b)  fair account should be taken of any economic advantage derived by either party from contributions by the other, and of any economic disadvantage suffered by either party in the interests of the other party or of the family;

(c)  any economic burden of caring, after divorce, for a child of the marriage under the age of 16 years should be shared fairly between the parties;

(d)  a party who has been dependent to a substantial degree on the financial support of the other party should be awarded such financial provision as is reasonable to enable him to adjust, over a period of not more than three years from the date of the decree of divorce, to the loss of that support on divorce;

(e)  a party who at the time of the divorce seems likely to suffer serious financial hardship as a result of the divorce should be awarded such financial provision as is reasonable to relieve him of hardship over a reasonable period.

 

10  Sharing of value of matrimonial property.

(1)  In applying the principle set out in section 9(1)(a) of this Act, the net value of the matrimonial property shall be taken to be shared fairly between the parties to the marriage when it is shared equally or in such other proportions as are justified by special circumstances.

 

(2)  The net value of the matrimonial property shall be the value of the property at the relevant date after deduction of any debts incurred by the parties or either of them—

(a)  before the marriage so far as they relate to the matrimonial property, and

(b)  during the marriage,

which are outstanding at that date.

 

(3)  In this section “the relevant date” means whichever is the earlier of—

(a)  subject to subsection (7) below, the date on which the parties ceased to cohabit;

(b)  the date of service of the summons in the action for divorce.

 

(4)  Subject to subsection (5) below, in this section and in section 11 of this Act “the matrimonial property” means all the property belonging to the parties or either of them at the relevant date which was acquired by them or him (otherwise than by way of gift or succession from a third party)—

(a)  before the marriage for use by them as a family home or as furniture or plenishings for such home; or

(b)  during the marriage but before the relevant date.

 

(5)  The proportion of any rights or interests of either party

(a)  under a life policy or similar arrangement; and

(b)  in any benefits under a pension arrangement which either party has or may have (including such benefits payable in respect of the death of either party),

which is referable to the period to which subsection (4)(b) above refers shall be taken to form part of the matrimonial property.

 

…

 

(8)  The Secretary of State may by regulations make provision about calculation and verification in relation to the valuation for the purposes of this Act of benefits under a pension arrangement or relevant state scheme rights.

 

(8A) Regulations under subsection (8) above may include—

(a)  provision for calculation or verification in accordance with guidance from time to time prepared by a prescribed person; and

(b)  provision by reference to regulations under section 30 or 49(4) of the Welfare Reform and Pensions Act 1999.

 

(9)  Regulations under subsection (8) above may make different provision for different purposes and shall be made by statutory instrument which shall be subject to annulment in pursuance of a resolution of either House of Parliament.

...”

 

Thus, under the 1985 Act, the court’s powers are wider than under the earlier legislation. Its provisions may seem to set out a process for arriving at the award of financial provision in such detail as to constrain the court but it is clear that much has in fact still been left to its discretion. Despite an approach which might look clinical, sufficient discretion has been retained so as to enable the court to achieve what, in its judgment, is a fair and practicable result in accordance with commonsense, according to the circumstances of the individual case (see:  Little v Little, Lord President (Hope) at p.787 and Jacques v Jacques 1997 SLT 459, Lord Jauncey of Tullichettle at p.461).

 

Pensions: Section 10(4) and 10(5) of the 1985 Act

[13]      It is important for the present appeal to note the terms of section 10(5) of the 1985 Act.  It does two things.  First, it resolves any doubt as to whether or not pension interests can be matrimonial property.  Secondly, it contains the primary provisions so far as the treatment of those interests are concerned.  It is evident that the nature of pension interests is such as to call for separate statutory provision; they are different from other assets.  For instance, in an occupational pension, each day of service accrues value and in the case of a pension in payment, each day of survival  may accrue capital value, as demonstrated by the increase in CETV between the date of the pursuer’s retiral and the relevant date in the present case.  Payments into the pension can affect value as can the tax treatment of pensions as can the performance of financial markets.  A self employed pension may be used as a tax shelter, relieving the member of liability to income and/or capital gains tax otherwise payable on investments.  Accordingly, put shortly, section 10(5) recognises that pension interests are different from other property and require to be treated differently.  The provisions of sec 10(4) are thus “Subject to” those of section 10(5) and section 10(5) is the primary provision in relation to pensions.  If a spouse has rights or interests in a pension scheme which are “referable to” the period “during the marriage but before the relevant date” then such proportion as is so referable is to be “taken to form part of the matrimonial property”.  There is no need to ask whether or not those rights or interests were “acquired” during that period.  Whilst it may be possible, as I suggest in paragraph 13 above, to talk in terms of pension value being acquired during the marriage, contrary to your Lordships, I do not read these provisions as making acquisition a pre-requisite to the value of pension interests being taken to be matrimonial property under section 10(5).

[14]      It follows that when it comes to pension rights, section 10(5) directs that it is a matter of seeking to identify their value at the relevant date and then to exclude only such of that value as the spouse can be regarded as already “having” at the date of the marriage.  I agree with the observations of Lord MacFadyen to that effect in Jackson v Jackson 1999 Fam LR 108 at 112, para 95-20.

[15]      For the purposes of the present appeal, it is important to note that matrimonial property is expressly defined as including all the pension rights referred to in section 10(5); that is, they are to include not only the rights in an occupational pension scheme but also those in any similar arrangement – such as a SIPP or other personal pension of the sort in which a self-employed person might invest - or under a life policy.  Pension rights are not a readily realisable asset; they are, rather, a person’s entitlement to future financial payments from a pension scheme of which they are a member. That description applies as much to a pension in payment as it does to pre –retiral pension interests.  However, whilst they may not be cash or a saleable asset, they can be valued in capital terms.  The right to a pension in payment to which a CETV can be attributed – as in the present case – is a capital asset and constitutes matrimonial property: Gribb v Gribb 1996 SLT 719 at 721 – 2, Lord Justice Clerk (Ross). 

[16]      It is also relevant to note that, since 2000, the court’s powers have included the ability, when determining the appropriate award of financial provision, to make a pension sharing order (section 8(baa)) whereby a proportion of one spouse’s pension rights and interests must be transferred into a qualifying scheme for the benefit of the payee spouse.  That cured a deficiency of the sort identifiable in the circumstances of cases such as Little v Little 1990 SLT 785 where cash is not available to meet a disparity in parties’ capital arising from pension values.  No longer does that mean that the spouse who has no - or a less valuable - pension cannot benefit from the pension of the other spouse. 

 

Orders for financial provision: the court’s powers

[17]      Turning to the principle in section 9(1)(a), it has been referred to as a presumption in favour of the net value of the matrimonial property being divided between the parties equally; that is a characterisation from which I would not demur albeit that, like all presumptions, it must be recognised that it is but a starting point.  For an asset to be classed as matrimonial property, it does not need to have been attributable to the income or efforts of either spouse; for example, windfalls such as lottery winnings would be included, as would bonus shares, as would damages paid to a spouse as a result of a personal injury claim.  It is not, as the sheriff suggests, part of the ethos of the 1985 Act that an asset brought into the marriage is to be ignored when assessing the extent of the matrimonial property if it was not brought into the marriage by reason of one or other or both spouses’ efforts or income; perhaps the sheriff had in mind the provisions of section 10(6) under which if the source of  funds used to acquire some item of matrimonial property was not derived from “the income or efforts” of either party then that may be founded on as a special circumstance justifying division of matrimonial property in other than equal shares, but that is a different matter.  It is not, in terms of the statutory provisions, a good reason for excluding it from the pool of matrimonial property.

[18]      The 1985 Act recognises that it may not, in an individual case, seem fair to share the net value of the matrimonial property in equal portions.  If fairness requires it to be shared in other proportions, the court has the power to allow for that in its overall assessment of what order is justified by the section 9 principles and reasonable having regard to the resources of parties (section 8 (2)(b)).  In particular, it can work on the basis that the net value of the matrimonial property should be divided in unequal shares if there are special circumstances (sec 10(6)).    Those principles apply as much to pension sharing claims as they do to straightforward claims for payment of capital or transfer of property.

[19]      Accordingly, whilst there can be no doubt that any asset acquired by either spouse during the marriage, (other than by way of gift to that spouse or by way of succession) – or any pension interest that falls within the provisions of section 10(5) -  is matrimonial property to which the principle in section 9(1)(a) applies, if, for example,  there is an asset in the pool that was acquired with the proceeds of sale of property owned by that spouse prior to the marriage, the court may decide that the fact of that pre marriage source justifies unequal sharing.  The court thus has the power to relieve what might otherwise seem to be a harsh outcome since, had the pre marriage asset not been sold, it would not have been included in the pool of matrimonial property at all.  The court also has further flexibility; it can award less than whatever it determines  was a fair share of the matrimonial property at the relevant date if the payer spouse’s resources at the time of making the award are so limited as demonstrate that justice requires that it do so (section 8(2) of the 1985 Act).

 

Valuing pension interests and the Divorce etc. (Pensions)(Scotland) Regulations 2000 (“the 2000 Regulations”)  

Background

[20]      Initially, the valuation of pension interests caused difficulty. There were competing views as to what was the correct method of valuation; different methods, all of which were legitimate from an actuarial point of view, produced different results. The commonest debate involved considering whether it was appropriate to value the pension interest on a continuing service basis or on the basis that the spouse was leaving service.  There were also differing views as to whether or not allowance ought to be made for the widow/widower’s element in the pension.  Regulations to resolve the problem were first made in 1996 but for actions commenced after 1 December 2000 – such as the present action – the 2000 Regulations apply.  Under those regulations, the vast majority of pension interests require to be valued using the CETV method.

The 2000 Regulations
[21]      The 2000 Regulations apply to a number of different “pension arrangements”: (i) any occupational scheme within the meaning of the Pensions Schemes Act 1993, (ii)  a personal pension scheme within the meaning of that Act, (iii) a retirement annuity contract, (iv) an annuity or insurance policy purchased or transferred for the purpose of giving effect to rights under an occupational pension scheme or a personal pension scheme, and (v) an annuity purchased or entered into for the purpose of discharging liability in respect of a pension credit under section 29(1)(b) of the Welfare and Reform and Pensions Act 1999 or under corresponding Northern Ireland legislation (see: paragraph 2 of the 2000 Regulations and section 27(1) of the 1985 Act).  

[22]      Paragraph 3 of the 2000 Regulations provides for the method by which the value of benefits under each of the above pension arrangements must be “calculated and verified for the purposes of” the 1985 Act. In particular, paragraph 3(2) provides:

“(2)   The value, as at the relevant date, of the rights or interests which a party has or may have in any benefits under a pension arrangement as at that date shall be calculated as follows and in accordance with –

1. paragraph (3), if the party with pension rights is a deferred member of an occupational pension scheme^[1];
2. paragraph (4), if the party with pension rights is an active member of an occupational pension scheme^[2];
3. paragraphs (5) and (6), if –
   1. the party with pensions rights is a member of personal pension scheme; or
   2. those rights are contained in a retirement annuity contract; or
4. paragraphs (7) and (8) , if –

1. the pension of the party with pension rights is in payment;
2. the party with the pensions rights holds an annuity other than a retirement annuity contract; or
3. the rights of the party with pension rights are contained in a deferred annuity contract other than a retirement annuity contract; or
4. the pension of the person with pension rights is not in payment and the person has attained normal pension age.”

 

There then follow, in paragraphs (3), (4), (5), (6), (7) and (8) of regulation 3, instructions as to the approach that must be taken to valuation in each case.  For example, in the case of an “active” member, the valuer must assume that the member has asked for an estimate of the cash equivalent that would be available to him if his pensionable service were to terminate on the date of the request.  And where the person is in receipt of pension payments – referred to as a “pensioner member”^[3] in paragraph (8)(b) - the valuer must calculate and verify value in accordance with the provisions of regulations 7 to 7E of the Occupational Pension Schemes (Transfer Values) Regulations 1996.  The valuer has no choice in the matter; it is, for instance, irrelevant that there may be another actuarial method which would produce a different value.  There may be a degree of pragmatism about such an approach but it is understandable if it is accepted that the object of these provisions was to provide certainty where it had not, hitherto, existed.

[23]      Regulation 3 applies to the valuation of all pension interests “as at the relevant date”.  If one spouse were, for instance, to take out a personal pension and make the first contribution to it on the relevant date – or enter pensionable employment for the first time on the relevant date - regulation 3 would apply to the valuation of it in the same way as it applies to any pre relevant date pension interests. The pension value on that date, thus ascertained, insofar as referable to the period of the marriage prior to that date, would form part of the matrimonial property. The question would, however, arise as to whether,

notwithstanding it being matrimonial property belonging to a spouse at the relevant date (section 10(4) of the 1985 Act) any part of it could in fact be said to be referable to the period of the marriage prior to that date.  One then must look to regulation 4.

[24]      Regulation 4 deals with apportionment of the value of the benefits for the purposes of section 10(5) of the 1985 Act. The purpose of regulation 4 is to identify that part of the value of a person’s rights or interests in a pension arrangement which forms part of the matrimonial property.  In the example cited in the paragraph above, the result would be that no portion of the value of the pension interests owned at the relevant date would be included in the pool of matrimonial property because the figure for ‘B’, in the formula quoted below, would be zero.

[25]      Regulation 4 applies, in terms, to all types of pension arrangement; it not only provides for apportionment of the value of an interest in an occupational pension. It provides, insofar as relevant:

“The value of the proportion of any rights or interests which a party has or may have in any benefits under a pension arrangement … as at the relevant date and which forms part of the matrimonial property by virtue of section 10(5) shall be calculated in accordance with the following formula-

A X B

______

C

 

where –

A is the value of these rights or interest in any benefits under the pension arrangement which is calculated, as at the relevant date, in accordance with paragraph (2) of regulation 3 above…

and

B is the period of C which falls within the period of the marriage of the parties before the relevant date and, if there is no such period, the amount shall be a zero; and

C is the period of the membership of that party in the pension arrangement before the relevant date…”

 

This is a straightforward time – based apportionment.  It is immediately obvious that it may not always seem to produce a fair result.  Contributions to the pension may not have been regular throughout the period between entry into the scheme and the relevant date or they may have been of dissimilar amounts or the pension may not have grown at an even rate, but none of that is to be taken into account for regulation 4 purposes. Take, for example, circumstances where a self employed person’s pension interests are valued at £150,000 on separation in 2015, after 5 years marriage during which he contributed £10,000 to the pension but had, between 2000 and 2010, contributed £90,000 to it.  Application of the regulation 4 formula would result in £50,000 – one third of its value - being identified as matrimonial property notwithstanding the fact that 90% of the contributions were made prior to the marriage.  

 

Parties Contentions

[26]      Counsel for the pursuer contended that regulation 4 is ambiguous and “period of membership” in relation to the “C” part of the formula requires to be read as “active membership”, as defined in regulation 2. That is, it was said, because of that part of the definition of “B” which provides that if there is no period of membership of the pension arrangement before the relevant date, then B is zero.  The only way that B could,  it is said, be zero, would be if one or more of the categories of membership possibly covered by regulation 4 were to be excluded; there could not otherwise be “no period of membership” as referred to in the definition of “B”.  A purposive construction was called for.  Furthermore, a construction restricting “membership” to “active membership” would accord with the ethos of the 1985 Act. If there were no such restriction, in the present case, the whole of the value attributable to the twenty five and half years of the marriage that had elapsed before the relevant date would be included in the pool of matrimonial property which would be unfair given that, after the marriage, the pursuer contributed to his pension for only five months.  The pursuer’s approach was to confine consideration to the period during which he had, as it was put, made savings in the form of pension contributions.  “Membership”, in regulation 4, ought, accordingly, to be read as restricted to “active” membership as defined in section 124(1) of the 1995 Act.  In the course of submissions, counsel sought to rely on the evidence of Dr Pollock, consulting actuary, submitting that his evidence was that active, deferred and pensioner membership arose in all types of pension and expressed the view that regulation 4 ought to be construed as applying only to “active membership”.  As regards the former, I do not read the passage relied on (at p. 9 – 10 of the transcript) as being to that effect at all.  As regards the latter, the issue is one of construction of the regulations and that is a matter for determination by the court, not by an expert.

[27]      When asked how – if regulation 4 only applied to “active membership” – it would work in the case of a personal pension where contributions were sporadic, counsel was unable to respond beyond suggesting that perhaps it would be possible to identify when contributions had stopped.  She did not, however, begin to explain how that could be possible in the context of a pension arrangement within which, subject to relevant tax constraints, a member could opt to make contributions at any time.  

[28]      Counsel for the defender contended that “membership”, in regulation 4, covered all forms of membership – including pensioner membership – and that meant that the whole of the period of the marriage before the relevant date had to be taken into account.  It was important to bear in mind that the regulations did not only apply to occupational pensions as was clear from their express terms and from the ‘Explanatory Note’ attached to them. Such notes are of assistance when identifying the objective context of the legislation and the mischief it was designed to meet: Comhairle Nan Eilean Siar v Scottish Ministers 2013 SC 548.  The pursuer’s interpretation would, however, effectively restrict the application of regulation 4 to occupational pensions.  The term “active member” could have no sensible meaning in, for instance, the case of self employed personal pensions to which contributions do not require to be made regularly, are often in fact irregular and also liable to be of variable amount.  Further, the pursuer’s approach would conflict with the provisions of the primary legislation, the 1985 Act; it clearly intended that a party’s whole pension interests, such as existed in the present case, were to be regarded as matrimonial property.  It would then be for the court to decide, in all the circumstances, how the section 9(1)(a) principle ought to be applied.

 

The sheriff’s decision

[29]      The sheriff accepted the pursuer’s contentions for, essentially, two reasons.  First, he considered that the possibility of “B”, in the regulation 4 formula, being zero could not arise unless one or more categories of membership were to be excluded.  Secondly, he considered that restricting “membership” to the period during which the spouse was an “active member” would be consistent with the general principles enshrined in the 1985 Act because it would confine the relevant value to that which related to the period of the marriage during which, as he put it, “the activity generating value” took place and the defender would already have benefited from the pursuer having received pension income and any lump sum.  He seemed to feel driven to do so principally because otherwise the defender “would end up with a share of the pursuer’s income when the bulk of the activity to create that income took place before both parties were married.”

 

Discussion and Decision
[30]      When addressing the issue in this appeal – what proportion of the CETV of £172,748.38 is referable to the period of the marriage prior to the relevant date - a question arises as to what the legislature meant by the term “membership” as used in regulation 4 of the 2000 Regulations? The answer is, I accept, not entirely straightforward and it is to be regretted that – as the present dispute demonstrates – doubts exist as to its interpretation. 

[31]      When answering the above question, I consider that  regulation 4 requires to be read not only in the context of the regulations as a whole but, importantly, also in the context of the relevant primary legislation – in this case, the 1985 Act.  As I have already explained, the purpose of the regulations was to meet a need which arose from the inclusion of rights in any benefit under a pension arrangement in the definition of matrimonial property.  It is not just occupational pension rights relating to the period during which contributions are made that are relevant; the definition of “pension arrangement” extends to other types of pension, both occupational and non-occupational^[4] and other types of membership and pensions in payment are included in the definition of matrimonial property^[5].  

[32]      The regulations disclose no express intention to restrict their application to only one form of pension membership and it would, in the circumstances, seem odd if they did; the need to provide for the ascertainment of the value of all relevant pension interests would not have been met save in respect of a person’s period of active membership in an occupational scheme.  Had that been the intention, there would have been no purpose in setting out the directions for the methods of valuation to be employed when valuing seven other types of membership as, in terms, regulation 3 does.  Whilst it might be said that regulation 3 stands alone and would still provide the methodology whereby each type of pension interest is to be valued, it is, I consider, plain from reading the regulations as a whole that the purpose of regulation 3 is to provide – other than in the case of state scheme rights – the figure required for the “A” part of the regulation 4 formula.  To put it another way, regulations 3 and 4 are plainly intended to be read together and as fulfilling the requirements arising from the terms of section 10(5) of the 1985 Act.  Regulation 3 provides a means whereby the figure for “the rights or interests of either person”^[6] in a pension arrangement, at the relevant date, is to be ascertained and regulation 4 directs what “proportion”^[7] of that value is to be regarded as matrimonial property.  I cannot identify any reason let alone a good reason for providing in full for the former but only in part for the latter. I have reached that view without having regard to the terms of the Explanatory Note but accept that, in the circumstances, it is narrative to which regard can be had when identifying the objective context of the legislation (Comhairle Nan Eilean Siar v Scottish Ministers) and it certainly supports the defender’s interpretation.

[33]      I also note that, had it been the intention to restrict applicability to “active membership”, it would have been a simple matter to insert the word “active” before “membership” in the definition of “C”. 

[34]      Turning to what was advanced as a conundrum arising from the reference to the possibility of the period of membership being zero, I would reject the submission that that drives one to the conclusion that there must in fact have been an intention to restrict the applicability of the regulations. I would do so for two reasons. First, even if it raises a question mark, I cannot accept that it does so in such a way as to destroy the clear evidence to be found within the regulations, as read in the context of the relevant primary legislation, of the contrary intention to which I have already referred.  Secondly,  there is no necessary conundrum if account is taken of the fact that the regulations require the pension interests to be valued as at the date of separation but the possibility of zero membership allowed for by “B” is during a period prior to that date.  I do not accept that it can confidently be concluded that B could never be zero.  For instance, I would refer to the examples discussed in paragraph 23 above; in such cases, B would be zero for the purposes of section 10(5).  Clarity would be provided regarding the occupational pension – it could be ignored even although it was a pension benefit that existed on the relevant date.  Clarity would also be achieved in the case of the self employed pension. The money used to make the pension payment would, however, be matrimonial property since it would, prior to it being paid to the pension provider on the relevant date, have been an asset in the ownership of that spouse also on the relevant date.  Regulation 4 would, in those circumstances, prevent the double counting which would otherwise result.  Further, it seems to me that it must also be remembered that whether or not a party is, in terms of the relevant pension contract, to be regarded as a member during any period will depend on the terms of the individual scheme.

[35]      It must also, I consider, not be forgotten that the purpose and effect of these regulations is only to provide instructions as to how pension interests are to be valued at the relevant date and what portion of that value is to be regarded as matrimonial property. They do not trespass on the court’s discretion when it comes to deciding what, in a particular case, amounts to fair sharing of that property, what is justified by application of all the relevant section 9 principles and what is a reasonable award once regard is had to the resources of both parties at the time the award is made. This is not a matter of providing a safety net.  It is an instrinsic aspect of the 1985 Act scheme.  In the example set out in paragraph 25 above it would, for instance, be open to the party with the pension interest to rely on the fact that 90% of the contributions to the pension were made prior to the marriage as being a special circumstance justifying division in other than equal portions.

[36]      I turn then to the underlying principles of the 1985 Act and can deal with this briefly, given the more detailed discussion of this matter above.  I disagree with the sheriff’s approach which, ultimately, was that those principles required that the pool of matrimonial property be limited in such a way as to exclude value attributable to the period after 10 August 1985 because otherwise the outcome would, inevitably, be unfair bearing in mind that the bulk of the activity to create it occurred prior to marriage.   He has, however, failed to have regard to the nature of pension valuation as a means of placing a capital value on a future income stream, to that part of the value which reflected the defender’s continuing contingent interest in the scheme qua surviving spouse and to the extent of judicial discretion that remains when proper account is taken of the whole of the 1985 Act scheme. The inclusion of an asset in the pool of matrimonial property does not make it inevitable that it will be split equally between the parties or, in this case, that a pension sharing order will result whether reflecting one half of the value of the pursuer’s  interests in it or otherwise.  The court will have to identify what, in all the circumstances – including any special circumstances^[8], amounts to fair sharing and then decide what, overall, amounts to a reasonable award of financial provision taking account of the resources of both parties[9].  The sheriff was wrong to think that the outcome was a foregone conclusion and that it would, necessarily, be unfair.  As already discussed, whilst it may be felt that the straight line apportionment provided for by regulation 4 is unfair – that it is something of a blunt tool – that is not an end of matters and the court does have means at its disposal to achieve a fair outcome.  It cannot, accordingly, be said that the principles underlying the 1985 Act require the interpretation of regulation 4 to be as contended for by the pursuer.

[37]      I would, accordingly, have allowed this appeal but recognise, of course, that your Lordships do not agree with my approach.  I should add that I would not, however, have been persuaded that it would have been appropriate for this court to determine the defender’s claim for financial provision. The sheriff had not considered what order ought to be made if the pool of matrimonial property included, for the pursuer’s pension interests, the higher sum of £138,734.  He would have required to do so and I would, accordingly, have remitted the case to the sheriff to consider, of new, on the basis that the parties’ matrimonial property included  pension interests owned by the pursuer with a value of £138,734, what orders ought to be made in relation to the defender’s craves for financial provision.

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION

[2015] CSIH 61

XA22/14

Lady Smith

Lord Malcolm

Sheriff Principal Abercrombie QC

 

 

 

OPINION OF LORD MALCOLM

in the appeal

by

THOMAS CLARK MCDONALD

Pursuer and Respondent;

against

ANNIE FLOCKHART MOFFAT NEWTON or MCDONALD

Defender and Appellant:

Pursuer and Respondent:  Malcolm; Thorley Stephenson SSC

Defender and Appellant:  Speir; Allan McDougall

 

11 August 2015
[38]      I have had the advantage of reading a draft of the opinion of her Ladyship in the chair.  I gratefully adopt her narration of the circumstances, the relevant legislation and regulations, and the issue in the case.  However, unfortunately, I differ from her Ladyship on the proper outcome.  I agree with the reasoning of the learned sheriff, and would set out my own views as follows.

[39]      The express context of regulation 4 is the working out of the proportion of the value of a pension “which is referable to” the period of the marriage – see section 10(5) of the 1985 Act.  It is that proportion which forms part of the matrimonial property.  This exercise takes place in the light of section 10(4) of the Act which, for present purposes, defines matrimonial property as property which was “acquired” during the marriage, but before the relevant date; which is usually the date of the separation of the parties.  So, the task is to assess the period, before the relevant date, during which the value of the pension was acquired; and the proportion of that period, if any, which fell between the date of the marriage and the parties’ separation.  That is the purpose of the formula in regulation 4, which seeks, on a time basis, to provide a mechanism for identifying the amount of the pension value which the member already had at the date of the marriage.  It is a calculation designed to apply the terms of section 10(5)(b) to the particular circumstances of the case.

[40]      Once payments into a pension cease, and the member becomes a deferred or pensioner member, I find it difficult to talk of the value of the pension as still being acquired.  I agree with the learned sheriff that the approach adopted by the appellant would create odd and surprising results, for example where, throughout the marriage, the member was a deferred member paying nothing towards his ultimate entitlement.  How can it be said that the pension value was, to any extent, acquired during the marriage?  Surely the value was already acquired before the marriage began.  How much more so if throughout the marriage the couple are enjoying the financial benefits of the pension?  I would only be driven to a construction of regulation 4 which had these results if this was clearly required by its terms; and even then, there would remain a question as to whether the regulation was consistent with the primary legislation.  As it is, I prefer a purposive construction which avoids results going against the grain of the Act and the underlying legislative purpose. 

[41]      The process envisaged by paragraphs 3 and 4 of the regulations is as follows.  Firstly, the value of the pension as at the relevant date is calculated in accordance with paragraph 3.  That will give rise to a figure; let us say £100,000.  Applying regulation 4, one then requires to find out how much of the £100,000 falls into the matrimonial property pot.  One does this by identifying the period of membership “in the pension arrangement” before the relevant date;  let us say 20 years, and the part of that period, if any, which fell within the marriage, let us say 10 years.  In those circumstances, and applying the formula laid down, the proportion of the value which is added to the matrimonial property is £100,000 x 10 ÷ 20, which = £50,000.  (In regulation 4 this is expressed as A x B ÷ C.)  The issue raised in the present appeal is – what is meant when the regulation refers to “the period of the membership … in the pension arrangement”?  Does this cover all types of membership, or only a limited class or type of membership;  and, if so, which?  The answer to this is of crucial importance when identifying periods B and C.

[42]      The regulation 4 calculation can take place if, and only if, (a) as at the relevant date there is a pension to be valued, and (b) the person concerned was a member of the pension arrangement for a period prior to the relevant date.  The calculation does not assume that some or all of that period must fall within the marriage – regulation 4 expressly allows for period B to be zero.  In other words, it is acknowledged that there can be cases where none of the period of the membership in the pension arrangement falls within the period of the marriage.  However the regulation does not allow for period C being zero.  In such a case there would be no need for a pension calculation.  Period C must be a positive number, but period B can be zero.  This is recognition that all of the value of the pension at the relevant date could have been acquired by way of contributions made before the marriage.  It follows that one cannot be measuring the duration of all and any forms of membership of the pension arrangement.  If one was simply totting up all forms of pension membership, including deferred and pensioner membership, until the relevant date, period B could never be zero.  On the appellant’s approach, if there is a period applicable for C, there would have to be some period applicable for B.  So, to my mind at least, taken along with what one would in any event expect from the terms of sections 10(4) and 10(5) of the Act, this rules out the approach contended for by the appellant.

[43]      Before the sheriff, evidence was led from Dr John Pollock, who is an actuary experienced in the giving of expert evidence on, amongst other things, the valuation and apportionment of pension rights.  He testified that if one construed the reference to the period of membership in the pension arrangement as covering every kind of membership, it would never be possible for period B to be zero.  Counsel for the appellant told the court that he had spent much time trying to come up with an example, consistent with his interpretation, whereby B was zero, but he never succeeded.  Her Ladyship in the chair has offered such a case – see paragraphs [23] and [34] of her opinion.  However, no doubt because the valuation is of pensions held as at the relevant date (regulation 3), in terms of regulation 4, periods B and C are both calculated by reference to a period “before the relevant date”.  In the case postulated by her Ladyship, where a pension is taken out on the relevant date, there would be no call or need for a regulation 4 calculation, which, in any event, could not be worked through (one cannot divide zero by zero).  In the paragraph [23] example, no part of the pension value would fall into the matrimonial property, but the money spent on the pension would do so.  In short, pensions taken out on the relevant date are not relevant to any pension value assessment under the regulations.

[44]      Her Ladyship’s views have been influenced by section 10(6) of the Act.  It allows for the unequal division of matrimonial property if justified by special circumstances; which might include circumstances where matrimonial property was not derived from the income or efforts of the parties during the marriage.  This safety valve does not cause me to interpret regulation 4 in the manner suggested by the appellant.  However, I recognise the possibility of the purely time-based regulation 4 calculation creating unfair outcomes.  In such circumstances, regulation 10(6) might come into play.  Her Ladyship discusses such an example in paragraph [25] of her opinion.

[45]      To recap, there must be a pension in existence as at the relevant date; C must be a positive number, however B can be zero.  It follows that there has to be the possibility of a period of a type of pension arrangement membership, using the phrase in its broadest sense, which falls outside the scope of the calculation, otherwise B could never be zero.  This excludes the appellant’s approach; but what is the correct approach?  Driven by the statutory context of the acquisition of the pension value, and the assessment of the proportion of it acquired before and after the date of the marriage, the sheriff applied the concept of active membership, by which I understand him to mean, broadly, the period when contributions towards the pension are being made and value is being created.  This would exclude periods of deferred or pensioner membership.  Counsel for the appellant and her Ladyship in the chair have observed, in my view correctly, that this approach is relatively easy to apply in respect of occupational pension schemes, such as the present, but potentially more difficult with regard to other schemes, such as personal pensions.  Nonetheless, while no doubt there will be cases where fact sensitive judgments have to be made, and perhaps section 10(6) adjustments applied to the eventual division of the matrimonial property, if it is held in mind that the calculation should focus on the period during which value is being added to a pension arrangement, it ought to be possible to make an appropriate calculation.  Thus, by way of example, if a self-employed person makes annual contributions, perhaps of varying amounts, to a personal pension, and even if these payments are subject to occasional lapses because of cash flow or other financial problems, it can still be said that over this period the member is acquiring value in the pension scheme.  However, once there is a positive decision to stop payments, or even more so once benefits are being taken, the relevant period for the purpose of the regulation 4 calculation has ended.  If a regulation 4 calculation operated in this way gives rise to obvious unfairness, there remains the section 10(6) safeguard.

[46]      In his submissions to this court, counsel for the appellant drew attention to the impact of the ill-health aspect of the respondent’s retiral on the value of the pension.  This boosted its value, and the enhancement occurred during the marriage.  Even if this should influence the proper outcome as between the parties, which I doubt, in my view it could only be achieved through the section 10(6) mechanism.  In any event, the sheriff was presented with a straight choice between the two extremes, £10,002 or £138,734, dependent upon which interpretation of the regulation was correct.  Before him there was no reliance on any enhanced value arising from ill-health, and therefore no associated findings in fact.  Both the sheriff and this court were presented with a stark choice as to the proper approach to regulation 4.  If there are any special considerations flowing from an ill-health retirement, in my view, they can and should await a case where the point has been properly raised and argued by the parties.  In my opinion, the sheriff having correctly preferred the respondent’s approach to the regulations, it follows that this appeal should be refused.

 

EXTRA DIVISION, INNER HOUSE, COURT OF SESSION

[2015] CSIH 61

XA22/14

Lady Smith

Lord Malcolm

Sheriff Principal Abercrombie QC

 

OPINION OF SHERIFF PRINCIPAL IAN R ABERCROMBIE, Q.C.

in the appeal

by

THOMAS CLARK MCDONALD

Pursuer and Respondent;

against

ANNIE FLOCKHART MOFFAT NEWTON OR MCDONALD

Defender and Appellant:

Pursuer and Respondent:  Malcolm; Thorley Stephenson SSC

Defender and Appellant:  Speir; Allan McDougall

11 August 2015

[47]      I have had the opportunity to consider in draft the Opinions of Lady Smith and Lord Malcolm.  I am grateful to Lady Smith for her summary of the facts and historical perspective.

[48]      I agree with Lord Malcolm that the words “period of the membership of that party in the pension arrangement” in Regulation 4B of the Divorce etc. (Pensions) (Scotland) Regulations 2000 should be construed as active membership of the pension arrangement in question.  I too consider that the emphasis placed in the Divorce (Scotland) Act is on assets acquired during the marriage and that the words “if there is no such period, the amount shall be a zero” in Regulation 4B, can only apply as the expert witness in this case observed, to active and not to any other specified category of pension membership.

[49]      I have nothing usefully to add to Lord Malcolm’s opinion.

[50]      I respectfully agree with both my senior colleagues that any injustice or unfairness in the interpretation or application of the Regulations, regardless of which interpretation is preferred, could be corrected by invoking the provisions of section 10(6) of the 1985 Act.  That has not been sought in this case.

[51]      I too would refuse this appeal.