Based in the North East of Scotland, you may find it surprising that I am often asked to advise on divorce cases in which one or both parties have international pensions. As I have mentioned previously, pensions can be incredibly valuable assets and their value can often eclipse those of other matrimonial assets. They are frequently overlooked, however, especially where the pension funds are based overseas. With French pensions, complex arguments can be encountered in respect of the approach to valuation, especially when the pensions are "public" pensions rather than private ones.
Although I studied law in France as part of my university degree, I did not focus on French family law issues and I am not qualified in French family law. I am fortunate, however, to have good contacts in France who can assist with advising clients on French family law issues.
One of the key differences between UK pensions and French pensions is that French pensions cannot be shared. That is, they cannot be split in the way that pensions can be shared in Scotland (or in England and Wales) on divorce.
It is important to understand how UK pensions are dealt with 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 the ex-spouse on divorce. This can happen following a pension sharing order (PSO) by a Scottish Court, or more commonly, by way of a Qualifying Agreement (QA) between the parties made prior to divorce.
Qualifying Agreements – what are they and when can they be used?
A Qualifying Agreement (QA) is a Scottish bi-lateral formal written agreement which provides for the sharing of a spouse's UK pension or pensions on divorce. It can provide for a percentage to be shared with the other spouse on divorce or can specify a fixed sum to be debited from the pension fund. It is more common in Scotland to provide for a fixed sum to be shared rather than a percentage.
Legislation provides for the information which must be contained in the QA and the form in which it should be presented. It is necessary to include the parties' details as well as details of the fund to be shared and the destination of the pension credit. Some pension schemes will permit internal transfers so that the ex-spouse will join the same scheme as the existing member but others will insist upon an external transfer. External transfers are more common.
After it has been finalised, it must be sent to the Books of Council and Session for registration as an extract QA is required to implement the pension share. When the QA has been registered, the onus is on the intended recipient of the pension share to ensure that the divorce is finalised as soon as possible thereafter. That is because the pension share can only take effect on divorce. The divorce need not be granted by a Scottish court.
There are strict time limits for intimation of the extract QA and extract decree of divorce (or the equivalent order for divorce from a court in a different country) and the consequences of missing those can be devastating.
Pension Sharing Orders – what are they and when can they be used?
A Pension sharing order (PSO) can be sought by a spouse in an action for divorce and financial provision in Scotland in respect of UK pension benefits. It is important to note that the party who seeks the pension share in their favour must formally crave the PSO. Even if a party wishes to share their pensions with the other spouse in partial satisfaction of their claim it is incompetent to seek a PSO to be made against themselves.
The formal crave for a pension sharing order may be framed as a percentage of the pension or as a fixed sum.
How are UK pension benefits valued in Scotland and how are the amounts or proportions contained in QAs or PSOs arrived at?
Where a party's assets include UK pension benefits, I would expect to see a Cash Equivalent Transfer Value (CETV) or Cash Equivalent Value (CEV) of any pension benefits that were held at the date of separation whether the matter is being negotiated or litigated. If those pension benefits were accrued wholly or partly before the parties were married then the CETV should be apportioned to reflect the proportion which built up during the marriage. The formula for apportionment is set out in legislation.
In simple terms, a CETV or CEV is the capital value of the spouse's interest in a pension fund at the date of separation. This is calculated by the pension administrators and is equivalent to the cost to replace those benefits. When the pensions are occupational schemes rather than personal pensions there may be contributions by the employer as well as the employee. State pensions, however, do not tend to be considered.
The CETVs or CEVs will normally be taken into account when considering how to share the net matrimonial assets between the parties. Pensions do not have to be shared and their values may be offset against other assets either in litigation or negotiation. If there is to be pension sharing, the way in which they are to be shared will be either agreed or determined by the court. The amount or percentage to be shared will usually be ascertained with reference to the division of other assets.
Can the value of French pensions be capitalised or taken into account when divorcing in Scotland?
To date, there is no authority on this point. I have had expert reports from an experienced actuary in Scotland, however, who has calculated a capital value of different types of French pensions in a litigated case. That actuary was able to apply similar methodology to the matter of valuation that would be used when dealing with UK pensions.
Competing arguments were advanced, however, to the effect that the value of an AGIRC-ARRCO scheme which is sometimes described as a "compulsory supplementary pension" or a French public pension could not and should not be capitalised. There were various reasons given for this, including that the pension could not be shared and there was also reference to death benefits that may be payable to a spouse or an ex-spouse in the event of the member's death. Reference was also made to the proposed reform of the retirement system in France.
A distinction was drawn between the different types of pensions in that case. A RECOSUP pension, which was described as a private plan or Plan Epargne Retraite (PER), which was subscribed by the member and their employer. While it was not accepted that the value of a PER should be capitalised as such, there was recognition that in a "community of assets" regime (the default regime applicable on divorce in France if parties have not opted for a different pre-nuptial arrangement) the pension would not be shared between them but that the value should be shared or taken into account.
These arguments may well require 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 consideration should be given to the best forum to deal with the financial issues arising from a separation, if it is possible to use either.
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