Untying the financial knot

PENSIONS

When the Central Statistical Office tots up the number of divorces in the first half of 1995 it could find a significant dip from the normal six-monthly rate of 100,000.

With the Government increasingly on the back foot over the issue of women's pension rights it would take an act of true desperation for a wife to start divorce proceedings before the Pensions Bill completes its passage through the House of Commons.

The bill has already been amended, following a government defeat in the House of Lords, to give the courts power to force divorced husbands to hand over part of their pensions to former wives on retirement.

The amendment will ring-fence an ex-wife's share of her husband's pension up to the time of divorce. And in a further concession this week Peter Lilley, the Social Security Secretary, said the pension schemes, not ex- husbands, would be made directly responsible for handing over those entitlements.

But in a week when the Lord Chancellor unveiled the most radical reform of divorce law for a quarter of a century, Mr Lilley has dug in his heels over the most controversial element of the pensions debate - the splitting of a husband's pension fund at the time of divorce.

Advocates of splitting - including the Law Society, the Pensions' Management Institute and the Equal Opportunities' Commission - argue that it would allow divorcing couples to make a clean break.

They say that as things stand a wife's entitlement remains locked up in her husband's pension scheme. She will have to wait until he retires before she gets a penny, even if she retires first. Neither does a divorced wife have any control over her investment. If her ex-husband changes jobs and transfers the pension - possibly to a badly performing fund - she will have no say in it.

But in resisting the move, Mr Lilley said that splitting a husband's pension fund would be wrong in principle because it would lead to a divorced couple being taxed at a lower marginal rate on retirement than if they had stayed together. Such a complex issue would not be resolved within the timescale of the Pensions Bill, he added.

That it could cost the Treasury £300m a year in income tax revenue is being cited as the central reason for government resistance. But some actuaries specialising in divorce settlements are also worried. They fear that pressure from proponents of pension fund-splitting could bounce the Government into crude legislative guidelines that would be counter-productive in working out the details in individual cases.

Others argue that such a law will merely encourage husbands contemplating divorce to hold off making pension provisions where they can until the fund is split.

But Richard Malone, vice-president of the Pensions Management Institute, said: "There may be isolated cases where this happens. But in most instances money held back from a pension will form part of the marital assets and be split anyway."

Mr Malone believes that the Government will eventually be forced to concede on pension fund-splitting, possibly before the Pensions Bill finishes its passage through the Commons. "There is a great groundswell of feeling among MPs of all parties," he said. "This is an issue of social justice and the Government should be prepared to pay the price."

Neither does he agree that splitting funds on divorce would cause unnecessary complications for the administrators of pension schemes.

"Pension funds are valued every day of the week," he said. "Let the courts decide how they should be split."

In fact, it has been possible for women to claim entitlement to their husbands' pension rights since the 1973 Matrimonial Causes Act went on the statute books. But it quickly became obvious that there was no satisfactory mechanism of splitting the pension fund.

"The entitlement had to come from spare money," explained Robert Graham, an actuary specialising in pension funds and divorce. "If there was no spare money then the wife's rights were trodden on and in practice most divorces ignored the pension fund."

That was until 1993 when the celebrated Griffiths case shook the legal profession. Aggrieved that her solicitor had not presented a claim for her entitlement to her husband's pension rights, the wife sued and won £20,000 from the firm in question. Wives' pensions were firmly on the agenda.

Now - even if the Government resists the "clean break" option - non-working and part-time working wives will have their rights to a share of their husband's pension enshrined in law.

The bad news is that divorce is still a shattering experience, financially as well as emotionally. Neither party gains and a divorced man who gives away half his pension will struggle to catch up before he retires.

He can boost it with additional voluntary contributions, but cannot put more than 15 per cent of tax-free pay into a pension. And that is unlikely to be enough.

Wives, too, will find that trying to make up for their ex-husbands will be impossible on 15 per cent a year.

Either way you lose.