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Supreme Court: 'period of membership' of pension scheme includes inactive membership


The length of a pension scheme member's 'period of membership' for the purposes of Scottish matrimonial property law includes any point that the individual belongs to that scheme, and not just while contributions are being paid, the UK's highest court has confirmed.

The Supreme Court's judgment means that the pension rights included within matrimonial property on divorce in Scotland are more extensive than was previously understood, according to pensions expert Ian Gordon of Pinsent Masons, the law firm behind Out-Law.com. The lower courts in Scotland had previously held that the phrase referred only to periods of 'active' membership, while contributions are being made and benefits built up in the scheme.

Mr McDonald, the ex-husband in this case, had worked as a miner for British Coal, and joined the British Coal Staff Superannuation Scheme on 11 December 1978. He married Ms Newton, the ex-wife in the case, on 22 March 1985. Shortly afterwards, he retired early on ill-health grounds and exercised his right to receive a pension income before his normal retirement age. He stopped contributing to the scheme and began receiving benefits on 10 August 1985.

McDonald and Newton separated on 25 September 2010. As part of the divorce settlement, Newton is seeking a pensions sharing order under the 1985 Family Law (Scotland) Act, on the basis that McDonald's pension forms part of the couple's matrimonial property. The 2000 Divorce etc (Pensions) (Scotland) Regulations contain a formula for calculating the pension rights entitlement, under which only pension rights applicable to the period of pension scheme membership which overlapped with the marriage can be classed as matrimonial property.

The lower courts in Scotland had previously held that only benefits attributable to McDonald's active membership of the pension scheme during the course of the marriage could be classed as matrimonial property. This period ran from the date of the marriage, 22 March 1985, to McDonald's early retirement on ill-health grounds five months later. Newton appealed, arguing that the period during which McDonald was drawing his pension should also be covered.

Given the relatively short period of McDonald's active membership of the pension scheme, the difference in the value produced by the formula under each definition of 'period of membership' was quite extreme. If only active membership counted, then the value produced by the formula was £10,002. However, if the period of membership also included deferred membership and pensioner membership, the value was £138,734, because a greater proportion of the overall value would be attributed to the period of the marriage.

In a unanimous judgment, the Supreme Court backed the second interpretation of the phrase. It found there were four reasons why 'membership' should not be confined to 'active membership'. These included that the drafter distinguished between the different types of membership elsewhere in the regulations; and that the regulations apply to both occupational and personal pension schemes. The term 'active membership' is only relevant in the context of occupational pension schemes.

"It is to be assumed that parliament intended the provisions of the regulations to operate sensibly in relation to the differing pension schemes and state pension rights," said Lord Hodge, giving the judgment of the court.

"This case was a relatively extreme one, where almost all the benefits were 'earned' or 'accrued' before the marriage, while the husband continued to participate in and receive benefits from the scheme throughout the period of the marriage," said pensions expert Ian Gordon of Pinsent Masons. "The difference between the figures produced by the formula on the two possible interpretations was therefore substantial."

"It should be noted that although the decision extends the scope of pension rights which have to be taken into account, it does not follow that the value of the pension which is matrimonial property will always have to be shared equally. Lord Hodge made clear that other provisions of the 1985 Act give flexibility to determine that another split may be more appropriate. It would therefore still be open to the court to decide that something other than equal sharing is appropriate where the bulk of the pension rights which form part of the matrimonial property were built up before the marriage," he said.

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