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Family practitioners have been eagerly awaiting the Supreme Court decision in the case of McDonald v McDonald as to the interpretation of Regulation 4 of the Divorce etc (Pensions) (Scotland) Regulations 2000.   The Supreme Court have now released their judgment – creating a landmark decision for how pensions should be treated upon divorce.                                                                                                                                                                                                                             

The particular facts of the case are briefly narrated in Part 1 of my blog, “Pension sharing on divorce: The case of McDonald v McDonald – what’s next?”  but essentially, the dispute between the parties was as to the correct interpretation of Regulation 4 and the corresponding calculation for apportionment.

Mr McDonald submitted that the phrase “period of membership” contained in the formula formulae in Regulation 4 referred to his period of “active membership” in the scheme only and not to his period of “pensioner membership” wherein he made no contributions but received an income from the scheme. Mrs McDonald argued that as her husband had been a member of the pension scheme for the entire period of their 25 year marriage, the whole period of his membership ought to be taken into account in quantifying the value of the pension attributable to the marriage.

The Sheriff at first instance and the majority of the Inner House ruled in favour of Mr McDonald and held that Regulation 4 must mean the period of “active” membership. This meant that Mr McDonald’s pension rights were calculated at a sum of £10,002 as oppose to the sum of £138,534 which Mrs McDonald contended. Mrs McDonald appealed the Inner House decision to the Supreme Court, who unanimously allowed the appeal ruling that “period of membership” does indeed refer to the whole period of a person’s membership in a scheme and not just the period in which they are actively contributing to it.

It was reasoned that confining the phrase “period of membership” to mean “active” membership only would mean adding words into the Regulation which are not there. There are of course different classes of membership of a pension scheme, which the drafters of the Regulation would have been well aware of. They chose not to differentiate between any of those classes in the drafting of Regulation 4. Parliament must have intended the Regulations to operate sensibly in respect of the differing pension schemes given that they clearly apply to both occupational and personal pensions even though the definition of “active membership” in s124(1) of the Pensions Act 1995 does not refer directly to personal pension schemes.

Both the Sheriff at first instance and the majority of the Inner House relied upon the general principle contained in s10(4) Family Law (Scotland) Act 1985 which sets out the definition of “matrimonial property”. The Supreme Court noted that the reading of the words “active” and “contributing” into the Regulation could not be supported by s10(4) as there is specific provision for pension rights at s10(5) of the 1985 Act – Parliament again chose to deal with pension rights differently to other matrimonial property and so the reliance on s10(4) here falls.

The Supreme Court noted that their finding does not mean that the value of an interest in a pension arrangement must be shared equally and a court still has scope to apply the principles contained within the 1985 Act to effect an unequal sharing of matrimonial property in certain circumstances. Although the decision may have perhaps been a little unexpected, it does not mean that it is an unwelcome decision. It will inevitably have an impact upon separating parties and the advice tendered but at least we now have a clear direction on how rights in pension schemes in the context of matrimonial property ought to be dealt with, all the way from the Supreme Court.

Michelle Fearn, Associate

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