Info & Advice

Another peril in the pension minefield

The suspension of pension funds can cause significant financial problems for beneficiaries. But what can family lawyers do to mitigate the risks for clients they are advising during divorce proceedings? Financial planner David Lamb, of The Pension Sharing Service, explains.

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We begin with a scenario: Karen was awarded 100% of one of Norman’s pensions, and a smaller share of another. Their solicitors have been very prudent because one pension had a guaranteed annuity (an income, for life, that could not be purchased on the open market) that would have been lost on transfer, meaning neither party would benefit. This is the plan that Karen received the smaller share of.

Unfortunately, this order cannot be implemented because a couple of the funds the pension holds are suspended from trading.

Karen has a problem.

The transfer process

When a defined contribution scheme, such as a personal pension, is to be transferred, the assets (effectively unit trusts held by the pension trustee) are sold. The cash is then transferred to the receiving scheme and invested in a new portfolio of funds, ideally recommended by the pension creditors’ financial adviser, based upon their attitude to investment risk.

The issue

Many modern pension funds do not invest the money themselves, instead offering external investment funds with different fund managers and a wide range of objectives. This is generally good but, occasionally, the funds can experience issues which can result in them being suspended from trading (meaning they cannot be bought or sold and turned into cash).

This could be for a variety of reasons; most commonly it is property funds suffering liquidity issues (an inherent risk with these funds). If too many people want to disinvest, the fund may not hold enough liquid assets (cash) to pay them and therefore may have to sell properties to raise the cash. But this can take some time.

This would not normally cause a problem for a pension sharing order as most orders are made for less than 100% of the fund, therefore other assets can be sold to provide the funds to be transferred. Unfortunately, for Karen, the 100% order meant that the transfer must be all or nothing; the pension provider cannot transfer less than the amount stated in the PSO (for example leaving the suspended funds and transferring only those that are tradable).

Karen is currently surviving on her State pension and desperately needs the money she has been awarded.

Karen’s options

Karen has three options:

  • The first is to be patient and wait for the suspensions to be lifted. Unfortunately, one of the suspended funds is the Woodford Income Fund, and due to problems with the underlying investments it could take years for the suspension to be lifted and could be very costly to the investor. Karen cannot afford to wait very long.
  • Secondly, Karen could instruct her financial adviser and pension company to individually transfer all the underlying unit trusts by stock transfer, but this could take a long time. This would incur extra costs and is littered with pitfalls. Even the pension company advises against this, and, in the end, Karen will still be stuck with funds that she cannot convert into cash for the foreseeable future to provide her with an income.
  • Karen’s third option would be at to apply to get the PSO varied so that she takes a greater share from Norman’s other pension. However, under section 31 Matrimonial Causes Act 1973 an application would have to be made before the decree absolute is made and before the pension sharing order takes effect.

So what can family lawyers do to avoid similar situations?

I would strongly recommend when asking for details on pensions, a breakdown of the individual funds is requested. This information will help identify any funds that are currently suspended or run the risk of suspension at short notice. If a pension portfolio holds these types of funds, a request for a PSO should not exceed the percentage of funds trading without this risk.

Where possible, spread the PSO over other pension policies to avoid having to take 100% of one product.

When providing the Pension Trustees with a copy of the pension annex, at least 21 days before the order is submitted to the Court, ask the Trustees whether there are any issues with any of the funds held that could impede the implementation of the order.  This appears not to be covered under the Pensions on Divorce etc (Provision of Information) Regulations 2000.

Ensure that the PSO is implemented as quickly as possible as fund suspensions can occur at any time, with relatively short notice.  (In any event, the PSO should be sent to the Trustees within seven days of the order being sealed).

I was discussing these issues with my wife, who is a family lawyer, and the very next day Aviva, which operates some of the largest property funds, gave notice that their funds (which are currently suspended) are to be wound up, with the properties being sold. They have warned that this process could take up to two years.

Be aware of pensions holding this fund and ensure the order excludes the percentage held in this fund.

Assistance is available

If you have any concerns about the issues raised in this article, please do not hesitate to contact The Pension Sharing Service.

Tel.      0808 1781695/07708 690811



David Lamb is Director of the Pension Sharing Service, is a Certified Financial Planner CFP™, a Chartered Wealth Manager, holds the Society of Estate Practitioners (STEP) Certificate for Financial Services Trusts and Estate Planning, and is a STEP Affiliate.

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