Pension Adjustment Orders (PAOs) can raise difficult issues for trustees of occupational pension schemes. Under the Family Law Acts trustees must be put on notice prior to a PAO being made and often the trustees are asked to review draft PAOs and confirm that they are capable of implementation. This has the potential to expose trustees to liability. Once the PAO is formally made by a Court it may prove very difficult to have it amended. In order to reduce the risks of receiving a PAO which the trustees cannot implement, it is prudent for trustees to have a procedure in place for reviewing PAOs when they receive them. Any issues which arise can then be dealt with as early as possible in the process. These seven steps should assist with an initial review of a draft PAO and reviewing any final PAOs trustees receive.
Steps in respect of draft and final PAOs:
1. Check legislation: where the PAO is made following a divorce, it should reference the Family Law (Divorce) Act 1996 and the relevant section (Section 17). Where the PAO is made following a judicial separation, it should reference the Family Law Act 1995 and the relevant section of the Act (Section 12).
2. Check member details: ensure that the member’s details are correct and that they correspond to the scheme referenced in the PAO.
3. Check scheme details: ensure the scheme details (including name, policy number, trustees’ details etc.) are correct and that they correspond to the member named in the PAO.
4. Check type of PAO: determine whether the PAO is made in relation to retirement benefit (all benefits other than contingent benefits), contingent benefit (death in service benefits) or both.
4.1. Retirement Benefit
4.1.1. An order in respect of retirement benefit (or any element of retirement benefit e.g. death in retirement benefit) should be made under Section 17(2) of the 1996 Act or Section 12(2) of the 1995 Act, as appropriate. Every order made in respect of retirement benefit must specify the person in whose favour the PAO is made along with:
(1) the relevant period of reckonable service of the member to be taken into account; and
(2) the relevant percentage of retirement benefit to be paid.
4.1.2. The relevant period specified in the PAO should not extend beyond the date of the decree. Best practice is to specify a start date and an end date. However, PAOs are often made in relation to “the whole of the period of reckonable service of the member”. In circumstances where such an order is made, the trustees may need to notify the spouse, the member and their relevant solicitors that the relevant period will terminate on the date of the decree (i.e. because accrual after the date of the decree will not be subject to the PAO).
4.2. Contingent Benefit
4.2.1. An order in respect of contingent benefit should be made under Section 17(3) of the 1996 Act or Section 12(3) of the 1995 Act, as appropriate. Such an order need only specify the relevant percentage of contingent benefit to be paid and the person or persons to whom it should be paid.
4.2.2. An order in respect of contingent benefit will only apply where the member remains in relevant employment. Where the member is no longer in employment or self-employment to which the scheme applies, any order in respect of contingent benefit will cease to have effect. In circumstances where a PAO is received in respect of contingent benefit and the member is no longer in relevant employment, the trustees may need to notify the spouse/dependant/member and their advisers of this.
4.2.3. An order in respect of contingent benefit may only be made where the application to the Court is made at the date of the decree or within one year following the date of the decree.
Steps in respect of final PAOs:
Where the trustees receive a finalised PAO (at which point it is an Order of the Court) the following are some of the steps which will need to be carried out (in addition to those outlined above – if not already done).
5. Contact member: the member should be notified that the PAO has been received and informed of the effect of the PAO on his/her benefits under the scheme i.e. where a PAO is made in respect of retirement benefit, details of the member’s residual benefit should be provided.
6. Reply: where the final PAO is served by someone other than the a registrar/clerk of the Court a letter of reply may need to be sent to the person who served the PAO, acknowledging receipt of the PAO and, where necessary, outlining any problems the trustees may have regarding the implementation of the PAO. In circumstances where the PAO has already been made, these may be confined to fundamental problems which affect the trustees’ ability to implement the order such as inability to identify the relevant scheme, scheme no longer in existence or failure to specify reckonable service/relevant percentage in respect of retirement benefit. Where the PAO purports to split retirement benefit into its different constituent elements, specific legal advice should be obtained.
7. Disclosures: The trustees should write to the relevant spouse/dependant within 2 months of receiving the final PAO outlining the following:
7.1. details of the amount and nature of the benefit to be provided under the PAO;
7.2. details of the options available to the spouse/dependant;
7.3. the name and address of the relevant person to whom enquiries regarding the PAO should be sent;
7.4. that further information may be obtained from the Pensions Authority; and
7.5. that the spouse/dependant should inform the trustees of any change of address.
As noted above, PAOs can give rise to liability for trustees. At no point should trustees accept responsibility for drafting PAOs, their content, effect or validity. While the trustees may be in a position to confirm that a particular PAO is capable of implementation, it is not appropriate for trustees to approve PAOs. That is a matter for the parties to the PAO, their advisers and, most importantly, the Court.