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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Slattery v Cabinet Office Civil Service Pensions & Anor [2009] EWHC 226 (Ch) (16 February 2009) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2009/226.html Cite as: [2009] Pens LR 129, [2009] 1 FLR 1365, [2009] EWHC 226 (Ch), [2009] Fam Law 398, [2009] ICR 806

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		16/02/2009

Mrs Justice Proudman:

1. This is an appeal by Mr David Slattery under the Pensions Schemes Act 1993 Part X against a determination made on 8^th August 2008 by the Deputy Pensions Ombudsman. Mr Slattery appeared in person. The respondent, the Cabinet Office (Civil Service Pensions), which represents Mr Slattery's pension scheme administrator, appeared by Counsel, Mr Raymond Hill, instructed by the Treasury Solicitor. For convenience sake I will refer to the first respondent as "the respondent" because the second respondent, HM Revenue and Customs, was not represented on the appeal.
2. I will use the following abbreviations in this judgment:

The Commissioners of HM Revenue and Customs	HMRC
Welfare Reform and Pensions Act 1999	WRPA
Pension Sharing Order	PSO
Cash Equivalent Transfer Value	CETV
Principal Civil Service Pension Scheme	PCSPS
Civil Service Compensation Scheme	CSCS
Approved Early Retirement	AER

3. This is an appeal in point of law, involving construction of a PSO in the light of WRPA and other legislation and the rules of PCSPS and CSCS. The underlying issue is whether,

i) as the Deputy Ombudsman found, a PSO made on the appellant's divorce in 2002 in favour of his wife applies to reduce the additional benefits he received as a result of his entering into an AER agreement in September 2006, or

ii) as the appellant asserts, the PSO only applies so as to reduce his annual pension from November 2009 when he attains his normal retirement of age of 60.

4. The outcome of the appeal depends on whether the Deputy Ombudsman erred in law in finding that the PSO applies to the appellant's rights under the AER agreement.

The facts

5. The material facts are uncontentious:
6. 1 The appellant was born on 9^th November 1949 and will therefore attain the age of 60 on 9^th November 2009.
7. 2 He joined HMRC on 7^th July 1975. As a result he became a member of the PCSPS, which is an occupational pension scheme. It is agreed that the applicable PCSPS Rules are PCSPS 1972 Section. The appellant was also covered by the CSCS. Both the PCSPS and the CSCS are statutory schemes established under s.l of the Superannuation Act 1972 to provide retirement benefits for civil servants.
8. 3 The appellant's normal retirement age under his employment contract (reflecting the provisions of the PCSPS) was 60. He had no right under his contract or the PCSPS to retire earlier on full pension, and the contract provided that he could only retire later with the express agreement of HMRC.
9. 4 The appellant and his wife (to whom I shall refer as "Mrs Slattery") were divorced in January 2002. On 22^nd January 2002 a PSO under the Matrimonial Causes Act 1973 s. 24B was made by consent in favour of Mrs Slattery in the Guildford County Court. The relevant clause of the PSO ordered:

"The respondent's civil service pension be subject to a pension sharing order giving the applicant 50% of the pension CETV calculated as at the date of this order, in accordance with annex B to this order."

The information contained in annex B to the PSO included the following:

i) The transferor was the appellant.

ii) The transferee was Mrs Slattery.

iii) The pension arrangement was the PCSPS.

iv) The PSO was to take effect on 22^nd January 2002.

v) The benefits should be valued as at 22^nd January 2002.

10. 5 A CETV was duly produced in accordance with the terms of the PSO. This showed a total CETV of £353,982.91, including as the pension element £225,382.13, being £25,380.87 x 8.88. It is common ground that the calculations were correct.
11. 6 In August 2006, the appellant, who had attained the position of Deputy Director, was told that he was "pre-surplus" and that his current post would disappear. He applied for, and was granted, AER. The grant of AER was not automatic but discretionary and the evidence shows that HMRC operated a selection procedure. The benefit of AER to the applicant for present purposes was that it gave him the right to receive his pension immediately without any actuarial reduction for the fact that it was coming into payment three years before his normal retirement age. On 15^th September 2006, the appellant and HMRC entered into a short written agreement in the following terms:

"1. It is hereby agreed that the employment of DAVID SLATTERY by the Commissioners of HM Revenue and Customs shall end on 3 ^rd November 2006 on the following terms.

2. DAVID SLATTERY will receive benefits calculated in accordance with the provisions applicable to Approved Early Retirement Scheme as set out in the rules of the Civil Service Compensation Scheme.

3. If either pensionable pay or reckonable service used in the calculations are changed between the date of this agreement and 3 ^rd NOVEMBER 2006 the provisions referred to above will be applied using the revised details and the benefits referred to above will be altered accordingly."

12. 7 The appellant's employment duly terminated on 3^rd November 2006 and his pension started to be paid from December 2006.
13. 8 In January 2007 the appellant was told that in consequence of the PSO the pension debit provisions were applicable and his pension payments had to be reduced accordingly. He claims that pension debit deductions should not be made until he attains the age of 60.
14. The appellant estimates that whereas the additional three years of pension is worth a total of some £100,000 to him, the Deputy Ombudsman's decision means that £40,000 of this will have been taken away from him. The appellant's grievance is not based on any objection to a windfall for his ex-wife. It is common ground that none of the amount deducted ends up in the hands of Mrs Slattery, although the only purpose of the PSO, reflected in its terms, was to give her an interest in the appellant's pension. Her financial position is entirely unaffected by the appellant's AER and consequent extra pension. It is also common ground that, if the Deputy Ombudsman's decision is correct, the benefit of the deductions in respect of pension debit for November 2006 to November 2009 accrues in its entirety to the scheme or to HMRC as the employer.

General

15. WRPA created and governs the concept of pension sharing. Pension sharing allows the shareable rights of a member of a pension scheme to be divided between the parties to a marriage on divorce. The Court has power in ancillary relief proceedings to make a PSO. Retirement benefits can now be transferred from one spouse to the other by way of a clean break financial settlement.
16. WRPA operates by creating a pension debit against the member's pension rights, matched by an equivalent pension credit in favour of the transferee spouse. The value of the pension debit is expressed as a percentage of the CETV. The CETV is the lump sum value of the pension rights accrued at the time of the divorce within a member's pension scheme. The CETV is calculated actuarially on the hypothesis that the member is leaving employment and makes a pension transfer to an alternative pension arrangement. The creation of the pension debit and pension credit and the operation and effect of the reduction of a member's retirement benefits as a result of the pension debit are prescribed by Part IV of WRPA.

The PSO

17. The PSO is the appropriate starting-point for analysis of what happened in the appellant's case. The words "the respondent's civil service pension be subject to a pension sharing order giving the applicant 50% of the pension CETV calculated at the date of this order" are not prospective in form. Mrs Slattery is entitled to provision based on half of the CETV. The CETV was calculated as at the date of the PSO. Thus, as is accepted, the amount ordered to be given was fixed as at 22^nd January 2002, subject only to a statutory uplift for inflation. The PSO was intended to effect a clean break. Future increases in the appellant's pension (based for example on increases in his salary) belong to him without further deduction or adjustment. That does not however resolve the current issue between the parties because it is not the amount of the annual deduction that is in dispute, but the years in which it is to be made.

Sections 27-30 WRPA

18. I therefore turn to the provisions of Part IV of WRPA. The scope of pension sharing is set out in s. 27 and s. 28. For present purposes the relevant provisions are:

i) Pension sharing is available in relation to "a person's shareable rights under any pension arrangement" (save for an exception which does not apply in this case).

ii) A person's shareable rights under a pension arrangement are "any rights of his under the [pension] arrangement" (save for exceptions which again do not apply).

iii) Pension sharing is activated by a PSO "relating to a person's shareable rights under a pension arrangement".

19. The pension sharing mechanism is dealt with by sections 29 to 31 WRPA. S. 29 (1) provides that when the section applies (that is to say, when a PSO is made),

"(a) the transferor's shareable rights under the relevant arrangement become subject to a debit of the appropriate amount, and

(b) the transferee becomes entitled to a credit of that amount as against the person responsible for that arrangement."

20. The first thing to note from s. 29(1) is that it is the shareable rights which are subjected to the pension debit. This is a constant throughout this part of WRPA and I agree with the appellant that it is important not to conflate the concept of shareable rights with benefits payable. The second matter is that the pension debit and the pension credit are necessarily identical in amount. That is a separate question from the timing and amounts of the payments from the scheme to the transferor and the transferee respectively.
21. The "appropriate amount" is defined by s. 29(2) in relation to a PSO, such as the one in the present case, which specifies a percentage value to be transferred. It is "the specified percentage of the cash equivalent of the relevant benefits" on the valuation day, which I understand was 30^th January 2002. In short this means 50% of the CETV on that day, but it is nevertheless necessary to look at the definition of "the relevant benefits". Where the transferor was in pensionable service at the time the PSO took effect, and the relevant arrangement was an occupational pension scheme, s.29 (4) applies:

"...the relevant benefits...are the benefits or future benefits to which he would be entitled under the scheme by virtue of his shareable rights under it had his pensionable service terminated immediately before [the day the PSO took effect.]"

The "entitlement by virtue of his shareable rights" for CETV purposes must refer to entitlement and shareable rights under the scheme in question at the time the PSO took effect. This follows as a matter of logic from the statutory hypothesis (imposed when calculating the amount of the pension debit) that the employment had terminated and that what must be valued are the rights accrued at the time of divorce.

22. S.30 WRPA provides for regulations to be made about the calculation and verification of the CETV. The relevant rules are the Pension Sharing (Valuation) Regulations 2000 (2000 No 1052).
23. Unless the scheme trustees so direct, discretionary benefits are not taken into account save (see rule 5 of the 2000 Regulations) in cases of established custom. It is common ground that possible benefits under an AER were thus not specifically factored into the CETV in this case.
24. Rules 3 and 4 of the 2000 Regulations provide that cash equivalents are to be calculated and verified by adopting methods and making assumptions which are certified to be consistent with the Institute of Actuaries' publication "Retirement Benefit Schemes- Transfer Values (GN11)". The appellant points out that paragraph 1.1 of GN11 states not only that,

"These guidelines apply to the basis of calculation of cash equivalents under the Regulations"

but also adds,

"(including the treatment of pension debits and credits under pension sharing legislation)".

GN11 paragraph 3.1 provides:

"It is a fundamental requirement, stemming from the legislation, that a cash equivalent should represent the actuarial value of the corresponding accrued benefits. Such actuarial value should represent the expected cost within the scheme of providing such benefits and should be assessed having regard to market rates of return on equities, gilts or other assets as appropriate."

25. For the purposes of ascertaining the appropriate amount of the pension debit under s. 29(1), a person's shareable rights are necessarily ascertained at the time of the PSO because that is the manner in which s. 29(2) and the CETV calculation work. That is common ground. However, I observe that s. 29(4) is only expressed to apply for the purposes of s. 29(2) and (3), i.e. in calculating the appropriate amount of the pension debit. By contrast, the definition in s. 27(2) of a person's shareable rights for the purposes of the mechanism generally is simply "any rights of his under the arrangement", without any express restriction as to the time when such rights are to be ascertained. Thus the position is that while the amount of the pension debit and pension credit is fixed by reference to rights existing at the time of the PSO, the shareable rights subjected to that debit are not expressed to be so restricted.
26. In principle, therefore, I am not persuaded by the appellant that, because the PSO is not prospective in form, future rights cannot be shareable rights for the purposes of WRPA and thus for the purposes of the PSO. I agree with the respondent that rights to a preserved pension in respect of the appellant's accrued service between 1975 and 2002 are shareable rights whether they relate to a deferred pension at the age of 60 or whether they relate to a pension payable as a result of a future right. Other future rights, for example discretionary benefits granted in cases of established custom under reg. 5 of the 2000 Regulations, would also be capable of constituting shareable rights.
27. That conclusion is however subject to two important provisos. First, by s. 29(1) the pension debit only applies to rights "under the relevant arrangement", that is to say, the pension scheme to which the PSO is expressed to relate. Annex B to the PSO in this case specifically names the PCSPS. Secondly, a reduction only applies to benefits under the scheme if the requirements of s. 31 WRPA are met as to the benefits which fall to be reduced by the percentage specified in the PSO. I propose to deal with those matters in turn.

Are the appellant's AER benefits paid under the PCSPS?

28. Clause 10 of the appellant's employment contract (which was not before the Deputy Ombudsman but to which both parties wish to refer) provided,

"As a civil servant you are a member of the PCSPS. You are also covered by the provisions of the CSCS..."

29. The CSCS supplements the PCSPS by providing for five broad types of discretionary pension benefits if certain conditions are satisfied. Under the CSCS rules four of those categories entitle the member in specified circumstances to a lump sum compensation payment and in some cases to enhancement of the pension to take account of the loss of opportunity to accrue benefits based on further service. The fifth category is AER, for which CSCS makes no separate provision for lump sum compensation or for any enhancement of pensionable service.
30. The relevant CSCS rule applicable to AER for present purposes is rule 4.1:

"A civil servant aged 50 or over with five or more years' qualifying service who is retired under the Approved category, will receive a preserved pension and lump sum under rule 3.11 of the 1972 Section which may, notwithstanding that rule, be brought into payment immediately under the PCSPS rather than at the pension age... "

Rule 3.11 of PCSPS provides that a civil servant who leaves his employment before pension age is entitled at the age of 60 to a preserved pension and lump sum.

31. Mr Hill submits that the effect of CSCS rule 4.1 is that on AER there is immediate payment of PCSPS benefits, paid pursuant to rule 3.11 PCSPS. This is the case notwithstanding that (a) rule 3.11 refers to the age of 60 and (b) the employer is required to meet the costs of early payment. It is submitted that the Deputy Ombudsman was therefore correct to find that it is the PCSPS preserved pension itself which is brought into payment early, although the entitlement to early payment is triggered by the CSCS. It is merely a case of accelerated payment of the PCSPS pension.
32. The appellant submits to the contrary that this approach confuses entitlement on the one hand with payment pursuant to the entitlement on the other. Rule 4.1 of CSCS is merely a convenient drafting device. The right to the extra years of benefit derives from the AER agreement and the CSCS, not from the PCSPS which is used to provide the mechanism whereby the payment is made.
33. The Deputy Ombudsman relied on the fact that the rules of the CSCS originally formed a part of the PCSPS rules, and a separate set of rules for CSCS were only laid before Parliament in 1995. I am of the firm view that just because PCSPS and CSCS comprised a single scheme prior to 1995 that does not make them a single scheme now or at the time of the PSO. The separation of the two schemes took place several years before the PSO. However in my judgment once an AER application is granted, all rights as well as payments are channelled through the PCSPS and from that date the appellant's rights and remedies lie in and against PCSPS.
34. Accordingly, if I am right in construing WRPA to mean that shareable rights may include rights arising after the PSO, those rights include the appellant's rights in respect of AER.

The operation of the pension debit under s.31 WRPA

35. I therefore turn to the construction and effect of s.31 WRPA. That section stipulates the manner in which the pension debit (to which a person's shareable rights are subject) operates in practice by means of deductions from benefits. The section overrides anything to the contrary contained in a relevant pension scheme. Pension payments are reduced if the requirements of the section are met and, by obvious implication, they are not reduced if those requirements are not met.
36. The applicable subsection is s. 31(2). It provides:

"Where a pension debit relates to the shareable rights under an occupational pension scheme of a person who is in pensionable service under the scheme on [in this case, 22^nd January 2002], each benefit or future benefit-

(a) to which the person is entitled under the scheme by virtue of those rights, and

(b) which corresponds to a qualifying benefit,

is reduced by an amount equal to [in this case 50%] of the corresponding qualifying benefit".

37. If what I have already decided is correct, it follows that the requirement at (a) is satisfied.
38. The outstanding question is therefore whether "each benefit or future benefit...corresponds to a qualifying benefit" within s. 31 (2) (b). If it does, the appeal will fail. If it does not, the appeal will succeed. S. 31 (3) defines "qualifying benefit", as follows:

"A benefit is a qualifying benefit...if the cash equivalent by reference to which the amount of the pension debit is determined includes an amount in respect of it."

39. There is a distinction between s. 31 (1), applying to pensions already in payment, and s. 31 (2), applying where the member is still in service. Under s. 31 (1), the actual benefit itself is reduced by the appropriate percentage. Under s. 31 (2), the benefit "is reduced by an amount equal to the appropriate percentage of the corresponding qualifying benefit". This reflects the fact that the amount of the actual benefit may not be the same as the qualifying benefit to which it corresponds.
40. Mr Hill submits:

i) The requirement is for the CETV to include an amount in respect of the relevant benefit.

ii) CETV is calculated on the basis of certain assumptions, one of which is that the Appellant would retire at age 60, without regard to any future changes in his rights.

iii) It is not necessary for the circumstances in which the benefit is paid to be identical to those assumed by the actuary when calculating the CETV.

iv) Although the pension debit and the pension credit are the same, that does not mean that there is any explicit link between the amounts paid to husband and wife.

v) The benefit is the appellant's pension under PCSPS based on service accrued between 1975 and 2002 (and his right is the right to such a pension).

vi) That benefit is a single benefit of a preserved annual pension.

vii) The CETV does indeed include an amount in respect of that annual benefit on retirement.

41. The appellant submits that there is no qualifying benefit because:

i) There was no right to early pension payments at the date of the PSO. There is a clear distinction between the right to a pension at the age of 60, on which the actuarial calculation was based in the CETV, and a further period of full pension from the age of 57 to the age of 60, which was not factored into the CETV.

ii) Pension sharing works by the sharing of rights, not the sharing of actual payments (as with ear-marking).

iii) The CETV does not contain an amount corresponding to the benefits which the appellant acquired by virtue of AER.

iv) The fact that that no account was taken of these potential rights in calculating the CETV is borne out by the fact that the pension credit in favour of Mrs Slattery is entirely unaffected by them.

42. In support of his arguments Mr Hill relies upon R (Smith) v. Secretary of State for Defence and Secretary of State for Work and Pensions [2004] EWHC 1797 (Admin), [2005] 1 FLR 97. In that case a wife who was the beneficiary of a PSO argued that it was contrary to her human rights (to peaceful enjoyment of property, to respect for her private life and to enjoy her rights without discrimination on the grounds of her gender or status) to have to wait until the age of 60 for payment of her benefits, while her husband received his from the age of 58. In deciding that the restriction on the wife receiving her benefits before the age of 60 was justified, Wilson J pointed out that:

"The main purpose behind the pension sharing legislation was to free pension credit rights from links with the circumstances of the active member and to render them apt to the circumstances only of the pension credit member."

It was inherent in the legislation that:

"any pension sharing order made will bring about an immediate reduction in [the husband's] pension income but will not produce any immediate corresponding benefit to [the wife] until she attains age 60."

43. The way in which the sharing provisions of the legislation operate means that although the amount of the pension debit and the pension credit must be equal, there is not necessarily any equality in the payments made, whether as to amounts or to timing. It seems to me that is a wholly different question from whether an amount has been included in the CETV calculation in respect of the relevant benefit. I do not therefore find that the authority has the effect contended for by Mr Hill.
44. Mr Hill also prays in aid the situation where a member retires at an age higher than normal retirement age. He postulates a case in which the appellant had agreed with HMRC to work until, say, the age of 64. Mr Hill points out that in such circumstances Mrs Slattery would receive her pension credit from May 2009 as before, notwithstanding that no deductions could be made in respect of pension debit until the appellant's pension came into payment. In those circumstances pension credit would not be offset by pension debit in the way the appellant suggests is mandatory, and (conversely to present circumstances) the scheme (or the employer) would have to bear the shortfall. The example supports the respondent's case, but I am not persuaded that it is conclusive. The employee had no right to elect to work beyond the age of 60 and thus the possibility was not factored into the CETV. There is no issue in such circumstances about whether an amount has been included in the CETV under s. 31 (2) (b). I suspect that the example represents an unusual exception to the normal situation. The appellant tells me it was not HMRC policy at the time he worked there to permit an employee of his grade to stay beyond normal retirement age. If the employee's services were so valuable to HMRC that they wished him to do so then they would have made a conscious decision to fund the shortfall between the deductions and the amount payable as a result of the PSO.
45. I posed the following question to the parties: what happens if a member takes the option to which he is entitled under PCSPS rule 3.10a? That rule would have enabled the appellant to retire early and take his pension immediately, subject to actuarial reduction. Mr Hill replied that in such an event the appellant's pension would have been liable to suffer the same deduction as was in fact made. The appellant demonstrates by way of an example that if the respondent is right, no-one with a pension sharing order could take this route without a substantial and unfair penalty. The pension entitlement might well be a significant minus amount.
46. He says there are two ways of dealing with the matter. One is for the actuary to reduce not only the gross pension but also the deductions flowing from the pension debit so as to match the stream of deductions with the stream of pension income. This would not have the stark effect of a reduction which bears no relation to the principle behind the PSO. The other method, which the appellant submits is correct in principle, is to make the deductions in respect of pension debit only from the age of 60. He applies the same argument as with AER that the CETV does not take account of any payments prior to that age.
47. Mr Hill submitted that if the effect of s.31 (2) (b) were as the appellant says, s. 31 (3) would have been worded differently. Instead of a requirement for the CETV to include an "amount", the subsection would have provided for the sum specified in the CETV to be identical to or the same as the benefit. That would follow from the fact that s. 31 (3) is dealing only with a hypothetical ("qualifying") benefit, not the actual benefit subject to the deduction. The appellant says that s. 31 (3) cannot apply because the basis of calculation of the actuarially reduced pension would be different from that of the CETV, involving, for example, a higher multiplier due to greater accrued service.
48. I see the logic of Mr Hill's argument. However, it insufficiently recognises that the draftsman had to accommodate the fact that the CETV contains not only a pure pension element but other separate benefits such as lump sum entitlement. The use of the phrase "includes an amount" is, I believe, neutral.
49. Each side's stance reflects a basic difference of approach both as to the principle of pension sharing and as to the method by which it operates. The respondent's case is that all the appellant's pension payments are derived from the same right to a preserved pension based on service accrued from 1975 to 2002. His hypothetical pension was calculated in the CETV. The actual pension corresponds to that hypothetical pension; it is not a different benefit (such as death in service) but the same pension. The only difference is that it has been accelerated. The appellant's case is that there is a fundamental difference between the right to a pension payable at the age of 60 and the right to a pension, whether full or subject to actuarial reduction, payable at an earlier age.
50. In my judgment a contingent discretionary benefit is indeed a separate benefit which is not taken into account in the CETV. The reason why the AER was not taken into account is because the right to it was not in contemplation at the time of the PSO. Save in the cases provided for by regulations, discretionary benefits are ignored for the purposes of the calculation: that much is accepted. If a benefit is not taken into account it cannot be said that the CETV contains an amount in respect of it and it is not therefore a qualifying benefit (to which payments by virtue of that benefit correspond) as defined by s. 31(3).
51. This conclusion is supported by the fact that Mrs Slattery obtains no benefit from the deductions. It is not that she gets no matching payments (as in Smith); she gets no benefit at all. That in turn is because the appellant's right to AER benefit arose after the PSO and is not one of the cases specifically required to be taken into account in the CETV. It flies in the face of common sense to say that in these circumstances the obligation to make the deductions arises from, and is in implementation of, the PSO.
52. Advantageous early retirement without penalty may be a real possibility, although a purely discretionary matter, at the time of a PSO. If the wife commissioned her own actuarial report to show the potential effect of such benefits it would necessarily produce different figures from the CETV because the CETV is produced without regard to them. The wife's remedy would be to try to persuade the divorce court to reflect those possible future benefits in the PSO by asking for a greater percentage of the CETV to be given to her. It cannot be right that deductions are taken away from the husband in the name, as it were, of the PSO, with no corresponding benefit to the wife whatsoever.

Conclusion

53. In these circumstances the requirements of s. 31 (2) (b) of WRPA are not met. I therefore find that the Deputy Ombudsman made an error of law in deciding that on the true construction of the PSO, the legislation and the rules, the appellant's additional AER entitlement was a benefit which was taken into account in calculating the CETV and falls to be reduced under WRPA s. 31. Accordingly I would allow the appeal.