Thousands of divorcees at risk of losing out on six-figure pension payouts as new EU regulations kick in

A major upheaval in the pensions industry means thousands of divorcees face the prospect of losing out on significant payouts.

he looming crisis relates to “death in service” payments, usually worth hundreds of thousands of euro, that a divorced person would receive if their former spouse dies before reaching retirement age.

New EU regulations have prompted companies to move their pension schemes, and this has had the unforeseen knock-on effect of denying divorcees the ability to access the payments.

The issue has led to concerns being expressed by a number of Circuit Court judges in recent weeks, while the Law Society has told solicitors that emergency legislation is required to fix the problem.

In a letter to the Pensions Authority, Law Society director general Mark Garrett described the situation as “very serious” and said it need to be addressed “without delay”.

Arrangements regarding pensions, and to what extent former spouses should benefit from them, are a major part of any divorce or separation.

Pensions tend to be the second biggest asset that needs to be dealt with, after the family home. Recently, increased EU regulatory requirements have prompted a rush to transfer pension schemes into new entities, known as master trusts.

But an unintended consequence of this is that court orders in divorce and separation cases, requiring death-in-service payments to be made to the surviving ex-spouse or dependant family members, can no longer be enforced.

This is because the order relates to the original pension scheme and not the new master trust, and there is only a limited window during which such orders can be varied by the courts.

“The potential financial loss to such a beneficiary may be in the region of several hundred thousand euro,” warned Mr Garrett.

He said the large-scale movement of schemes to master trusts was already under way.

Industry observers expect the vast majority of group defined contribution pension schemes in Ireland to move into master trusts over the coming years.

Courts can issue two types of order in relation to the carving up of pensions.

One relates to normal retirement benefits, while the other, known as a contingent benefit pension adjustment order, relates to death-in-service payments.

While changes in the pensions industry have not affected orders in relation to retirement benefits, they have had an effect on contingent benefit pension adjustment orders. By law, such orders must be obtained within 12 months of a decree of divorce or separation.

As a result, people who obtained such orders more than a year ago cannot have them varied or enforced following the death of their former spouse if the original pension has been wound down and moved into a master trust.

The movement of schemes into master trusts has been driven by the implementation of an EU directive known as Institutions for Occupational Retirement Provision (IORP) II, which has significantly increased governance requirements in company pension schemes.

As a result, master trusts, which manage multiple pension schemes, have become an attractive option for companies as the increased risk and compliance costs can be spread across all of the participating employers using the trust.

A bulletin to Law Society members yesterday revealed the issue was discussed at a meeting with the Pensions Authority in January.

In a follow-up letter, Mr Garrett urged the authority to issue guidance to trustees, saying this could “significantly clarify matters” and “alleviate the potential for unwelcome consequences”.

Although not stated in the letter, it is thought such guidance could include advising trustees to pay out even if the court order technically relates to the old pension scheme before it was moved into the master trust.

It is understood the society has also drafted legislation which would remedy the issue by removing the 12-month deadline within which orders can be obtained or varied and by also allowing trustees to recognise such orders as though they had been made in relation to the new scheme.

Contacted for comment, Mr Garrett said: “This is a significant issue that had been identified through the work of the Law Society’s family law committee, who are the practitioners working with clients every day. This issue will have a major impact on the people affected.

“We are working with the Pensions Authority to offer our assistance, including providing possible legislative solutions. We have informed the solicitors’ profession to enable them to notify their clients who may be affected.”