United Kingdom House of Lords Decisions

HOUSE OF LORDS

OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT

IN THE CAUSE

BROOKS (A.P.) (RESPONDENT)

v.

BROOKS (A.P.)(APPELLANT) AND ANOTHER

ON 29 JUNE 1995

Lord Keith of Kinkel
Lord Ackner
Lord Lloyd
Lord Nicholls of Birkenhead
Lord Steyn

John Elvidge and Geoffrey Topham (instructed by Girlings (Canterbury)) for the husband
Martin Pointer and Nicholas Mostyn (instructed by Paisner & Co) for the wife

LORD KEITH OF KINKEL

My Lords.

For the reasons given in the speech to be delivered by my noble and learned friend Lord Nicholls of Birkenhead, which I have read in draft and with which I agree. I would dismiss this appeal and vary the order as he proposes.

LORD ACKNER

My Lords.

I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Nicholls of Birkenhead. For the reasons he gives I too would dismiss the appeal and vary the order as proposed.

LORD LLOYD OF BERWICK

My Lords.

I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Nicholls of Birkenhead. For the reasons he gives I too would dismiss the appeal and vary the order as proposed.

LORD NICHOLLS OF BIRKENHEAD

My Lords.

A third of all marriages in this country end in divorce. One of the perennial problems which then arises concerns money and property: how best to make financial provision for the future. Money is required for the children of the family while they grow up. If the husband and wife are a little older. the financial arrangements made for their retirement need adjusting since they will no longer be living together in one household.

For many married people their two single assets of greatest value are the house in which they live and. as time passes, the accumulating pension provision of the money-earner. Although this is now changing, traditionally the role of money-earner has been discharged principally by the husband. So it was with Douglas and Anne Brooks. They lived together from 1975 and were married in January 1977. He was then 47 years of age and she was 38. Both had been married before. Their marriage broke down 12 years later, in the middle or l989. The husband left the wife, and in September she filed a petition for the dissolution of the marriage. An application by her for ancillary relief was heard in October 1992. The husband was then 63 years old and the wife 54. Their principal assets were the jointly-owned house in which they had lived in Sunningdale, Berkshire, and several pension schemes of the husband. He owned a building business, run through his company DE Brooks Ltd

District Judge Plumstead found that during the marriage the husband was a generous, hard working provider. She was critical of his conduct alter the breakdown of the marriage. She found his evidence unreliable, and was not satisfied he had made full and frank disclosure of his assets. She ordered that the house in Sunningdale should be sold, and that the wife should be paid £150,000 out of the proceeds of sale. The district judge further ordered the husband to make periodical payments to the wife at the rate of £4,000 per year until her remarriage or death, to be secured by an attachment of earnings order against the husband's pension entitlement under his pension schemes. The district judge also held that one of the husband's pension schemes was a post-nuptial settlement which the court had power to vary under section 24(1)(c) of the Matrimonial Causes Act 1973. She made an order varying the scheme by directing that funds should be allocated to provide the wife with an immediate index-linked pension of £2,618 per annum and a deferred index-linked pension, payable from the husband's death, of £4,600 per annum.

On appeal to the judge [1993] Fam 322, Ewbank J. reduced the amount payable out of the proceeds of sale of the house from £150,000 to £l00,000. He dismissed the husband's appeal against the order varying the terms of the pension scheme. A further appeal by the husband to the Court of Appeal [1994] 3 WLR 1292 was also dismissed, by Neill L.J. and Waite L.J. Hoffmann L.J. disagreed. He considered that the husband's pension scheme was not a post-nuptial settlement and that, even if it was, the surplus within the scheme belonged to the company.

On this still further appeal by the husband, the issue is whether the court had jurisdiction to make the order varying the terms of the pension scheme. This issue will necessitate considering some of the terms of the pension scheme. The wider financial and other circumstances or the parties are not relevant on this appeal. They are set out fully in the decisions of Ewbank J. and the Court of Appeal.

The pensions problem

The problem of how to treat pension rights on divorce has still to be solved. The Law Commission has considered the topic twice, in 1969 and in 1977, Several other bodies and organisations have investigated the subject, and many reports and articles have been produced. There is general dissatisfaction with the present state of the law. The problem stems from the fact that on divorce the accrued pension rights of the parties are not usually equal. The major responsibility for family care and home-making still remains with women. The consequent limitation on their earning power prevents them building up pension entitlements comparable with those of men.

The problem does not admit of one simple solution. Some of the complexities may be noted. There is a wide variety of pension schemes, throwing up their own difficulties: some are funded, some are not: most are tax-approved, but not all: there are final salary schemes, with benefits according to formulae fixed by the rules, and money purchase or defined contribution schemes, with benefits reflecting the contributions made; there are small self-administered schemes and executive pension plans, self-employed pensions and additional voluntary contribution arrangements. Rights under the state earnings-related pension scheme have to be borne in mind on any re-allocation of pension rights. Individuals often have a complicated pension history. A solution which is attractive when a pension is already being paid may be unattractive when pension age is still some way ahead. Some changes in the law would have significant cash implications for the government, in respect of tax yield and the cost of funding transfer payments from unfunded public service schemes.

The most recent comprehensive review is in a report of a working group set up by the Pensions Management Institute in conjunction with the Law Society. The group's report, Pensions and Divorce, was published in May 1993. The working group outlined four different approaches. The first is to leave pension scheme rights undisturbed, but their value is taken into account on divorce by the other party receiving as compensation an appropriately enlarged share of the parties' other assets. This compensatory approach suffers from the drawbacks that it is difficult to compare the value of pension rights, with their favourable tax treatment, and the value of non-pension rights subject to different tax treatment; unlike non-pension assets, pension values do not represent immediately available cash, so that typically a wife may finish up with the house and no pension, and the husband with a pension but no money for the time being; and this method cannot work if there are inadequate non-pension assets.

A second method involves earmarking part of the pension benefit for payment direct to the spouse when the pension comes into payment. This earmarking method suffers from the disadvantages that it would not be a clean break"; payment of benefit would depend on the happening of events some of which would be under the member's control; there would often be uncertainty for some years for the former spouse, not knowing when benefits would start or what would be their duration; and in most cases this method would yield nothing for the wife after the husband's death, she no longer being entitled to a widow's pension under the scheme.

The third and fourth methods involve splitting the pension rights, and either retaining within the scheme the pan allocated to the spouse, who would become an individual member of the scheme, or valuing that pan and directing a transfer payment to another pension arrangement entered into by the spouse. Both these fund-splitting methods involve significant administrative burdens and expense for scheme trustees; there may be problems over guaranteed minimum payments and protected rights; and there would be major financial implications for unfunded public service schemes.

The working group recommended that while the earmarking approach, coupled with life insurance, was the best method when divorce occurs after retirement, the fourth "transfer" method was the most satisfactory for pensions not in payment at the time of the divorce. Taking a broad view, in its report Pensions and Law Reform (Cm 2342) (September 1993) the pension law review committee under the chairmanship of Professor Roy Goode QC endorsed the thrust of the working party's recommendations.

The present state of the law

The present state of the law is to be viewed against this background. In Scotland one of the principles the court applies in deciding what order to make for financial provision on divorce is that the net value of the matrimonial property should be shared fairly between the parties to the marriage. Matrimonial property includes the proportion of any rights or interests of either party under a life policy or occupational pension scheme or similar arrangement referable, stated shortly, to the period while the marriage subsisted: see the Family Law (Scotland) Act 1985, sections 8 to 10. The Act contains no express provision for actually varying the terms of pension schemes as such. Thus, so far as the legislation deals directly with pension schemes, it essentially adopts the compensatory method of sharing pension scheme benefits between the parties.

The matrimonial legislation in England and Wales adopts a similar approach. Section 23 of the Matrimonial Causes Act 1973 provides that on granting a decree of divorce the court may make orders on one party to the marriage for periodical payments, secured or unsecured, or for payment of lump sums, to the other party or for the benefit of a child of the family. Section 24(1) provides that the court may make property adjustment orders. Under subsections (a) and (b) the court may order one party to transfer any property to which he or she is entitled to the other party, or for the benefit of a child of the family, or to settle such property for the benefit of the other party or the children of the family. Subsection (c) empowers the court to make an order varying the terms of a marriage settlement:

"(c) an order varying for the benefit of the parties to the marriage and of the children of the family . . . any ante-nuptial or post-nuptial settlement (including such a settlement made by will or codicil) made on the parties to the marriage;"

Subsection (d) authorises the court to make an order extinguishing or reducing the interest of either of the parties to the marriage under such a settlement.

In exercising these powers one of the matters to which the court is directed to have particular regard is

"the value to each of the parties to the marriage of any benefit (for example, a pension) which, by reason of the dissolution or annulment of the marriage, that party will lose the chance of acquiring":

section 25(2)(h). In this way the court seeks to compensate for loss of pension expectations. The court may also achieve a degree of "earmarking' by making attachment of earnings orders. Some pension payments are regarded as earnings for this purpose: see section 24 of the Attachment of Earnings Act 1971. But in England, as in Scotland, there is no express power enabling the court to vary pension schemes, for instance, by splitting the pension rights between the parties. That leaves open the question whether, although there is no express power directly aimed at pension schemes, section 24(l)(c) is drawn in terms wide enough to embrace pension schemes and. thus, indirectly to give the court that power. A similar provision exists in Scotland, in section 14(2)(h) of the Family Law (Scotland) Act 1985. That is the question raised by this appeal. Hitherto the courts have not been asked to consider this question. The possibility that a pension scheme might fall within the scope of section 24(1)(c) seems to have first received judicial recognition by Ewbank J in Griffiths v. Dawson & Co. [1993] 2 FLR 315.

The question necessitates consideration of the proper interpretation of the expression "any ante-nuptial or post-nuptial settlement" in the context of a section which gives the court jurisdiction, on the dissolution of a marriage, to vary such a settlement "made on the parties to the marriage". That expression, as properly construed, must then be applied to the facts of this case.

Marriage settlement

In English law "settlement" is not a term of art, with one specific and precise meaning. Its meaning depends on the context in which it is being used. To a conveyancer a settlement essentially connotes a disposition by deed vesting property in trustees to be held by them for a succession of interests. In some contexts settlement bears a statutorily defined meaning, as in section 1 of the Settled Land Act 1925. Another example, where settlement is given an extremely wide statutory meaning, is section 670 of the Income and Corporation Taxes Act 1988 ("any disposition, trust, covenant, agreement, arrangement, or transfer of assets").

In the Matrimonial Causes Act settlement is not defined, but the context of section 24 affords some clues. Certain indicia of the type of disposition with which the section is concerned can be identified reasonably easily. The section is concerned with a settlement "made on the parties to the marriage" So, broadly stated, the disposition must be one which makes some form of continuing provision for both or either of the parties to a marriage. with or without provision for their children. Conversely, a disposition which confers an immediate, absolute interest in an item of property does not constitute a settlement of that property. The statutory provision is concerned with an order varying the terms of a settlement. This would not be an altogether apt exercise in relation to property given out-and-out and belonging to one of the parties to the marriage as his or her own absolute property. The context does not require that outright gifts of this nature should fall within the scope of the variation provision. In such a case the appropriate order on the dissolution of the marriage, if an order is needed in respect of the property, is a property transfer or property settlement order.

Beyond this the authorities have consistently given a wide meaning to settlement in this context, and they have spelled out no precise limitations. This seems right, because this approach accords with the purpose of the statutory provision. Financial provision that is appropriate so long as the parties are married will often cease to be appropriate when the marriage ends. In order to promote the best interests of the parties and their children in the fundamentally changed situation, it is desirable that the court should have power to alter the terms of the settlement. The purpose of the section is to give the court this power. This object does not dictate that settlement should be given a narrow meaning. On the contrary, the purpose of the section would be impeded, rather than advanced, by confining its scope. The continuing use of the archaic expressions "ante-nuptial" and "post-nuptial" does not point in the opposite direction. These expressions are apt to embrace all settlements in respect of the particular marriage, whether made before or after the marriage. In this connection, it should be noted in passing that a settlement may be made in respect of a particular marriage even though in certain circumstances the wife or husband by a subsequent marriage might be the person to take. Lort-Williams v. Lort-Williams [1951] P 395 affords an illustration of this.

Applying this approach, there is no difficulty with a disposition which creates interests in succession in specified property. Nor is there difficulty where the interests are concurrent but discretionary. Concurrent joint interests are nearer the borderline, such as a case where parties to a marriage hold the matrimonial home as beneficial joint tenants or tenants in common. Even in such a case, however, given the restrictions which would impede any sale of the house while the marriage subsists, this type of case has rightly been held to fall within the scope of the section: see Brown v. Brown [1959] P 86. Periodical payment provisions have also been controversial. But income provision from settled property would readily qualify, and it is only a short step from this to include income provision which takes the form of an obligation by one party to the marriage to make periodical payments to the other. This was held to be so from the earliest days of this statutory provision whose ancestry stretches back to the Matrimonial Causes Act 1859: see Worsley v. Worsley (1869) LR 1 P & D 648. a decision subsequently affirmed in Bosworthick v. Bosworthick [1927] P 64.

One feature of the power of the court under the section is to be noted. The section gives the court power to vary a settlement. Inherent in this provision is the notion that the court's jurisdiction extends to all the property comprised in the settlement. Thus it includes any interest the settlor himself thenceforth may have in the settled property by virtue of his own settlement. Further, the court's power is not confined to varying the interests of the parties to the marriage under the settlement. The power includes, for instance, the interests in the settled property of the children or, more widely, of others under an old-fashioned protective trust. Blood v. Blood [ 1902] P 78 is an example of the former, and Marsh v. Marsh (1878) 39 LT 107 , 545, of the latter. Conversely, it is also implicit in the section that the court's power Joes not extend to property which is not part of the settled property. In some cases, of which Dormer v. Ward [1901] P 20 is an example, nice questions may arise over whether property is or is not property brought into the settlement.

A further preliminary point may also be noted. Where the settled property comprises a chose in action, it is possible for the creation of the chose and the making of the settlement to be telescoped into a single transaction. Perhaps the simplest example is an insurance policy, written on terms whereby the policy proceeds are payable to persons other than the person paying the premiums. As between the latter person and the insurance company there is an arm's length commercial contract. As between him and the persons beneficially interested in the policy proceeds, there may be a marriage settlement of the proceeds, as occurred in Lort-Williams v. Lort-Williams [1951] P 395. Thus, entitlement to payment of amounts of money in one capacity, for example, as an employee, is not inconsistent with the terms of payment arranged by the employee being a marriage settlement made by him.

Mr. Brooks' pension scheme

Mr. Brooks' retirement benefits scheme was a non-contributory exempt approved scheme set up in January 1980 by his company, D E Brooks Ltd. "to provide for you" benefits in accordance with certain rules. The benefits were to be provided under a policy effected with The Equitable Life Assurance Society. The policy was to be held on an irrevocable trust by the company as trustee of the scheme. The rules provided for payment of a pension to Mr. Brooks on his retirement up to a specified maximum amount, with the familiar right to commute part of this for a lump sum. At his retirement Mr. Brooks was to be entitled to elect to give up a portion of his pension to provide, from the date of his death, a deferred pension for life for his spouse or any other person financially dependent on him (rule 1 (e)). A lump sum death benefit was payable if Mr. Brooks should die while still employed by the company or within five years after beginning to draw his pension. These death benefits were payable at the discretion of the company to the members of a class comprising Mr. Brooks' spouse, children, parents and grandparents and the issue of any of them, and any persons nominated by Mr Brooks in his life, with a long stop provision in favour of Mr Brooks' executors (rule 2 (e)). Mr. Brooks' benefits were non-commutable and non-assignable

Rule 7 (Family Proceedings Rules 1991/1247) provided what should happen if a benefit payable under the policy were to exceed the maximum amount of benefit permissible under an exempt approved scheme. In that event Mr. Brooks' company was entitled to use the excess in augmenting other existing benefits under the policy or in providing benefits additional to those under the policy, subject always to the limits prescribed by the Inland Revenue. Any unused excess would be refunded by the Equitable Life to the company.

If each of these unexceptional features is considered in isolation, it is easy to conclude that the scheme does not constitute a marriage settlement made by Mr. Brooks. The primary benefit is a pension payable to him. The option to cut in a dependant's deferred pension conferred no rights on Mrs. Brooks. The discretionary trust in respect of the death benefits should not colour the character of the whole scheme.

That, however, cannot be the right approach. In considering the purpose of the husband when entering into the scheme, the scheme must be looked at in the round and in the context of the circumstances then subsisting. Viewed in this light, the husband is to be taken to have entered into this scheme with the intention of providing for the retirement of himself and his wife by the highly tax efficient means afforded by this scheme. His pension would provide financial support for both of them in his retirement. If his wife was still alive when he retired, he could then direct that pan of his pension benefit should be used to make separate provision for her after his death. Should he die prematurely, the death benefits would be available for her. In my view, a disposition of this character falls within the wide meaning given to marriage settlement in the matrimonial legislation. The feature which places this scheme on the marriage settlement side of the line is the presence of rules 1 (e) and 2 (c). It would be difficult to conclude that a scheme under which benefits were payable exclusively to the scheme member was a marriage settlement, even though in a broad sense the benefits in such a case could be described as family assets. Something more than that is needed. Where that something more is present, however, the natural inference is that all the benefits form pan of the marriage settlement, including the benefits payable to the scheme member. Accordingly in my view the court has power to vary the scheme in the present case so far as it constitutes a settlement made by the husband.

The surplus money

The emphasised words draw attention to the need in this case to distinguish between the pension and death benefits provided by the scheme or the one hand and the rule 7 surplus money on the other hand. The order made by the District Judge proceeds on the footing that recourse will be had to this surplus to fund the immediate and deferred pensions directed to be paid to the wife. There is a difficulty here.

I should first explain how the surplus arises. The husband has three pension schemes beside the Equitable Life policy scheme. Two of the schemes are small. The third one is larger, but it was entered into before the parties were married, and the wife has not sought to contend that it is a settlement within section a 24(l)(c) either in whole or in part. The maximum permissible benefits payable to the husband are an index linked pension of £19,396 per year and a lump sum of £40.000. He is entitled to draw hi; pension now, but he is awaiting the outcome of these proceedings before doing so. If the cost of providing him with these benefits is borne primarily by the three other schemes, on the figures used by Ewbank J. and the Court of Appeal there is at present an actuarially estimated surplus in the Equitable Life scheme of £166,000. This comfortably exceeds the amount required £76,000, to provide the two pensions directed in favour of the wife.

This makes it necessary to consider whether the rule 7 surplus money forms pan of the settlement. It is only in respect of the settled property that the court has jurisdiction to make a variation order. Under the scheme the surplus money belongs to the company. But the settlor was the husband, no: the company. The company was not the settlor, because the provision it made for the husband by the scheme was in his capacity as an employee. This provision was in the nature of deferred remuneration. Thus this surplus belonging as it does to the company, was never brought into the settlement made by the husband. It does not form part of the settled property.

As between the company and the husband the scheme representee deferred remuneration. The position is different as between the husband and the wife. As between them the benefits which the husband and his family acquired under the scheme formed the property of a marriage settlement. But those benefits did not include any entitlement to the surplus money. On this I agree with Hoffmann L.J.

In fact the company has now ceased to exist. It ceased to trade in January 1990, and it was struck off the register of companies on 29 April 1992 for failing to file returns. The company was insolvent, owing a substantial amount to its bank. So far the bank has shown no interest in having the company resuscitated. Waite L.J. made the assumption that the bank as the company's sole creditor will eventually be paid off. so the reality is that the husband as the company's principal shareholder is entitled to the entirety of the pension fund.

The difficulty with this approach is that prima facie the court's jurisdiction does not extend to the rule 7 surplus. The somewhat messy factual situation is not a wholly satisfactory basis on which to found jurisdiction when there are creditors lurking in the background, including the Inland Revenue with a tax claim in respect of any unused surplus money in the pension scheme.

This, however, is not the end of the matter. The settlement does include the part of the Equitable Life scheme funds needed to provide the husband's pension so far as this is not funded by the other schemes. The amount required for this purpose from the scheme funds is about £90,000. This sum exceeds the cost of providing the two pensions for the wife. The appropriate course, therefore, is to vary the scheme by directing that the two pensions tor the wife shall be provided in priority to, and if necessary in diminution of. the pension payable to the husband. This will place on the husband the burden of sorting out the mess brought about by his letting his company be struck off the register. It is for him to take any steps necessary to enable the surplus to be used to maintain his pension at the maximum permitted level if part of the fund is used for making pension provision for the wife.

A variation of the scheme along these lines is expected to meet with the approval of the Commissioners of Inland Revenue in this case. In respect of the immediate pension the wife had earnings of her own from the company. paid for her nominal services as the company secretary. These earnings will support a pension for her of the amount in question. So. to achieve this purpose, the scheme can he converted to a multi-member scheme. As to the wife's deferred pension, unless she re-marries she will qualify as a financial dependant within rule 1(e). because she will be receiving periodical payments from the husband until her death or re-marriage. These variations will also require the approval of the Equitable Life. If the Inland Revenue approves. it is difficult to see any reason why the Equitable Life should wish to withhold its approval. No problem in this regard has been foreshadowed so far. Likewise with the trustees of the scheme, who are now the husband's accountant and sister. They were represented before the judge by the same counsel as appeared for the husband. They will give effect to the court's directions.

For these reasons I would vary the District Judge's order as indicated and dismiss the appeal.

The wider aspects

This decision should not be seen as a solution to the overall pensions problem. Not every pension scheme constitutes a marriage settlement. And even when a scheme does fall within the court's jurisdiction to vary a marriage settlement, it would not be right for the court to vary one scheme member's rights to the prejudice of other scheme members. Directing a variation which does not meet with Inland Revenue approval would normally be prejudicial to the rights of the other scheme members. A feature of the instant case is that there is only one scheme member and, moreover, the wife has earnings of her own from the same employer which will sustain provision of an immediate pension for her. If the court is to be able to split pension rights on divorce in the more usual case of a multi-member scheme where the wife has no earnings of her own from the same employer, or to direct the taking out of life insurance, legislation will still be needed.

LORD STEYN

My Lords.

I have had the advantage of reading in draft the speech prepared by my noble and learned friend Lord Nicholls of Birkenhead. For the reasons he gives I too would dismiss the appeal and vary the order as proposed.