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Linda Walker looks at McDonald case and Supreme Court judgement

The long awaited Supreme Court decision in the case of McDonald v McDonald has newly been issued and the Inner House has been overturned. 
The decision primarily concerns a matter of statutory interpretation of the Divorce etc (Pensions) (Scotland) Regulations 2000 (which I will refer to as the “2000 Regulations”).  The facts of the case are relatively straightforward.  Mr McDonald joined the occupational pension scheme with British Coal on 11 December 1978. Thereafter, he married Mrs McDonald on 22 March 1985. 
Unfortunately, shortly after the parties’ marriage, Mr McDonald sustained an accident and took early retirement on the grounds of ill health.  He started receiving his pension benefits on 10 August 1985.  Mr McDonald was therefore an active member of his occupational pension scheme from 11 December 1978 to 10 August 1985, a period of under seven years, (during which time he contributed to the pension) and a pensioner member of his occupational pension scheme from 10 August 1985 (during which time he received his pension benefits).
The parties separated on 25 September 2010, which was the relevant date for the purposes of the Family Law (Scotland) Act 1985.
The dispute arose as to the interpretation of Regulation 4 of the 2000 Regulations, which Regulation provides a formula to calculate the proportion of any rights or interests in any benefits under a pension arrangement which would fall to be classed as matrimonial property under Section 10(5) of the Family Law (Scotland) Act 1985. 
The formula itself is straightforward and allows a simple calculation in most cases.  The formula is A x B /C  where A is defined as the value of the pension rights under the pension arrangement as at the relevant date (ordinarily the date of separation);  C is the period of the person’s membership in the occupational pension before the relevant date and B is the period of C which falls within the period of marriage before the relevant date. 
In this case the total value of Mr McDonald’s interest in his pension at the relevant date (known as the CETV) was £172,748.38.  In particular it was the definition of “the period of membership” that was disputed in this case and whether “the period of membership” meant only the period during which Mr McDonald was an “active member” of the pension scheme (defined in Section 124(1) of the Pensions Act 1995) or the whole period of membership of the scheme, both as an active member and a pensioner member. 
Mr McDonald argued that the value of his pension rights should only be apportioned over the period in which he was an active member of the scheme, or the period during which he was making contributions to it.  On this basis the calculation amounted to £10,002.  However, his wife argued that the value of the pension should be apportioned by reference to the whole period of Mr McDonald’s membership of the scheme, both as an active member and as a pensioner member, which meant that the value was £138,534. 
There was therefore a huge difference between the two figures dependent on how “membership” was interpreted. 
The case called in the Sheriff Court before Sheriff Holligan and was subsequently appealed to the Inner House.  Both Sheriff Holligan and the Inner House found in favour of Mr McDonald’s calculation.  The reasoning was primarily based on the general principles of the 1985 Act that the spouses should share only the wealth accumulated by a spouse over the period of the marriage, and in particular section 10(4) which defines matrimonial property as only assets which are acquired during the marriage and before the relevant date. 
It was considered that the pension was only “acquired” during the period in which Mr McDonald was contributing to it and not during the period when he was a pensioner member, being the period after 10 August 1985.  This may seem a sensible, and even fair, interpretation of the 1985 Act.  In order to effect this, the “period of membership” referred to in regulation 4 of the 2000 Regulations was interpreted to mean the period of the person’s “active membership” of the pension.  Mrs McDonald then appealed to the Supreme Court. 
The Supreme Court has overturned the Inner House.  They have held that the interpretation of “period of membership” in regulation 4 of the 2000 Regulations refers to the whole period of the person’s membership, both while contributions were being made in that period and after that. 
They have given four reasons why the “period of membership” should not be confined only to active membership (ie. to the period during which contributions were being made only) and have given four reasons for this:

If Regulation 4 is interpreted as being confined to only “active membership” then this would involve adding words which are not present in Regulation 4 itself.  The different categories of membership of a pension scheme are well known and if there was to be any differentiation then that would have been made in the drafting of Regulation 4.  Differentiation is made in Regulation 3 In addition, it is clear that the value of a pension fund can be enhanced by the investment of further funds by the member (which only occurs while the member is an active member) or by the passive growth in the value of the fund (during both active membership and pensioner membership); 
The 2000 Regulations apply to both occupational pension schemes and personal pension schemes and the definition of “active membership” in the 1995 Act only applies to occupational pension schemes, and not to personal pensions nor state scheme rights.  It therefore must be assumed that the regulations operate in the same way in respect of different pension schemes.  If the same principals were applied to a personal pension scheme, where contributions can be made on an irregular basis, it may be difficult to ascertain at which point a person has ceased to make contributions altogether as opposed to a temporary break in contributions which may be resumed at a later date;         
Sheriff Holligan used Section 10(4) of the 1985 Act to support the reading of the word “active” to “membership” in Regulation 4 but this is misguided since the opening words of Section 10(4) specifically states that the definition is subject to sub-section (5) below and therefore parliament chose to deal with pensions in a different way by making separate provision for them in Section 10(5).  The definition in Section 10(4) should therefore not be considered to apply to pensions and both Sheriff Holligan and the Inner House erred in their reliance on this point;
The argument used by the Inner House that “membership” in Regulation 4 of the 2000 Regulation must mean “active membership” because it is specified in Regulation 4 that  B could be zero is also misguided.  In fact, B could be zero if parties separated on the day of their marriage or if a spouse had a pre-existing pension arrangement, for example.  If indeed the person drafting Regulation 4 of the 2000 Regulations did intend to confine membership to only “active membership” then they could have specifically done so in a way which would not involve the inference of words which do not appear.          

This decision may well come as a surprise to family practitioners who have come to interpret the 2000 Regulations in light of the Inner House decision.   It may also seem to be the fairest way to deal with valuing pension interests by taking in to account only such a period as when the person was paying money in to the pension during the marriage and not any other period.  However, the Supreme Court decision does not necessarily result in any unfairness. 
The valuation of the pension rights is only the first stage in the process.  The 1985 Act does contain several other provisions which gives the holder of that pension safeguards against a decision to share a pension valuation equally if indeed the calculation of the apportionment of their pension valuation does result in a potentially unfair result for them.  It is clear from the 1985 Act that the matrimonial property should be divided between the parties fairly, which does not always mean equally.  
Section 9(1) of the 1985 Act contained several principles which could be used to justify a departure from equal sharing where equal sharing would result in an unfair decision.  Further flexibility is introduced by the recognition in section 10(1) that there may be other special circumstances justifying a departure from equal sharing of the matrimonial property and family lawyers are well used to using both section 10(1) and section 9(1) in persuading a court that an equal division of the matrimonial property is not the fairest way to divide the matrimonial assets. 
This may well seem to be the better remedy than trying to shoehorn in an interpretation of Regulations which appear otherwise clear in their terms to achieve the same result. 
To read the full judgement please click here.