McDonald v Newton or McDonald (Scotland) [2017] UKSC 52

Mr McDonald, a former miner, retired early on ill-health grounds shortly after marrying. On divorce, the question arose whether his pension's matrimonial property value should be apportioned by reference to his active contributing period or his total scheme membership. The Supreme Court held membership included non-contributing periods.

Facts

Mr McDonald joined the British Coal Staff Superannuation Scheme on 11 December 1978 and began contributing. He married Mrs McDonald on 22 March 1985. Shortly thereafter, a leg injury rendered him unfit to continue mining, and he retired early on ill-health grounds, ceasing contributions on 10 August 1985 (aged 32, with only six years and 243 days of pensionable service). He has received a pension since then. The parties ceased cohabitation on 25 September 2010 (the ‘relevant date’ under the Family Law (Scotland) Act 1985).

The cash equivalent transfer value (CETV) of the pension at the relevant date was £172,748.38. The parties agreed by joint minute that if apportionment was by reference to his active membership only (1978-1985), the matrimonial property value was £10,002; if by reference to total scheme membership (1978-2010), it was £138,534.

Issues

The central issue was the interpretation of section 10(5) of the Family Law (Scotland) Act 1985 and regulation 4 of the Divorce etc (Pensions) (Scotland) Regulations 2000, specifically the meaning of ‘the period of the membership of that party in the pension arrangement’ (factor C in the regulation 4 formula). The question was whether ‘membership’ was confined to active (contributing) membership or extended to the entire period of scheme membership, including periods of receipt of pension income.

Arguments

For Mrs McDonald (Appellant)

Mr Mitchell QC argued that ‘membership’ in regulation 4 referred to total scheme membership without qualification. Reading ‘active’ into the regulation would add words not present, and the definition of ‘active membership’ in section 124(1) of the Pensions Act 1995 applied only to occupational schemes and made no sense in relation to personal pension schemes or state scheme rights, to which the regulations also applied.

For Mr McDonald (Respondent)

Mrs Scott QC supported the reasoning of the sheriff and the majority of the Inner House: that the 1985 Act’s purpose was to share assets acquired during the marriage, and ‘membership’ should be read as ‘active’ membership or as the period when contributions were being made. She suggested the definition of factor C could be read as ‘the period of membership of that party in the pension arrangement when contributions are being made by or on behalf of that party’.

Judgment

Lord Hodge, with whom Lady Hale, Lord Wilson, Lord Carnwath and Lord Hughes agreed, allowed the appeal. The court rejected the narrow interpretation adopted by Sheriff Holligan and the majority of the Extra Division for four reasons:

First, reading ‘active’ into regulation 4 added words that were not there. The drafter was clearly aware of different categories of membership in regulation 3, yet regulation 4 referred to ‘membership’ without differentiation.

Second, the 2000 Regulations applied not only to occupational schemes but also to personal pension schemes and state scheme rights. The concept of ‘active membership’ under section 124(1) of the Pensions Act 1995 applied only to occupational schemes and made no sense for personal schemes (where contributions may be irregular) or state scheme rights.

Third, the section 10(4) focus on acquisition during marriage did not support a purposive narrowing of section 10(5), because the opening words of section 10(4) expressly carved out subsection (5). Parliament chose to deal with pension rights differently. Furthermore, even within section 10(4), there was no unqualified principle that property must be acquired during marriage: section 10(4)(a) included pre-marital family homes, while gifts and inheritances during marriage were excluded.

Fourth, the argument that ‘membership’ had to mean active membership to give effect to the statutory provision that factor B could equal zero was unpersuasive. If the drafter intended to confine ‘membership’ to active membership, that would have involved ‘egregious circumlocution’, and there was no hint of such an intention in the regulations or the explanatory note.

Lord Hodge also observed that the focus of section 10(5) was on ‘the proportion of rights or interests… referable to’ the specified period, not on the acquisition of rights during that period. The proportion would naturally reflect both the holder’s contributions and the passive growth in value of the fund or the passive accrual of pension rights by survival over time.

Implications

The decision settles an important point of Scottish family law: when valuing a pension under section 10(5) of the 1985 Act and regulation 4 of the 2000 Regulations, the apportionment formula uses the entire period of the pension holder’s scheme membership before the relevant date, not merely the period of active contributing membership. This affects parties divorcing in Scotland where one spouse holds a pension that was in payment, deferred, or otherwise non-contributing for part of the marriage.

The judgment confirms that pension rights are treated distinctly within the matrimonial property regime, by virtue of the carve-out from section 10(4) effected by section 10(5). It also illustrates that the presumption of equal sharing of matrimonial property under section 10(1) does not preclude departure where special circumstances justify it, and that the other section 9 principles introduce further flexibility. Lord Hodge expressly noted that the conclusion ‘does not mean, of course, that the value of an interest in a pension arrangement must be shared equally’.

For practitioners, the case provides clear authority on the construction of regulation 4 across the various types of pension arrangement (occupational, personal and state scheme rights), and reduces uncertainty in valuation that had previously generated litigation and competing actuarial methods. The case was remitted to the sheriff at Edinburgh to proceed in accordance with the judgment.

Verdict: Appeal allowed. The Supreme Court held that ‘period of the membership’ in regulation 4 of the Divorce etc (Pensions) (Scotland) Regulations 2000 refers to the entire period of the person’s membership of the pension arrangement, whether or not contributions were being made during that period. The case was remitted to the sheriff at Edinburgh to proceed accordingly.

Source: McDonald v Newton or McDonald (Scotland) [2017] UKSC 52