With the divorce rate spiralling, Laverne Hadaway explores the ramifications for pensions and points to an increased demand for EAP schemes.
Case Study: Oracle
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The statistics are there for all to see: around 40% of marriages in the UK now end in divorce; and second marriages (and divorces) are more common too. Nearly one-in-five people divorcing in 1999 were divorced for a second time compared with only one-in-10 in 1981. So the phenomenon of divorced and divorcing employees, as well as those on their second or third time around is becoming increasingly common.
Divorce is meant to be one of those traumatic, life-changing events, along with bereavement and moving house, that can take a heavy mental and emotional toll. So what can employers do to help and support employees going through such a change? While few firms provide support specifically for those in the throes of divorce, many do offer employee assistance programs (EAPs). These will include services such as a 24-hour helpline, legal assistance, financial advice, debt counselling and access to stress counselling for a traumatic or difficult situation such as divorce.
For the employee there are practical considerations. While there may be legal and emotional shenanigans over who gets the house, the children and the dog, there are also clearly massive financial implications. Employer-sponsored insurance such as private medical or life, for example, may extend to the whole family. So does the employee want to continue to cover his (or her) soon to be ex-spouse?
The process may be almost exactly the reverse for an employee embarking on marriage for the second time around. There may be stepchildren or even children resulting from the new relationship to consider. The newly-hitched employee would definitely have to consider choosing more family-orientated benefits such as childcare vouchers, a workplace nursery and leisure vouchers over membership of the wine, book or luxury car club; or perhaps the sporty-looking company car will have to be exchanged for a more family-friendly, saloon model. Disability insurance, critical illness and life cover for the employee and their new partner, meanwhile, are likely to take preference over gym membership or additional holiday.
There may also be an employer-sponsored pension to consider. Since 2001, it has been possible for a pension to be split between spouses as part of a divorce settlement. When it comes to pensions splitting, however, it is the courts that will decide the proportions. All the couple’s goods and possessions will be taken into consideration, with a cash value assigned to the pension, and shared out. The spouse’s share of the pension will depend on its size and value and on the other goods that he or she is awarded.
Typically, pensions that are shared belong to men in their forties and fifties who have built up a substantial fund. David Gordon, a consultant at Watson Wyatt, points out that someone in their twenties may have too small a fund to make splitting it worthwhile. In that event, the financial settlement could leave the pension fund untouched, and the spouse would get a cash equivalent to compensate.
There are two main ways of splitting the fund. Part of it may be earmarked for the spouse for the future, or the fund may be shared immediately in the proportions decided by the divorce court. If it is shared, the ex-spouse may either join the scheme as a deferred member or take their fund out of the scheme altogether and invest it elsewhere.
John Wilson, head of research at HSBC Actuaries & Consultants, suggests that there have been around 1,300 pension sharing orders since they were first introduced in 2001. However, there have been only 250 earmarking orders. Earmarking did not achieve the clean break that divorcing partners were looking for. It kept them financially shackled. Worse, if the pension member died, their ex-spouse’s pension rights died with them. Their fund would go to their widow(er).
At this stage, all the employer can do is ensure that the pension scheme trustees co-operate fully with the court order, whether earmarking, setting up a deferred pension for the spouse or allowing a transfer out. These things will have to be done within a specific time scale.
Unfortunately, a consumer report published by the Independent Pensions Advisory Service has found that many divorced women are unaware of the option to share their spouse’s pension. More alarmingly, however, many of those who do know about it say that their legal advisers are either reluctant to consider it or have little practical knowledge.
However, the onus is on the person responsible for the pension to provide information about how the fund might be affected and what it all means. Tim Gillingham, head of employee benefits at John Scott & Partners, stresses that while it may be worthy for employers to provide all the help that they can to employees, it is probably prudent for them to stay clear and not be seen to be taking sides in any way.
There is no doubt that the number of divorced employees in the UK is likely to continue to grow, leading to all kinds of demographic and social consequences. A report from the Economic & Social Research Council, for example, predicts that the rate of divorce among those in their fifties is set to increase. However, the consequences for the less affluent include increasing pressures for those who are divorced or separated to maximise their earning capacities by deferring retirement.
The report predicts that men will be subject to particular pressures as a result of having had more than one live-in partner. They may be supporting children from previous marriages, who are still at college, as well as supporting dependent children from their current relationships. It can lead to heavy financial burdens.
Women may find themselves in a similar situation. They may have married and had their children later in life and then divorced to find themselves supporting their children in full-time education while having to cope with the welfare needs of a sick parent.
Men are also thought to be less able to cope with being on their own and the report suggests that the rising divorce rate will lead to growing social and psychological problems for them. Many people are likely to face a financially demanding future alone.
The report paints a bleak picture of the future and suggests that there may be increasing reliance on the kinds of services offered under EAPs, particularly for more of the stress and debt management counselling services.
Divorce in the UK
Increasing divorce rates may mean that people have to maximise their earnings by retiring later.
Divorced men and women may find themselves single-handedly having to support ailing parents, emotionally as well as financially, while still supporting dependent children.
Men, in particular, may have more than one set of dependent children to support.
Men tend to cope less well than women on their own and may also develop greater psychological problems as a result.
Demand for work-based employee assistance programmes’ (EAP) services, such as stress and debt counselling, is likely to grow.
Case Study: Oracle
One of the most useful options employers can offer employees going through a dramatic life change, such as divorce, is the flexibility to rearrange their benefits.
IT firm Oracle offers its 2,600 employees a range of flexible benefits including an employee assistance programme (EAP) that includes stress counselling, a 24-hour helpline and debt counselling.
Some benefits are available not only to individual employees, but also to their partners and families. The core benefits available are: 20 days’ holiday, 50% of average earnings disability insurance, pension scheme membership, life cover of two times salary and the EAP. Of course, they have the option of increasing most of these to a maximum level. Other benefits from which they can choose include: dental insurance, critical illness cover, a workplace nursery, childcare vouchers, life assurance for their partners, professional training support and, of course, more cash. They are allowed to change their flex choices once a year, with a deadline of 1 January.
However, once someone notifies the company that they are going through a divorce, a benefits review is automatically triggered. They are given a three week window in which to restructure their benefits package to suit the new circumstances of their significant life change.