Ahhh good idea for discussion. I'm gonna move this to Tech Talk though. I have done a lot of this for Singularity and will try and write up what or how I did it using Unreal and the tech side of things like shader setup, etc.
The tech I used at my previous job allowed you to make multiple states. So if I had a pillar, I'd give it HP, then as many states w/fragments as I wanted. I think it came from Epic and was modded in-house. I was pretty bumed when I installed UnrealED at home and it wasn't there.