Examination of witnesses (Questions 580
- 599)
WEDNESDAY 16 SEPTEMBER 1998
MR JOHN
DENHAM, MP,
MR CHRISTOPHER
EVANS and MR
WILLIAM ARNOLD
Chairman
580. Welcome, ladies and gentlemen. May
I open this session on the Committee's draft Pension Sharing Bill
report and welcome the Minister and the ministerial team. Mr Arnold
and Mr Evans have been very helpful, both in an informal and formal
way, in the work of the Committee in the recent past. We are very
grateful. May I say straight away that we are indebted to your
officials, John, for the work they have been doing because, as
we keep saying, this is pretty new procedure and, as far as we
are concerned, they have gone out of their way to help and provide
the information that we have been seeking. That does not make
some of the questions any easier necessarily, but I do want to
record the fact that we are grateful for the way in which we have
been offered assistance. I think the thing we would like to try
and do is that I would like to ask you a question or two about
the consultation process, and some of the things that it may have
thrown up that were unexpected perhaps in terms of what you were
looking for. Then we have some areas ourselves that we think have
been flushed out by the evidence sessions of the witnesses and
in the submissions that we have been receiving, so just to make
sure that you have got sight of these things and there are no
surprises in any of this process when the actual Bill itself comes
to be published. Unless you want to say anything at the beginning
I will ask you maybe a couple of questions on the consultation
process. I have just one or two factual, contextual questions.
How many submissions roughly have you been receiving in the process?
(Mr Denham) We have had, at the latest count,
82 written responses. You, yourselves, of course, have taken a
great deal of oral and written evidence—and some of the
oral evidence from groups that have not responded formally to
the consultation exercise—but we have been following your
proceedings closely, so we will be able to draw on that information
as well.
581. Were any of them submitted on the basis
that they wish to remain confidential?
(Mr Denham) I would have to check on that. I am
not aware of any.
(Mr Evans) There were a few which were. Those
were the ones which we did not pass on to the Committee although
we did pass on the vast majority.
582. Some people chose to seek that opportunity
to stay confidential?
(Mr Evans) There were a few, a small number.
(Mr Denham) I think I am right in saying that
these were essentially recounting personal experiences of their
own family circumstances. What I was not sure about was whether
there were any from major organisations on policy issues which
were on a confidential basis.
(Mr Evans) As I recall, none of the major policy
organisations asked for their responses to be kept confidential.
I can check that.[2]
583. Your inclination is that they were
mainly in personal circumstances and confidentiality is obviously
quite important.
(Mr Denham) Yes.
584. Is there any idea about how you might
make the submissions that you received public, either in the House
Library or on a wider basis? Have any thoughts been given to that?
(Mr Denham) I do not think there are any detailed
thoughts as to how to handle that. I would be interested in your
views as a Committee on that. Clearly at some point we want to
be able to summarise the major issues as they come out of the
consultation. We will obviously want to do that in part, I suspect,
when we respond to your report.
585. So even a catalogue might be very,
very useful but that might become a document which would go into
the public domain?
(Mr Denham) I see no difficulty in principle in
being able to summarise, at the appropriate point, the major issues
which have been raised in the consultation. Perhaps we can give
that a bit further thought to avoid duplicating work. I suspect
that your report will probably cover many, if not all, of the
major issues. There will be quite a similar exercise involved
in responding to those points.
586. Have there been any mechanical difficulties,
any logistics difficulties, apart from the actual amount of work
which I have already referred to, from the Department's point
of view?
(Mr Denham) I do not think we have come across
any major logistical difficulties in the exercise. Certainly the
process has flushed out a few areas where drafting can be improved;
where some minor changes need to be made to the draft legislation.
One example has come out about the length of time allowed for
appeals before a pension sharing order is implemented. This is
an issue which has come out through this process. We would probably
say we have received the type of representations that we might
have expected from the practitioners. The difference is that instead
of receiving those once the Bill is in Committee, which is very
often the case and time is pressing to make any changes, we have
had them sufficiently in advance to be able to take those points
into account and hopefully have a better prepared Bill by the
time we go into Committee.
(Mr Evans) I was just going to add to that: if
you also add to that simply the mechanics of consultation, as
such, then the vast majority responded promptly within our deadline.
One or two said, "It is the middle of summer and all our
experts are on holiday, can we have another week or so."
Naturally we said yes.
587. We had a bit of that trouble ourselves
but I guess that is something that everybody has to respond to
the best way they can. You have talked about some of the detailed
changes in drafting and things like that, which you have been
looking at. Are there any real areas where your thinking has changed?
(Mr Denham) Our general approach to the reasons
behind pension sharing remains unchanged. I think it is fair to
say that at the moment—of course, subject to the views you
express—the major planks of the policy remain pretty much
as it was at the beginning. There have been quite a number of
minor areas where we can clearly see the need to draft the legislation
more clearly, or to address certain points in regulations; but
I do not want to close off anything today because your own hearings
are an important part of this process, and we will obviously want
to consider very carefully the points that you put to us.
588. May I ask you specifically about the
balance between the primary and secondary legislation. There are
some people who are worried and concerned about the general enabling
nature of the legislation, as it is currently drafted; leaving
perhaps, some would say, too much to the Secretary of State and
regulation stage. Do you have a view on that? Have you further
thoughts or second thoughts about that question?
(Mr Denham) I think I said the last time we were
here that the broad approach we have tried to take is to say that
where we are amending pension legislation, or family law legislation.
If a certain measure is in primary legislation at the moment,
then we would generally seek to amend it in primary legislation.
If it is an area which would normally be dealt with through secondary
legislation, then we would deal with it through secondary legislation.
So there is a logic that we try to follow in the structure of
the Bill.
589. The only other point of substance before
we go into some of the more detailed areas: it occurs to me that
we have had a lot of discussion from the witnesses who have appeared
in front of us about cash equivalent transfer value and how it
may be the least worst option that is available to us, but some
of them are making quite powerful cases for elements of discretion
in addition to be made available to the courts. Do you have any
thoughts about that?
(Mr Denham) The CETV valuation is the only established,
widely recognised and agreed form of valuation, which is accessible
to us and is supported right across the pensions industry and
has been developed by the actuaries; so it is difficult to see
that there is a different or better formula that could generally
be applied. But, of course, once the CETV valuation is brought
to the court, as it would be as part of the information before
the court, of course it would be open to the parties to put forward
an argument that the valuation does not fully reflect the circumstances
of the case and, therefore, the overall divorce settlement should
take that into account. So I think we do feel that it is the valuation
method that should be used, but it is open for people to argue
in the court that it does not fully capture the full circumstances
of the case. It might be argued, for example, in a case involving
a scheme with a fast rate of accrual, where perhaps the divorce
is taking place just before somebody would enter the enhanced
rate of accrual. Those are schemes like police or fire service
schemes where you can reach your full pension value at an earlier
age because of the way it is structured. It is possible for somebody
to argue in court that the CETV valuation, as it was applied,
did not fully reflect the circumstances of that individual case,
so the overall court settlement should reflect that. But if you
take that particular example, if somebody was transferring out
of say the fire service or the police scheme, the CETV would be
the method of valuation rights which would be used. It is hard
to see that we could justify applying a different method of valuation
in the case of a former spouse gaining some rights compared to
an individual leaving the scheme.
590. I understand that perfectly well but
you may be allowing this, if you put the legislation on the statute
book as it is currently drafted, you will be leaving an awful
lot to case law to be developed by the courts. Once that genie
is out of the bottle it is very difficult to try to draw it back.
Perhaps we should give a wee bit more thought to examining just
how that transfer value can be pinned down a bit more in terms
of the legislation as it currently stands.
(Mr Denham) I think we would be very interested
to hear any proposals that the Select Committee brings forward
in this area. We certainly are not minded—some people have
said that we should allow each scheme to choose how they do the
valuation. I think that would be a very uncertain and unsatisfactory
situation. At the moment it is difficult to see how we could identify
a different method of valuation that we could ascribe, other than
the CETV. Certainly if the Committee has formed a view that there
is an alternative approach, I will certainly be quite willing
to consider it.
Ms Stuart
591. You give the impression that the CETV
valuation is a very straightforward process. Is there not an argument
that the value of the paid-up policies is actually showing that
companies have been hiding charges quite considerably? Is it as
black and white a method as you seem to think?
(Mr Denham) My understanding is that all systems
of valuation by actuaries inevitably involve a degree of judgment
and discretion so there is no very simple formula. But the CETV
practice is well prescribed, it is set out as to how it should
be carried out. Actuaries using that method of valuation are not
just professionally responsible to someone for their working,
but to their own professional guidance from their own professional
institutions; so as far as we can have a safeguard on a method
of valuation those safeguards are in place with CETV—and
certainly we would look for such safeguards if we were to come
up with any other formula for valuation of scheme rights.
Chairman: Can we turn
to some of the other areas. Costs and charges has obviously been
quite an issue. May I ask Chris Pond to ask questions on that
area.
Mr Pond
592. As the Chair says, there is considerable
worry about the issue of charges. In the evidence this morning
from Families Need Fathers, there was also the concern that attempts
to limit the charges through regulation may be insufficient. Could
we ask how the regulations, which would be made under the Bill,
can be made sufficiently tough on schemes which try to overcharge.
(Mr Denham) If we can take a step back and ask
the question whether the fears that have been expressed are likely
on the available evidence to materialise in practice, because
there are anomalous charges which exist at the moment within the
pensions industry—for example, if an individual chooses
to transfer from an occupational scheme to another or (perhaps
somewhat less advisedly in most cases) from an occupational to
a personal scheme—charges may be levied on those schemes
in those circumstances, but we have not found any evidence to
suggest that there is any major problem of overcharging by schemes
under those circumstances. So the first starting point would be
that there is no obvious evidence that schemes would attempt to
milk this new piece of legislation in a way that they have not
done in the past.
593. One of the anxieties is that the market
will have some influence in those circumstances because people
considering taking out schemes will know in advance what the charges
are, but when it comes to split pension: splitting, of course,
people would not necessarily know in advance what would be the
charges that their particular provider would be making in the
event that the pension was split. Therefore, the market does not
have the same influence in holding their charges.
(Mr Denham) On the first point I was really talking
of the situation in occupational schemes where an individual member
was transferring. I think you could probably say that under those
circumstances most people who join an occupational scheme probably
do not have the question of "what would happen if I transferred
out in five years' time?" at the top of their minds. So in
those circumstances, where there is not a market pressure, there
does not appear to be a problem. Potentially there can be a problem,
I recognise that, but there does not appear to be a problem. In
the occupational sphere it is quite good news that the National
Association of Pension Funds are prepared to consult their membership
on development of a scale of charges that could be appropriate
for implementing pension sharing. That would give some usable
recommended range of reasonableness. As we all recognise, the
costs may actually vary quite considerably from one scheme to
another depending on its size. In the area of personal pensions
where, as you say, there is a market pressure on costs but people
may not look at the costs of splitting, there will fairly quickly
develop the pressure of disclosure on schemes because the costs
will become known: what different providers are imposing on their
members who need to split their pension. That will enter the public
domain so I think there will be an analogous approach on personal
pension providers not to overcharge on this one.
594. Another source of anxiety, obviously
given the pensions mis-selling fiasco that we have seen in past
years, what is the situation that ex-spouses may find themselves
in if they come of the scheme, if they take credits out of the
scheme and are looking for a product elsewhere? Is there any pre-emptive
action you can take to prevent that sort of mis-selling? In a
sense, seeing this group as being a very vulnerable but lucrative
new market that could be created by the Bill.
(Mr Denham) I would need to give some thought
about whether I thought that any specific action was needed for
this particular group of potential clients. Clearly, on the wider
level, the Government has a series of initiatives in trying to
bring some clarity and certainty into charging on financial services.
The consultation is under way on the powers of the new Financial
Services Authority. In addition to their regulatory powers, one
of their likely general responsibilities will be consumer education.
We, in the DSS, have quite a major pensions education initiative
under way. We have revamped our own literature. When this Bill
has made its progress, we will be wanting to include literature
on pensions on divorce there, which is in a very simple format.
So the FSA will promote consumer education. We are involved in
that area specifically in relation to pensions education. We will
include the material on divorce. And finally, of course, in the
Government's proposals for individual savings accounts, where
"CAT marking" is under discussion and there are our
proposals for stakeholder pension schemes, we have been looking
at the possible role of bench marking and we have indicated that
we are keen on highlighting the costs to consumers and avoiding
high cost products when a lower cost product is available. I think
the issue has sort of gone on longer. I think the Government has
quite a wide-ranging strategy on good value-for-money financial
projects. The real question is whether anything additional needs
to be done in the regulatory sense for this particular group of
clients or whether that action will be sufficient. I will reflect
on that, but I am not persuaded at the moment that other than
general education targeted at that group of people we need to
take any further action.
595. I think it would be helpful if you
could look at it again.
(Mr Denham) Yes.
596. Could I turn to the issue of legal
aid because we have had a useful note on those issues from the
Lord Chancellor's Department and the Scottish Office. Of course
there are differences in the way that it is treated in Scotland
and England and Wales. Can you clarify for us how the statutory
legal aid charge will apply to split pensions?
(Mr Denham) As you know with earmarking, which
is the current provision, the recovery takes place when the property
money becomes due and payable and so that tends to be when the
pension comes into payment or the lump sum is paid over. I have
to say at the moment, and we will need obviously to clarify this,
at the moment the position of the pension credit and legal aid
is still under consideration by the Government, so I am afraid
I cannot give you a final answer on that issue at the moment,
although it is a very important question that you raise.
597. There is the question about whether
the legal aid boards will actually seek powers to force those
with split pensions to commute part to a lump sum so that charges
can be satisfied, so can you throw any light on that?
(Mr Denham) That again is another issue on which
work is continuing. I do not know whether Mr Arnold wishes to
add anything to that, but I think it is really work in progress
on that.
(Mr Arnold) Yes, I am sorry, but I do not think
there is anything I can add on that. Certainly my colleagues who
deal with legal aid matters are discussing this.
Mr Pond: I think we
will leave those issues on one side for the moment.
Ms Stuart
598. Can I just quickly pick you up on an
inconsistency, I think, in logic. If the whole purpose of CETV
was its simplicity and then we are saying, "But of course
if there are any shortcomings, we can ask the court to take them
into account of the overall settlement", that still means
that you need a valuation by an actuary to quantify those shortcomings
and then we are back into the game of a whole range of financial
advisers which cost a lot of money.
(Mr Denham) Basically, as I understand the position,
and I would be grateful if my officials would come in if I mangle
up family law in an unforgivable way in front of the Committee,
but the point is that we cannot say to the courts, I think, that
people are barred from arguing about the valuation of assets when
people are trying to come to a financial arrangement and there
can be an argument about the value of a painting, the value of
a house, however it is valued, and there can clearly be potentially
an argument in court about whether the particular valuation that
has been used was appropriate under those circumstances, but I
think it is to everyone's advantage for there to be a standardised
approach which is understood by the pensions industry and is understood
by pension schemes, so that they know when they are asked to provide
at the initial information stage a valuation of the rights in
a scheme how they are expected to do that, and they know that
when it comes to implementing the share what the valuation method
is going to be. That does not mean that people cannot go along
and say, "Well, actually in these particular circumstances,
that does not capture the full picture", but in order to
have a system which is clear, simple, understandable and predictable,
the use of a standard approach to valuation is, I think, highly
desirable and CETV seems, in our judgment at the moment, to be
not only the best, but probably the only realistic one that is
available to use and the one that is most widely understood and
the one that has a clear link to the minimum funding requirement
which is an advantage in the valuation of scheme rights.
599. You mentioned the family law implications
of this whole legislation. I know you cannot anticipate the Queen's
Speech, but would you expect the Pension Sharing Bill to be coming
forward at the same time as some wider reform of family law will
emerge or do you see the Bill for the time being in isolation?
(Mr Denham) Firstly, I cannot anticipate the Queen's
Speech. I think procedurally this Bill does not require any further
family law primary legislation, so in that sense it is not linked
to any further changes in primary law to family law as legislation.
The implementation of this Bill does of course require the implementation
of key parts of the Family Law Act because it is tied very much
to the new process of information and the new proceedings on divorce,
so things have to happen elsewhere in government for this Bill
actually to come into force.
2 On behalf of the Department of Social Security, the
Lord Chancellor's Department and the Scottish Office. Back
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