Select Committee on Social Security Minutes of Evidence


Examination of witnesses (Questions 600 - 619)

WEDNESDAY 16 SEPTEMBER 1998

MR JOHN DENHAM, MP, MR CHRISTOPHER EVANS and MR WILLIAM ARNOLD

  600.  On previous occasions this Committee was much exercised by the debate of whether the house has the same value as a pension ten years on because a pension is an increasing asset, whereas a house may be a depreciating asset if you cannot maintain it. What is your current view on taking the longer-term prospects of income into account in the process as I think it will particularly affect women?
  (Mr Denham)  Our current view, and it is reflected in the Bill, is that the valuation of the pension should take place at the time of the divorce and it is the rights accrued up to the date of the divorce or, in the case of Scotland, the rights accrued from the date of marriage up to the date of divorce which should be valued. We are not suggesting that there should be some attempt to capture the additional rights that will accrue beyond the divorce because one member of the scheme has continued to make contributions or the employer is making contributions on their behalf.

  601.  Turning your mind back to the previous Secretary of State's foreword in the consultation document, it made it quite clear that this is not just an asset-splitting device, but that part of the purpose of this legislation was to protect women's income on retirement. Do you think that the pension-splitting process, this current splitting process, is the most effective way forward or not?
  (Mr Denham)  What I think pension sharing does is enable some women to gain a fair share of the pension rights which have accrued during their marriage who are currently denied it because the facility for pension sharing does not exist and because the alternatives which do exist, like earmarking and attachment, are not satisfactory. So what we are doing is remedying a defect in the current ability of the courts and of the pension system to share those assets fairly. We are not doing more than that. We are not involved in an exercise which in some way separates out the pension rights from the rest of the assets involved in the marriage and deals with those separately in order to increase women's incomes or to decrease men's incomes. That would be going considerably further than we have attempted to do or indeed would think right. What we have at the moment is a situation where the courts cannot deal effectively with pension rights in, we think, about one-third of the divorces which take place and women lose out through that, or primarily women lose out through that. These measures will stop those people losing out in a way which is currently unfair.

  602.  Leaving it just to the courts' discretion, do you think that is sufficiently robust to ensure that that one-third gets access to it? Given that there is quite an intuitive reaction by people, and that includes professionals, to think that pensions are something to shy away from, is there not a danger that if we just leave it to the courts' discretion as one tool of many without an indication that this tool ought to have some kind of priority in the list of considerations that it could wither on the vine?
  (Mr Denham)  Well, I think it is difficult to prescribe a different arrangement. As I say, we have not gone as far as to say, "Let's deal with the pension rights separately from the rest of the assets". I suppose potentially we could say that no matter what happens to the rest of the assets, the pension has got to be split 50/50, but then that would create a whole series of problems of unfairness of its own. I think that by enabling the courts and the pension industry and the divorcing couple to ensure that pension rights are properly and efficiently taken into account, then those women who will currently lose out will benefit and that is what the aim of the exercise is. That is a significant gain and it is well worth having in its own right, but I do not think we can really go beyond that. The only way I think we could be more prescriptive would be in some way to pre-determine what should happen to the pension irrespective of what happened to the rest of the assets, and I think it would be as difficult to do that with a pension as it would be with a house or any other asset of the marriage.

  603.  Given how difficult we have found it to get accurate figures of how earmarking has been applied so far, and accepting it is relatively new, presumably you will put into place some mechanism for monitoring pension splitting and how it is evolving in practice and then report? Just as a little addition, at one stage it was suggested to us that we may make this Act renewable, like the Prevention of Terrorism Act which has to come back after ten years and renew it if it is deemed to be working!
  (Mr Denham)  Yes! Two things on that. Firstly, we will be evaluating and monitoring the implementation of the Act. I should say, Chairman, slightly later than we anticipated, we have begun to get the preliminary findings of the research which has been carried out on the operating of earmarking. When I was with you last time I think I said we had an evaluation under way and I hoped the report could get to you by this stage. If you will accept very much interim data, we can let you have some of the findings on earmarking and attachment, and that does give you some idea of how often it is used and what the consequences are and so on.[3]

Chairman

  604.  We have been looking carefully at the notes that Mr Evans and others have been sending us in terms of making sure provisions are made to make attachment and earmarking consistent with pension splitting. Has that created a difficulty? Are there problems about that? Some of the evidence you have just mentioned might shed some light on that, but what consideration has been given to make sure this will all tie up together in a sensible way?
  (Mr Denham)  I will ask, if I may, Mr Evans to go through some of the detail, but one of the sorts of things we are trying to deal with is the fact that earmarking orders are arriving at pension schemes in a form that the pension schemes cannot implement.

  605.  They are at the moment?
  (Mr Denham)  Yes. In other words, a defect in that legislation is the manner in which information should be provided to the pension scheme was not prescribed particularly clearly, so one of the things we are doing in this piece of legislation is hopefully setting out very clearly the prescription for the forms in England and the one form in Scotland which have to be filled in so when it arrives at the scheme they can carry it out. While we are doing that exercise, we want to go back to the attachment provision and have a similar process because that will still be a mechanism which will be available to the courts and will still be suitable for some people. That is one very particular example of where we have a defect in the legislation. I do not know if you want to add anything?
  (Mr Evans)  I do not really have a lot to add to that at this stage. We still need to add some things to the draft Bill to pick up some of that. As we said in the consultation document, it was one of those things which was not included when we were in a position to publish the consultation draft in June, but it is clear from the research we have done that problems have arisen in some of the attachment orders; orders made which the schemes could not implement and so on. We will also need to ensure consistency between the provisions. We will be bringing that material forward and probably talking at least to some of our expert consultation groups about those proposals over the next few months.

  606.  For my own information, can I ask a detailed question, and you may need to take this back, on the question of the valuation date in the Scottish context? Am I right in thinking that the parties will need to ask the court to provide a pension in percentage terms at the relevant date so that both parties can get the benefit, or run the risk of disadvantaged circumstances, of changes in the cash value up to the date of the actual valuation? This is deep in the entrails of Scots law, as you will understand, and it may be you will want to take that away and think about it, but in a Scottish context it is quite an important question.
  (Mr Denham)  Certainly as I understand it, it is true that in England it is just going to be a percentage and in Scotland it can be applied as a percentage of the cash value. I do not think we have formed a view, and it is an interesting thing we can look at, as to whether a particular course of action will be to the advantage of the divorcing couple. I know it is set out in law what will happen if it is prescribed in cash terms, but if you want us to say whether we think it is to people's advantage to ask the court to do it in a particular way, perhaps we can look at that and come back to you.

  607.  I just want it to be clear. I am not entirely clear myself but that may be my own ignorance, and I think that point has to be considered a little further.
  (Mr Evans)  The legislation provides for the calculation to be done on a cash basis and then back-calculated to a proportion in order to fit with the general pension sharing principles, but the particular point you raise relates to the date and whether different issues arise there in Scotland and England and Wales.

  608.  Indeed.
  (Mr Evans)  Perhaps we could let you have a note on that.[4]

Chairman:  Thank you. That leads neatly into the need for legal training and the competence of lawyers. Karen Buck has some important questions in that area.

Ms Buck

  609.  Quite a few of our witnesses have made a point about the competence of all the judges and lawyers in these cases to act in people's best interests. There were some very eloquent examples given this morning by the Fairshares representatives. Do you think that a good and cost effective service should be given to the public to increase information and awareness about the options as well as to lawyers?
  (Mr Denham)  One of the requirements of the Family Law Act is of course for attendance at information meetings, which will cover financial matters. Mr Arnold may be able to add some information but there are pilots under way at the moment on that information process to see how it is going to work most effectively. I think we can be reasonably confident when we have evaluated those pilots that the Family Law Act procedures will mean that information is available to the divorcing couple at the time they are most likely to think about it. That is certainly the way we would like to see things working.
  (Mr Arnold)  Certainly the intention is that the information given at the information meeting will include information about pension sharing, what that involves and where to go to get the most expert advice and so on.

  610.  How do you see the mediators' training developing to make sure that they are able to get advice on these issues?
  (Mr Denham)  I know one thing which is under way is that the Law Society have set up an accreditation panel for solicitor family mediators who are going to play that role, and that will give them a qualification as independent mediators. That is the major initiative which is under way in that area at present.

  611.  What do you think of the Government's role in terms of the training for judges?
  (Mr Denham)  Mr Arnold can comment on the detail again but there is a continuing process of judicial training and developing law, and this would be no different.
  (Mr Arnold)  Our Judicial Studies Board runs training all the time, and certainly when legislation came in we would make sure that was included in the training programme for the judiciary.

  612.  The thing which worries me slightly is how do we make sure it goes where it is most needed. We had some evidence to us from representatives of the legal profession who were rather giving the impression that all was for the best in the best of all possible worlds and that everyone involved was highly trained in these issues, yet on the consumer side there was clearly some scepticism about that and some rather grim examples where it has gone wrong. How are you going to make sure that reaches widely?
  (Mr Arnold)  As I say, I think this would need to be specifically built into the judicial training programme for not only new judges but existing ones to marry in with the implementation of the legislation.
  (Mr Denham)  Can I stress that although I think we are reasonably happy with what is being put into place and we are not complacent about the issue and it is a very important one, one of the findings of the early research we have been talking about on earmarking and attachment is that there is a much lower awareness amongst solicitors of rights to the State Earnings Related Pension Scheme than there is of company and personal pensions, and so it is certainly possible that an important area of pension provision is overlooked more often than it should be. So I think the Committee is absolutely right to focus on this issue, Chairman. It is one that we do want to get right.

  613.  The Fairshares representatives this morning, and this follows on from your point about the research into earmarking, were asking for consideration to be given to a proper evaluation programme that looks at the circumstances of divorcing couples a year and a half after and how their situation has developed. Is that something that you would consider now to start kind of building from the very beginning?
  (Mr Denham)  We will certainly want to monitor and evaluate the ways in which pension sharing is working and the decisions that courts are taking using the pension sharing legislation, as we have done with the earmarking provisions, and it is obviously very important that we do that to identify any shortcomings that may emerge.

Mr Pond

  614.  A number of people have said to us, and I am sure they have said to you as well, that they think that perhaps the new powers should apply for any divorce settlements that are not yet finalised and some have even gone as far as to say that settlements that have already gone by should be revisited with these powers. Can you give us your views on retrospection in these circumstances and how perhaps unfair retrospection could be avoided?
  (Mr Denham)  I think that our view is that it is very difficult to see how this sort of provision could be made retrospective without creating far more problems than one was actually solving. For those settlements which have already been reached, and they may often have had lengthy and difficult negotiations to get there, trying to revisit those could have very significant impacts on the two people directly affected. Equally, I think there needs to be a commencement date to avoid all of the uncertainty that can otherwise arise and where arrangements of course have been made over a range of assets, it would be quite difficult, I think, to go back and deal with one issue in isolation. We have looked at the issue of retrospection and I have to say I do not think we have managed to see a way that could be made to work and it could bring enormous problems in train.

  615.  How do you see that commencement date lining up with the Bill coming into force? Would it be at the same moment in time or would there be a time lag and how would impending divorces be affected at the time the Bill came into force?
  (Mr Denham)  Firstly, on the commencement date, the intention is that the pension sharing provisions would apply to actions that were initiated after the commencement date, so it would not apply to actions which were in course at the time of the commencement. In terms of the passage of the legislation and the commencement date, no firm decisions have been taken on that and we cannot, as you know, anticipate the Queen's Speech obviously, although, as I said last time, internally and in terms of preparing the legislation and managerially and so on, we are preparing to be in a position to implement this from April 2000 if all of the other things, including the passage of legislation, could be taken through in time.

  616.  There have been those who suggested that because of the difficulties with those two and the other challenges around the year 2000, perhaps implementation should be postponed to the year 2001. What would be your response to that?
  (Mr Denham)  There have been some representations, and I think the Pensions Management Institute is one of the organisations, which have been saying, "Well, yes, you have got the Millennium bug and various other things happening at once", and I think we need to assess the case that is being made there. We have not, in terms of doing our draft legislation and so on, changed that part of the timetable, but where people in the industry have said to us, "There are factors you need to take into account", I think that we have got to do an assessment of the strength of that case.

Ms Buck

  617.  The issue of divorcees being able to transfer out of unfunded pension schemes is a sort of recurring niggle. I think there are two connected points that I would like to explore with you. The first is the really quite serious absence of hard information that allows us to debate the extent of any demands upon pension schemes and I would like to ask you about that in a second, but then that leads on to the principle because there seems to be some wearily resigned acceptance that the Treasury will never forego any resources now and yet it seems to me that the whole principle of contracting out is based on precisely the foregoing of current National Insurance in order potentially to save on SERPS at a later stage and without the kind of information to debate that and debate the extent to which this might be an issue, we are really rather a bit in the dark. Can I just ask you first of all about the information? We have the information supplied to us by the Treasury on the number of potential transfers out and apart from the teachers' scheme, it is really very hard to know what kind of numbers are available, so where exactly is the evidence that letting ex-spouses take their pensions out of an unfunded scheme would be a significant cost to the Treasury?
  (Mr Denham)  I think there are two things. One is that any cost can quickly run into millions and millions of pounds which is significant, so one cannot be casual with public money, even though with pensions you are talking about very large sums of money indeed, because it all adds up and we have got to be cautious about that. It is difficult to put any firm prediction on the number of people that would exercise the right to opt out, but I think we have to proceed prudently. The estimated cost, which is based on recent divorce rates in the five major unfunded schemes and with an assumption that perhaps half of those would get a pension share and choose to opt out, is that that could be a cost of up to £190 million public expenditure brought forward.

  618.  What is the evidence for the half?
  (Mr Denham)  To say there is evidence I think would be overstating the accuracy with which you can do this. It is an attempt to produce a reasonable estimate of what the cost could be, so that is the basis on which those figures have been produced and that gives a figure of up to £190 million a year of public expenditure brought forward.

  619.  Is that an annual cost?
  (Mr Denham)  That is an annual cost, yes.


3   See Ev p. 136. Back

4   See Ev pp. 136-7. Back


 
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