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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