Select Committee on Social Security Minutes of Evidence


Examination of witnesses (Question 1 - 19)

WEDNESDAY 24 JUNE 1998

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

Chairman

  1.  Good morning, ladies and gentlemen. May I open the public evidence session this morning by welcoming the Minister. May I say that we are grateful that we have had the help of the Department as a Committee in what is really quite a novel, if not historic, occasion in terms of the Government of the day inviting comment on a Bill in a pre-legislative stage. Now that we have had access to some of the policy experts working in the field from various Departments the first thing that struck me was the extent of the complexity inter-departmentally on what has to be sorted out, indeed between different legal jurisdictions north and south of the border. We are being taken behind the curtain of secrecy if you like of the process of government perhaps for the first time and I think in a very important and historic way. I think it is obvious to anybody who spends any time looking at the subject that it is very technical and we are grateful, Minister, that you have brought Mr Christopher Evans and Mr William Arnold with you this morning because they will help interpret some of the algebra and some of the acronyms in some of these systems. Maybe, Minister, you could just say a few words about where you are in the process and what Mr Evans and Mr Arnold are particularly responsible for and then we can go into some of the questions. We perfectly well understand that you may have to refer to and draw quite heavily on the technical assistance you have on your left and right hand sides. We understand that because we are in the same difficulty ourselves.
  (Mr Denham)  Thank you very much indeed, Chairman. Perhaps I could say a few opening words, one set about the principle and one about the process that we are involved in today. On the principle of what we are trying to achieve, pension sharing is first about fairness. It is about ensuring that divorcing wives in particular can get a fair share of the pension which has accrued in the husband's name. Pension sharing will also contribute to one of the wider aims of the Government's pensions review, which is to narrow the gap between men and women in retirement. It is harder for women to build up a decent pension in their own right, often because of their caring responsibilities and the patterns of work that they enjoy. For many married women it is their caring and domestic responsibilities that have enabled their husbands to work and therefore to build up a decent pension. If they divorce women can be left without the pension provision which they have contributed to for their retirement. Pension sharing will enable courts to give a divorcing wife a fair share of the pension rights that have accrued in the husband's name. Pension sharing would apply equally of course to men and women but the current distribution of pension rights does mean that the main beneficiaries will be women. I recognise, as you do, Chairman, that the hearing today represents a new development in the parliamentary process. The Select Committee on Modernisation of the House of Commons recommended more pre-legislative scrutiny of Bills by Select Committees to ensure better legislation and to make better use of the time in Parliament. The inquiry that your Committee is undertaking on pension sharing is pioneering that proposal and I am very pleased to be here at the public evidence gathering stage of its work. I certainly believe that your Committee can add value to the process through constructive pre-legislative scrutiny. We have set out several basic policy principles in the consultative material but, as you recognise, pension sharing is immensely technical. It cuts across pensions, tax and family law. In developing the detailed policy and procedures we have often had to reach finely balanced judgements between different options. I hope that the judgements that we have made will deliver workable arrangements, but the point of this exercise to us and the wider public consultation is to test that out. Whilst today I will endeavour to explain why the draft legislation has set out particular approaches, I actually welcome very much the opportunity to discuss these approaches with the Committee and to take note of the concerns that are raised today and later of your conclusions. I know you will be hearing from other groups over the coming months and as a result of what you hear from them and the judgements you make I am certainly open to ideas on better ways of achieving the objectives that we have set out.

  2.  Thank you very much. Can I start by asking a very general question. Is there any substantive difference between the approach that we are taking now and the approach of the previous administration who went through a Green Paper, White Paper process? Is there anything there that is worth pointing to by way of changes in the emphasis or redirecting the policy in any meaningful way, or is it possible to rely on the consultative processes in the last Parliament as a continually evolving part of a single process?
  (Mr Denham)  Certainly I think that a few years ago the issue of pension sharing on divorce was a matter of major party political division, particularly in the House of Commons. That argument of principle I think was resolved some time ago now in the last Parliament when the principle of pension sharing on divorce was accepted by the previous administration. They published a Green Paper and then a White Paper and when we were elected with a commitment to implement pension sharing on divorce our approach was to build on the work that in the latter stages of the last administration was being done, so we saw no reason to go back and re-issue a new Green Paper or a new White Paper. It is quite difficult for me to know whether on the more detailed points of judgement that we have had to make in preparing the draft legislation a different administration would have made different choices. I think it is fair to say that what you have in front of you does build on the agreement that was finally reached in the last Parliament, that we should proceed on pension sharing.

  3.  Presumably we are right in assuming that it does actually play a part in the wider programme of reform for pensions. You get the whole stakeholder arguments, you get the educational process; all these things are important. Presumably you see this, although it is a free standing and technical issue in its own right, as also part of a more comprehensive pensions provision package across the wider spectrum.
  (Mr Denham)  What I think the pension sharing does is first to introduce fairness on pension rights into the process of divorce and that would be important in its own right as a free standing measure. But it does tie in very much with the challenges and objectives that we have set out in the pensions review. We are concerned about widening inequality in pension incomes and about the wide gap that exists between the incomes of men and women in retirement. We will be addressing those in the pensions review in a variety of different ways: better forms of second tier provision, looking at the position of carers who are unable to build up decent pension rights and who are most often women. There will be a wider process of reform as a result of the pensions review. The outcome that we can expect from pension sharing in divorce will complement those same aims and objectives.

Mr Wicks

  4.  Can I ask you more about the key objectives of this reform because you have very much presented it in terms of a pensions objective and splitting the pension fairly where there is divorce. Indeed, the Secretary of State in her foreword to the consultation paper talks about helping to narrow the pensions gap between men and women in retirement. We understand the pensions objective, certainly from you as Minister for pensions, but is there a possible confusion or conflict with the basis of this proposal in terms of family law where, as I understand it, the courts' objective is very much to look at assets and how they should be fairly distributed? Might there not be a situation, given that discretion still remains very much with the court, that because the pension funds are just being treated as other assets alongside furniture or the family home the court could well decide quite often that the deal really is that the wife or ex-wife gets the family home because the children are there, and he keeps the pension fund. In other words, I am just putting it to you that there may be a conflict between family law objectives and pension objectives.
  (Mr Denham)  I do not believe that there is a conflict although I recognise the potential for confusion. I hope one of the effects of the consultation process will be to make clear what is proposed. The starting point of the problem in terms of family law and divorce is that the lack of the type of legislation we are now discussing made it impossible for pension rights to be taken fully and properly into account in the divorce settlement because you did not have a mechanism for splitting the accrued rights in the way it is proposed. A key result of that was unfairness to many women who were denied effective access to pension rights which they had helped to build up. By introducing pension sharing into the family law process we will make it easier for a complete and fair settlement of the assets of a marriage to be determined when a divorce takes place. The practical consequence of that will be to enhance the security in retirement and the pension rights of women (as it generally is) who would otherwise lose out through that process. In other words, family law was acting to deny women a fair share of the rights which had built up during marriage as part of the marriage settlement. By introducing these changes we hope that women will gain access to a fair share of those assets. What we have not done, to make this point clear, is to try to suggest that family law should exclude consideration of pensions in the settlement that takes place at a divorce and to deal with the pension rights as an entirely separate matter irrespective of what happens to the other properties. We are effectively including pension rights within that process where they are not adequately included within the process at the moment. We have not sought to separate them out as an entirely separate matter.

  5.  Can I press you on this because it is a complex interface if you like between family law and the practice of family law and what we are trying to achieve in terms of pensions. I would have thought what we were trying to achieve in pensions was that, with four out of 10 marriages ending in divorce (or whatever it is), when those parties retire both have a reasonable chance of having a decent income in old age. That would be the pension objective. In the consultation paper, part 1 of it, paragraph 12 on page 15, it talks about stage 4 of the process. It is the financial settlement on divorce. If you look at paragraph 13 it does say: "Whether the settlement involves a pension share will depend on the individual circumstances of the divorcing couple and what is fairest in the division of total assets between them." It goes on: "This also means that any settlement will not necessarily divide the pension rights equally between the parties." This is the point and it is acknowledged to be, it seems to me, the real dilemma because, as I stated earlier, given that we are going to hear some evidence from a senior judge soon which will be useful, as I understand it often the deal in court at the moment will be that the wife and mother keeps the home for the sake of the children, and it just seems to me that if we want to be clear about pension splitting per se we could end up in a situation where it is still the husband that largely keeps the pension fund. In other words—and I am repeating myself now—family law practice and the pension splitting objective will often be in conflict with one another.
  (Mr Denham)  I think it is important to be clear on this point and it is not possible to try to use a process like pension sharing on divorce to tackle all of the issues that arise about whether any individual can build up a full or a decent pension on retirement. It has been the case for many years now that the courts have been able to take pension rights into account in a divorce settlement, but the flaw in the law is that in many cases the law has not allowed that to be done effectively or fairly. It is quite important to understand that what is being proposed here is a way of making the treatment of pension rights in divorce fair. It is not a process of taking the pension rights right outside the rest of the divorce settlement and trying to deal with them entirely separately. Yes, there will be circumstances (and I think the consultation paper makes this quite clear) where a divorce, where there are pension rights, does not lead to a split in those pension rights. What we are trying to seek is a situation where all of the assets which are built up in a marriage can be shared fairly at the point of divorce and it will be for the courts ultimately if there is no agreement to determine exactly how that should be done and what role the pension should play in that.

  6.  Can I push this one stage further because I think it is an interesting issue and I can see the complexities because if we were too prescriptive as a Parliament, so that we have to have pension splitting, perhaps (I am not sure) it could mean that more women and children in future have to leave the family home, so it seems to me there is a genuine dilemma here. Having said that, can I just ask whether the Department have considered pushing the pension objective further and actually saying to courts that when the division of assets is being made we expect the pension objective to be crucial and we do expect there to be some proper splitting of the pension given our concerns about financial insecurities in old age?
  (Mr Denham)  We obviously looked at a wide range of options. I have to say, and I would be interested in the views of the Select Committee, that if I gave you a simple example of where the matrimonial home was worth £80,000 and the pension rights were worth £80,000 and there were no other assets to be taken into account. If we had said that the pension rights should be split, say, 50/50, so that £40,000 went to the former spouse and £40,000 to the husband, you would either be in a situation then of saying you then determine the matrimonial home presumably on the basis of who has custody of the children, leaving one partner with £40,000 out of the settlement and the other with £120,000, or you end up in a situation where you would appear to need to force the sale of the property in order to realise the assets and split the finances differently. You would be quite right to say we drew back, in trying to tackle the situation where one partner cannot get a fair share of the assets, from going in the other direction to a situation where splitting the pension rights so overrode the other assets in the marriage that it created an unfairness in the other direction.

  7.  In a way the idea of pension sharing on divorce is arguably a bit inaccurate because the objective is to have a fairer splitting of assets on divorce and explicitly including the pension fund. That is not quite the same as pension splitting on divorce. I think that is just a quibble. Just in terms of the public debate I think we need to be clear about that.
  (Mr Denham)  It is certainly a very accurate description because at the moment pensions cannot be shared fairly on divorce. That is the problem that we are trying to tackle. What this legislation allows is for those pensions to be shared fairly on divorce. It does not compel the sharing of the pension on divorce. That, for the reasons I have given, could create inequities of another sort, but it allows it to happen.

Mr Goggins

  8.  One of the 32 success measures in the Green Paper is to ensure that all in retirement have a decent minimum income. I would be interested in your comments, purely as an extension of the line of questioning that Malcolm Wicks has been following, about how that objective might be part of this process. Let me just give you an example. A couple, say aged 45, divorcing, splitting their assets, may well end up doing what Malcolm suggested, that the wife, the mother of the children, keeps the house and the pension remains with the man. At 45 that might seem a fair split of the assets, but aged 65 the man may have retained all his rights to pension but the woman may now have a house which she cannot afford to repair and may be dependent upon the state for income support top-up. That may be the eventual outcome of what was a fair split in mid life but in retirement does not look fair at all.
  (Mr Denham)  The principle that family law works towards is trying to achieve a clean break on divorce, that at the time the divorce takes place you try—and this is one of the problems with the current pension provisions with earmarking and attachment and so on, that they do not allow a clean break—to apply a fair, clean break at the time the divorce takes place. It is difficult therefore to see that you could be entirely consistent with that principle and try to look too far forward into the future as to what might happen with a lifetime career path pattern for either individual. What I think we need to recognise is that pension sharing will make a contribution in a number of cases, and we suggested perhaps 50,000 a year on our best estimates, which is a minority of the divorces which take place each year, but in those minorities we will make a contribution to enabling those women to have a share in the pension rights which have accrued during the marriage. I do not think we could expect that process to resolve all of the issues facing women trying to build up decent pensions in retirement, which is why in the wider review we will certainly be looking at second tier pension provision including SERPS, and we will need to look at the position of women in particular who are unable to build decent pension rights because of their caring responsibilities. In the case that you gave clearly one needs to look at the ability of a woman to work, given her child care responsibilities, and to build up her own pension rights during the period following the divorce. In your scenario I would not take it for granted that if a woman is divorced at the age of 45 she is then therefore somehow dependent entirely right through into her retirement on whatever the divorce settlement was.

Mr Leigh

  9.  The Chairman in introducing this said this was a very complex area, but I suspect that we are now in the area where most of the public will be most interested. They will not be too concerned about the complexities. I take it that we were united in our desire to see less divorce, not more. Both parties have accepted that we are going to remove the legal delays to divorce, so the only bar that remains presumably is the pain bar. I have always been very attracted to the Scottish concept that you basically apply the judgement of Solomon in these cases, that people have to realise that when they get divorced it is going to cost both of them a lot of pain financially and that no party will be better off than the other party. The assets will be split. The trouble is that many men feel very aggrieved in this whole divorce process. They feel that they get divorced, the majority of divorces are now initiated by women, often younger women, the men feel that they lose the house because the house goes with the kids, and what they will be worried about in this whole process I think is that, having lost the house, they are now going to lose the pension. This is really building on Malcolm's point. I know it is very difficult for you to answer this but I think you have got to reassure many men out there who do feel aggrieved by this whole process—and they feel aggrieved by things like the Child Support Agency and things like that; we know that, we get a huge postbag on these issues—that the pain will be equally shared and, as Malcolm said, we will develop a system where everything is thrown in the pot and although the women may get the house for the time being, at the end of the day no one party will be better off than the other party. Do you understand what I am saying? It is an important political (not party political) point.
  (Mr Denham)  In a sense you are putting by implication the opposing point of view to Malcolm Wicks in terms of the practical implications of it. I think it is so essential that we give the assurance that this issue is about fairness in divorce. It is about ensuring that pensions can be dealt with fairly in divorce because we take the view that they cannot be dealt with fairly at the moment because we do not have the legal provisions which enable the fair splitting of pension fund assets and therefore in this situation in practice some people can be gainers within a marriage, so rather than having a fair division of the assets on divorce, some people can be gainers but that is because the law does not allow the sort of pension sharing that we are talking about at the moment. That is the inequity in the law that we are trying to address through these proposals, but I think to those constituents and others the reassurance must be that this is about fairness.

Mr Pond

  10.  In all the discussions we have had, Minister, about the balance between different types of assets, the house on one side, the pension entitlements on the other, these are going to be very complex issues in terms of the transfer and of course it places a big new burden on family lawyers and solicitors to advise their clients on what is best for them in terms of this balance. Given that most of them will have trained and operated under a very different environment, are you confident that family lawyers will have the skills necessary to be able to advise their clients properly, or are they all going to have to train as independent financial advisers by the year 2000? Is the Law Society taking this on board with sufficient speed? Will it all be in place in time?
  (Mr Denham)  I would like to divide that if I may into two parts. One is the ability of lawyers and solicitors (and, indeed, judges) to acquire the necessary training, but in the case of judges the normal extra training procedures that would take place as the new legislation comes into force would apply here. I understand that the family law solicitors are already beginning their own training and education exercises amongst their own members based on the draft legislation which you have. You are right in saying that there will be a need for training on better understanding but I am confident that that process is already under way. On the question of financial advice, one needs to recognise that if somebody is taking a decision about for example whether they should take up an option to remain within a pension scheme or to take the funds elsewhere into an annuity or into a personal pension, people will need advice on that basis. On occasion that will be available through solicitors if they are properly registered and comply with the Financial Services Act and, as an aside, we will clearly need to look at the evolution of the new Financial Services Act to make sure that everything is in step. In principle at the moment you can get independent financial advice properly regulated from some legal practitioners. Or individuals will need to take the responsibility of seeking their own advice. That needs to be quite clear, that individuals undertaking a divorce have some responsibilities about the management of their own affairs which only they can exercise, and that they will need to take responsibility there about where they turn for advice and to ensure that they seek advice that is properly regulated.

Ms Hewitt

  11.  I want to come back if I may to this issue we were exploring a minute ago about house versus pension fund because even if the nominal values of the house and pension fund are identical at the point of divorce they are not the same kind of asset. As Paul was saying, at the point of retirement the house may be a liability but a pension becomes an income stream. They are very different kinds of assets. I just wondered how far you thought that particular problem might be recognised in families where there are children by saying that although the residential parent will continue to live in the matrimonial home while the children are growing up, actually the appropriate route is then to sell the house when the youngest child grows up and divide the assets at that point, and take that presumed sale into account when you are looking at what the split of the pension would be, so that both partners get a share of the capital value of the house but both partners also in most cases get a share of the fund that is going to give them an income stream in retirement.
  (Mr Denham)  I can understand and appreciate the point you are making, but I would return to a basic point of principle, that in drafting the legislation we have tried to bring pensions into line with the way in which matrimonial assets are dealt with within family law at present. In that sense the pension is treated and under this is effectively treated in an equivalent way to somebody who has a large amount of money in realisable savings which might under the current law be offset against the value of a house. In that sense pension assets are perhaps less easily realisable because you cannot call on them until you retire and money that you may have in TESSAs or PEPs or unit trusts or whatever, where, although in principle what you have suggested one might say should be brought into account, it would not normally be brought into account largely because of the basis of the clean break settlement. I am getting slightly out of my ministerial responsibilities but in going through this area the trend in family law has to be to move away from arrangements which require another party to take further action 20 or perhaps 30 years in the future to realise assets and the principle has very much been to move right across family law to splitting assets cleanly so that two individuals are tied to each other as little as possible beyond that settlement. The sort of proposal that you put forward which could be applied irrespective of pension sharing if there were other financial assets around would be a huge break with that. It needs to be understood that we have not sought to use this legislation as a way of re-writing family law. I would say as a matter of principle that if people want family law to be changed then we should address the issues of family law in the way the courts operate in divorce and not to treat pensions in divorce as a way of changing wider family law.

  12.  I understand that point. I would simply want to observe that I think there is a very real problem with the clean break principle where there are children, where there is not and should not be a clean break between parents and children and that will have financial implications that of course we totally accepted as a Government in the Child Support Act. I take your point about not using pension share to change family law.
  (Mr Denham)  The Child Support Act though is of course about support for children of a marriage and perhaps raises some different principles. I have I hope made the position reasonably clear about the way we have approached this legislation.

Chairman

  13.  I want to move on to the courts but before I do that I would not mind observing myself that although your original answer to Malcolm's question about the conflict between the two objectives is sufficient in terms of England and Wales, it is actually not in terms of Scotland. It is not as simple as you suggested it was because in Scotland, as I know for a certain fact because in a previous incarnation I did some divorces in Scottish courts, the assets are those judged to be acquired during the subsistence of the marriage existing at the point of the separation, but there is a working presumption in the Scottish courts that there should be an equal division of the matrimonial assets, and "equal" means 50 per cent. Therefore what you said about the English situation does not cover entirely what happens in Scotland. Will you be very careful to take that into account in terms of the consideration of this question because there are differences between the two jurisdictions?
  (Mr Denham)  Yes. First, there are differences, you are quite in saying, between the two jurisdictions. The legislation has been framed to bring the treatment of pensions into line with the treatment of matrimonial assets in the two jurisdictions.

  14.  You could make it 50 per cent. You could actually make it a mandatory, almost prescriptive, 50 per cent division of the pension assets in Scotland and do just what you have said: keep it running with the grain of what exists already. Have you thought about that?
  (Mr Denham)  Certainly the way the pension sharing would operate in Scotland is within that tradition about the division of assets, but certainly I have not understood the family law framework in Scotland as requiring the pension assets to be divided 50/50 because there is a wider settlement risk. The 50/50 division of assets as I understand it—and I stand to be corrected—applies to the assets as a whole.

  15.  That is true.
  (Mr Denham)  Not to each individual asset which is there. The application of a 50/50 split to the pension alone would therefore have knock-on implications for treatment of the other assets.

  16.  I do not doubt that. I am just suggesting to you that if you wanted to do that—the Government seem to have considered it and moved away from that proposition—in Scotland you could do it and it would not make much of a difference. I agree that there is a discretion still in the courts, but I just want you to bear that in mind during the course of further consideration.
  (Mr Denham)  It is fair to say, Chairman, that we have not sought to go beyond the provisions which are in the family law jurisdictions in the different countries. That has been quite a principle.

Mr Wicks:  Last night in France both teams should have got one and a half goals each!

Chairman:  That is out of order. I will not have this insurrection from the ranks of my own colleagues on sensitive issues!

Mr Pond:  I thought the Chair was tetchy this morning!

Chairman

  17.  If in the fullness of time you did think that the balance was getting out of kilter—I am talking about a five or 10-year period—would you be prepared to monitor and even go as far as to have targets in your own mind about the balance that Malcolm alluded to as getting out of kilter—would the Government be concerned about that and think to take corrective action at a later stage?
  (Mr Denham)  There are a number of things. First, we will want to monitor the effectiveness of the legislation and its practical impact and we are already monitoring the impact of the earmarking and attachment provisions that were brought in under the last Pensions Act to see how those are working. Secondly, as you probably know, the Lord Chancellor has asked his advisory group on ancillary relief to look at some of these issues on the question of prenuptial agreements and how those might work and, where there is no such agreement, a presumption that matrimonial property might be split equally between parties and that is an issue which has been opened up for discussion in England and Wales. What I do recognise is that potentially family law can evolve over time in England and Wales and in Scotland and it will be necessary for pension sharing provisions to evolve with those changes of family law.

  18.  And of course cohabiting couples leads you back to Malcolm Wicks' original comment about poverty in old age for women. I guess the Government have not really looked at that at all.
  (Mr Denham)  I understand the Law Commission is considering in a wider sense the issue of cohabitation. Cohabiting couples are not currently recognised in law, either in terms of state pension benefits or in terms of occupational pension provision, although occupational schemes are free to make discretionary arrangements for cohabiting couples and others who are financially dependent on those schemes, but that is not laid down in law. Again, a constraint perhaps but a right one in drafting this legislation, is that we have not sought to use this legislation to establish new bits of family law, for example those we need to cover cohabiting couples. That must come from a much wider Government consideration about policy in that area.

Chairman:  That has been a very useful discussion. We have taken a long time on that but I think you will have got the drift that that whole question which Malcolm raised initially is something that is very much in our minds.

Mr Goggins

  19.  My question leads on from one of the Chairman's questions about differences between Scotland and England and Wales. It is not just the way that the assets are split; it is also the period of time over which the assets are measured and clearly there are differences there between what happens in Scotland and what happens in England and Wales. In Scotland as I understand it is the period of the marriage which is the relevant factor. In England and Wales it is the total value of the asset. I just wondered what observations you have got on that and indeed whether there is any consideration of extending the provisions in Scotland into the law in England and Wales.
  (Mr Denham)  The first observation is that you are right: there is a difference in treatment. The second is that I think a change in that is something that would have to be led by the Lord Chancellor's Department. As I have said, he has indicated that he has asked an advisory group to look at these issues and how these matters are dealt with in England and Wales. It is certainly quite a question for me to speculate on there being any changes but if there were any changes to come in that area, then our intention at the moment would be that those would be reflected in the pension sharing arrangements. The pension sharing arrangements reflect what exists at the moment. If there were to be a different treatment of matrimonial assets in the future, to speculate on that, then you would expect pension sharing logically to fall into the same pattern of treatment.


 
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