Examination of witnesses (Question 40
- 59)
WEDNESDAY 24 JUNE 1998
MR JOHN
DENHAM, MP,
MR CHRISTOPHER
EVANS and MR
WILLIAM ARNOLD
40. Can I pick you up on something you said
earlier about the under-funded schemes. How would a spouse actually
know that a scheme is under-funded? Is there a duty to state that?
(Mr Denham) It would be disclosed as part of the
disclosure of information procedures leading up to the court settlement.
41. And it would have to be?
(Mr Denham) Certainly that is my understanding
because schemes would need to advise as part of the process if
there would be difficulties in realising the assets which are
involved.
42. Coming back to the cash equivalent transfer
value, I accept very much what you say in terms of coming up with
a better alternative and I think it probably is the best way at
the moment, but could there, nevertheless, be an argument made
to allow for some exceptions, for example, for policemen and those
in other public sector funded schemes?
(Mr Denham) I think it is important to understand
that there would still be scope for a divorcing spouse to go to
court to challenge the value that has been put on it, so although
we are prescribing this methodology here as the way to approach
it, if, in the case of a particular type of pension scheme, someone
wished to make a clear case that that actually gave them an unfair
valuation, for example, over discretionary benefits which we were
talking about earlier, then there would be scope to argue that
point, not in the overall valuation, but in terms of what percentage
share might be taken into account in the splitting of the pension
assets.
Ms Hewitt
43. I am puzzled and perhaps I am misunderstanding,
but on page 18 of the document, paragraph 27, it talks about the
Inland Revenue cap on the benefits that will be provided by an
occupational scheme and it says that the "rules which limit
the amount of benefits...will continue to apply to the pension
credit", which I take it is what is being transferred to
the former spouse, "as if the shared pension rights remain
with the scheme member. Therefore the scheme member will be able
to rebuild their rights within the existing benefit limit rules".
They will be very constrained in doing so if the pension credit
is still treated as part of their benefit. Is there something
wrong in that paragraph or am I misunderstanding it?
(Mr Denham) I think what you have said is the
right understanding of the position, whether the paragraph is
as clear as it might be, but, yes, there will be a constraint
on the ability to rebuild in principle because the former spouse's
benefit entitlement will be still taken into the calculation of
the benefit limits applying to the scheme member.
44. So if, for instance, somebody, the scheme
member, in a final salary scheme at the point of the divorce has
built up a sufficient pension entitlement to give him, let us
say, half of the final salary, that is split down the middle so
that each of them is going to get a quarter of the final salary,
but he cannot rebuild his pension rights to take him from a quarter
of final salary to two-thirds and he can only rebuild from a half
to two-thirds?
(Mr Denham) Yes, that is right, although there
may be other options available to him, for example, the Revenue
limits are different for somebody who is in a personal pension,
so one could envisage some circumstances in which that individual
may seek to transfer out of their occupational scheme to take
advantage of higher contribution limits which exist in personal
pensions. Chairman, this is actually fairly important.
Ms Hewitt: I think
I feel some aggrieved men coming on here.
Miss Kirkbride
45. Big time.
(Mr Denham) It is necessary, I think, to decide
whether a divorcing couple should be able to enjoy greater overall
tax benefits than a couple that remain together and there clearly
is an issue here about the potential cost to the Revenue. I might
say, Chairman, that the numerous possibilities that can happen
here are, I think, very important and it might be helpful for
the Committee if I were to provide you with a few worked examples
which illustrate the cases.
Chairman
46. That would be very helpful.
(Mr Denham) And it is worth, I think, saying that
we would expect that the number of cases where people were really
severely limited in rebuilding by these limits as opposed to by
their own ability to save would be very few, but clearly it is
possible. I would be more than happy to provide some worked examples.
Chairman: That is
very helpful because that is a very important point. I hear what
you say about people not being able to enhance suddenly values
using this as a new device. On the other hand, we are actually
trying to encourage people to make pension provision for longer-term
old age and we must resist Treasury constraints on some of this
stuff. I hope you are going to be quite robust at facing down
your Treasury colleagues if they are getting too niggly in the
way that they are proposing to approach some of this legislation.
Mr Wicks: But that
does need to be balanced with the point that the Minister was
making that presumably we do not want to make divorce more favourable
fiscally than marriage, otherwise you would get divorced and stay
living with your husband.
Chairman: We will
have this argument privately.
Mr Wicks: It is a
very serious point.
Chairman: Yes, but
your offer of a note is gratefully accepted.
Ms Stuart
47. We move on to company pension schemes.
The Bill foresees the creation of a new category of deferred pensions
within company pension schemes. Now, we already had this debate
in the 1995 Pensions Act about how the views of deferred pensioners
and current pensioners will be represented. Do you foresee any
way in which the interests of what probably is going to be largely
ex-wives can have a voice within the company pension schemes so
that their interests are represented other than just being a silent
new group?
(Mr Denham) It is fair to say that I have not
given any particular consideration to creating, as it were, a
fourth category of pension scheme members other than the active
members, the retired members and the deferred members, and that
would need some very careful thought indeed. Our intention is
that, broadly speaking, the rights of the former spouse within
a scheme would be the same as those of a deferred member with
the same rights to information, the internal disputes resolution
procedures and so on. It is something I have to consider, but
I think in terms of the complexity of the arrangements that it
would introduce for the scheme, I would have some reservations
about moving in that direction. I would also be a bit unclear,
given that both groups of people are people who have rights to
a pension scheme who are not working for the employer, why the
interests of those who happen to come into that position by being
a former spouse are materially different from those who came into
that position because they worked for the company for ten years,
so it is not immediately obvious why they form a separate category
of people with a separate set of interests, but certainly if the
Committee wants to consider that, it is not something I think
we have seen as necessary up to now.
48. I think it is useful to say that you
do not see them as a new group who would be entitled to the same
as any other deferred pensioner group. Clause 15 tells us that
the companies can have what is a reasonable charge for an internal
transfer. Do I take it that this is purely a subjective test of
reasonableness, what is reasonable within the company itself,
or are you bringing some objective element into that, given what
you said earlier about the tremendous difference between schemes?
(Mr Denham) I am grateful for the advice from
Mr Evans on my right-hand side.
Chairman
49. He can speak for himself if he wants
to.
(Mr Denham) No, I know the answer now!
50. So you want the credit! Okay.
(Mr Denham) If there is a supplementary question,
I will go back to Mr Evans. That would be subject to the internal
disputes resolution procedure which, by law under the Pensions
Act, schemes must have for challenging the way in which ultimately
trustees are taking these decisions.
Ms Stuart
51. That still does not answer my question,
I am afraid.
(Mr Denham) I think the answer in principle is
that we just do not legislate. Schemes do all sorts of things
internally which involve costs.
52. But it is quite significant because
is it subjective to that scheme, in which we case we accept that
there will be a tremendous variation, if this is all about fairness
and equity, or do we have a kind of benchmark arrangement for
saying that it should be above a certain percentage?
(Mr Denham) The principle, I think, is that schemes
do all sorts of things which we do not externally impose benchmarks
for charges on. We have systems of internal disputes resolution
and the ability to go ultimately to the Pensions Ombudsman to
complain about how schemes administer their operations and I believe
that, and I may be corrected on this, these issues may be covered
in the guidance notes which go to actuaries, but if they are not,
I think we can overstate the nature of any problem here by suggesting
that this particular aspect of the running costs of a scheme should
be subject to some external imposition of a fixed charge or a
benchmark when that is not actually the way that we tend to handle
the running costs of occupational schemes in general.
53. What worries me is that OPAS said to
me that they have no view on this, so if in the advisory service
they have no view on what is a fair and reasonable charge and
the industry keeps referring to reasonable charges, any criminal
lawyer can tell you that the big problem with reasonableness is
always whether it is subjective or objective, so I would have
thought we should have some kind of indication of where your starting
point is.
(Mr Denham) I will certainly give that greater
consideration, and I cannot speak for OPAS, but it may be that
OPAS do not have a view because they do not view this as a significant
area of concern. As I say, there is a balance to be struck in
all regulation of occupational pensions which are at the end of
the day a voluntary activity undertaken by employers. No employer
is required to provide an occupational scheme. We have evolved
a system of regulation based on the trusteeship of those schemes
and the oversight of those trustee schemes and some general principles
for internal resolution of disputes, the access of members to
information and rights to complain either through the scheme or
externally if people are dissatisfied with what is happening,
and in general we have not seen the need to intervene beyond that
within the scheme to say, "Well, you must do this".
Some areas are prescribed and other areas are not. I think I would
not close my mind to the issue, but I would need to be convinced
that the issue that you have raised about the cost of creating
a new member is likely to be such a significant problem that that
would need us to come in and say, "This is what the charge
should be". I would be reluctant to go down the business
of imposing what that charge should be in the absence of any evidence
that it is likely to be a problem.
54. In a sense you have answered what would
have been my final question referring to company schemes. I think
everybody would accept that you define a final salary occupational
scheme as the best scheme you can be in, but I think that there
is an argument which is sometimes brought up for saying yet again
that we are imposing more regulations, more burden, so is this
yet another nail in the coffin of occupational pension schemes?
(Mr Denham) I think my answer to that is no. We
have been working very, very closely with the pensions industry
throughout the preparation of this legislation and I think that
not only is the process that the Committee is undertaking quite
unique, I am not sure how many pieces of draft legislation have
had so much input from external groups prior to their getting
to this stage and, given the overwhelming consensus in the pensions
industry that this measure is necessary and given their close
involvement, I suspect we would have heard by now if they had
fundamental problems with what we are doing. I am sure there will
be points of detail on which they will come back and say, "You
have made this unnecessarily complicated" or "This is
too burdensome", or "There is a simpler way of achieving
that", and that is part of the aim of the consultation exercise,
but I really do not see this having anything other than an overall
beneficial effect on pension provision.
55. Can we go on to unfunded public sector
schemes. This is the group like policemen and teachers and one
of the arguments originally was that if we have pension splitting
on unfunded public sector schemes and allow the divorcing partner
who comes out of the scheme to take a lump sum, this would have
tremendous implications for the Treasury. Is it really fair in
a sense to, as could be argued, discriminate against that group
of spouses when we say, "Everybody else can get a lump sum,
but you can't and you have to stay within the scheme"?
(Mr Denham) It is not just unfunded public service
schemes, but there are also unfunded private sector schemes where
the judgment has been that in both cases it would create problems
by requiring expenditure to be brought forward, where there is
no fund to draw on at an early stage. Certainly the implications
for the Exchequer are quite significant and our estimate is that
although it is of course bringing forward public expenditure costs,
nonetheless, you are doing that by about £190 million a year
which is a substantial amount of money and one that we certainly
cannot ignore in drawing up these proposals. I think we can in
practice take some comfort from the fact that public sector schemes,
in terms of their benefits, are pretty good and I believe that
less than 2 per cent of early leavers of unfunded public sector
schemes actually exercise any right to transfer out of their schemes
and the vast majority of people stay in as deferred members, the
equivalent position to the former spouse. You can always think
of possible cases, but in general it is very difficult to see
how the former spouse would generally be disadvantaged by the
requirement to take up deferred membership of the unfunded public
sector scheme, but there is a simple truth that we cannot ignore
the Exchequer implications of doing the policy in a different
way.
56. Have you made an estimate of what the
Exchequer implications would be, given the working assumption
that it is around 50,000 divorcing couples per annum?
(Mr Denham) The figure I have is up to £190
million in the first year.
57. For starters, one of the disadvantages
I would have if I was in a public sector scheme as a just divorced
spouse who may have a new partner, but not wish to remarry, is
that I would not have the right to nominate.
(Mr Denham) There can be circumstances where people
would only have the benefits in that scheme, yes, that is right.
Chairman
58. If unfunded public sector schemes are
so good and you do not think many people leave them anyway, why
do you not just allow them the choice because it will not cost
£190 million because nobody will take up the option?
(Mr Denham) We have to be mindful of the potential
costs in doing it and that is a gamble on the future which is
difficult.
59. You are beginning to sound like a Treasury
minister!
(Mr Denham) Oh dear! I did not come here to be
insulted.
Chairman: I do not
know if that is a back-handed compliment or not.
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