Select Committee on Social Security Minutes of Evidence


Examination of witnesses (Question 60 - 89)

WEDNESDAY 24 JUNE 1998

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

Miss Kirkbride

  60.  Has it ever been valued, the unfunded public sector scheme, when the divorcing spouse takes it away? What value has been put on them and how has it been decided what the benefits were?
  (Mr Denham)  The usual cash equivalent valuation would be applied to the rights of the member of the scheme in order then for that valuation to go to the settlement in court and then to be divided in proportion.

  61.  I want to take you on to a few things which just cross my mind. When you said earlier that you could challenge the valuation given to the divorcing spouse by the pension fund, the benefits of that fund, is that challenge one which could be applied against the pension fund as being too mean or is it a part of the sharing of the property and an argument about that?
  (Mr Denham)  I am grateful to you for raising that. In terms of the pension sharing on divorce, it would be the ability to argue about the percentage that is applied to the valuation. If members of the scheme have complaints about the valuation process, that would not be dealt with by the family law court, as I understand it, but through the internal disputes resolution procedure, going to the Ombudsman and so on if they were unhappy about how the scheme had valued it, so the reference I made earlier was to the ability to argue about the percentage as it applied to the valuation.

  62.  The other thing that crosses my mind again when we are talking about tax treatment, presumably although men will not be able to completely rebuild their contributions, you could have a situation in which, as it is normally the wife who takes the pension, she could get her full rights by the tax system in addition to his, but he cannot. Has that been addressed?
  (Mr Denham)  There is a consequence which comes of the tax treatments being proposed in the Bill that he is likely to be more limited in his ability to rebuild, although he is likely to have a much bigger pension than she is, yes.

  63.  But that is something that you have already agreed and acknowledged?
  (Mr Denham)  We have acknowledged that, yes, and we will cover that point in the examples that I said I would send to the Committee.

  64.  And then the other thing that crossed my mind about the problems that arise due to the tax system is how much thought have you given to the possibility that it may suit some couples, if there are great charges on pensions, to actually divorce when they reach retirement because you get two separate lots of tax relief?
  (Mr Denham)  I recall that this was heavily debated in the last Parliament when there were questions about whether pension sharing should go ahead and I think the view which emerged, which was certainly mine, was that it was actually extremely unlikely that there would be a significant behavioural change of that sort. There is, as Mr Wicks said earlier on, a balance to be struck in the general treatment of pension sharing to avoid people being able to maximise very significantly their pension advantages, so I am sceptical about the number of people who, once retired, would divorce solely to enable them to reduce their pension income down to take advantage of two personal allowances. One has to say I think that would be possible, as I understand it, but I am sceptical that people would divorce for that reason.

  65.  But the moral climate having changed and bearing in mind what the personal allowances are around for, that means you get it tax free, plus a 10p tax bracket to bring it in, you could be talking about very small amounts of money that you would then have to pay tax on for a reasonable pension on which a couple would be living in addition to their state pension.
  (Mr Denham)  It is a matter on which everybody is going to have to make their own judgment. My own judgment is that you are not going to see significant behavioural changes of that sort from this legislation because there is, I believe, though it is not my field, very little evidence that people enter into financial calculations when they go into a divorce at present, although it can have big implications for the two parties.

  66.  Moving on to SERPS, can we be clear about what the position is with regard to SERPS and how it will operate under the pension arrangements in the Bill?
  (Mr Denham)  The SERPS will be split and the principle is the same as the other.

  67.  So no earmarking?
  (Mr Denham)  It will be split.[2]

  68.  On the computerisation, given that it is so complicated, I would not even want to begin to try and ask anything in too great a detail, but are you confident that you can do it on the new computer?
  (Mr Denham)  Yes, our discussions with Andersens who are the main contractor on the NIRS2 computer system, they know the sort of timescales on which we would like to work and I am sure that we will have a system which is capable of delivering this, if we can get the legislative time, by April 2000.

  69.  You are confident that it will?
  (Mr Denham)  Certainly sitting here today, I have no grounds to believe that it will not.

  70.  And it will all be in place because the problem of valuing SERPS is so much greater than all the other types of pensions and that too has been worked through?
  (Mr Denham)  Certainly we have been working towards the aspiration of having this in place by April 2000 and that has not just meant that the work has been going on on the legislative side, but on the managerial and administration side as well, so yes.

  71.  And bearing in mind the wider context of the Pensions Review, how much have you been worrying about the wider Pensions Review being compatible with the pension-splitting arrangements if indeed SERPS continues under it?
  (Mr Denham)  I think it is clear that if there are changes in pensions policy as a result of the review, just as pension sharing reflects current pensions provision, pension sharing will need to evolve to reflect those changes in future.

Ms Stuart

  72.  I understand that the Government will not make a charge for the administration of splitting SERPS to the parties. Is that so?
  (Mr Denham)  Yes, I am assured that is the case. There will be no profiteering here!

  73.  I remember tabling a question not long back asking how much it would cost if you sent every person an annual pensions entitlement statement and the standard answer which came back was that it would be £3.50 a head and it was £20 million or was it billion—anyway it was enormous.
  (Mr Denham)  It was a lot of money.

  74.  So what is your estimate of how much it would actually cost you or is that such a marginal cost that you think it could be absorbed?
  (Mr Denham)  I have seen an estimate, but I cannot recall it and, if I might, perhaps I could write to the Committee to give you a direct answer on that. It is certainly something which we have looked at, but I could not off the top of my head tell you what the answer was.

  75.  I do not want to miss this opportunity because I have been approached by people who thought that given this issue of helping women in retirement who have not built up their pension rights and whether SERPS could be used in some way to supplement that, could you just make it clear that all this has no potential of any retrospective legislation and that within the whole draft Bill there is nothing which has an element of retrospection about it?
  (Mr Denham)  The provisions will come into place when the Act comes into force. There is retrospection in the sense that it will apply to pension rights accrued up until that point, some of which will clearly already have been accrued today, so in a sense when the legislation comes into force, somebody entering into the divorce process will then look backwards over the working life or the period of the marriage, but there will be no retrospection provisions for revisiting previous cases.

Chairman:  I want just now to spend a few minutes talking about the modernisation process itself, but before we do that, I wonder if we could just spend a moment looking at how this potential legislative change might affect marriage and remarriage rates and I know that Malcolm is particularly interested in this.

Mr Wicks

  76.  It is one of these behavioural things again and it relates to the issue of co-habitation. I acknowledge that people get married and remarried for all sorts of reasons and the actuary is not usually present, but I think there is potentially a serious point here, that we know that in recent years marriage rates have declined and we should not exaggerate that trend, but there has been a decline, and, as I remember from my demography a few years ago, remarriage rates have particularly declined. Now, is it not possible that in future, let us take remarriage, and with large numbers of divorces, there is a lot of re-partnering going on, which I think is now the expression, and a certain number of remarriages, but particularly from a man's point of view, a man who has had a divorce and lost a chunk of his pension fund, but settles down again with another woman, is it not likely that this will affect his decision, and it might affect her decision as well of course, about whether to contemplate a second marriage? Given that, as I say, there are a lot of co-habitations now following divorces, and, as I remember, rather fewer remarriages, is there not a chance that your policy has an impact on that kind of behaviour which could lead to fewer women in the future having access to a decent pension in old age when the second relationship breaks down, as they often do?
  (Mr Denham)  I think it is actually very difficult to predict any behavioural changes that might come from these measures. I, therefore, am quite reluctant to say, "No, that could not possibly happen", or "That would certainly happen". All I would say at the moment is that I am not aware of any evidence that suggests that pension rights are a major factor in determining whether people get married or whether they get divorced. Whether that will evolve in the future, I do not know, but I think the safest assumption to make is that this sort of measure will not lead to a significant behavioural change and I do not see any great evidence to suggest that it would change significantly.

  77.  There is no answer to my question if you do not know, but can I ask that you consider seeking advice from some of the demographers both within government and maybe outside, people like John Haskey and the Government Statistical Service who might be able to look at some of the evidence about what motivates remarriages and so on and possibly give some advice both to yourself and to this Committee. I am not certain, but it seems to me to be a potentially interesting one because following one divorce and the person contemplating a remarriage, it is different for the man and the woman of course, but from the man's point of view, if you were that man's accountant or lawyer or if you were writing the family finance page on this in the Daily Telegraph or in the Guardian, what advice would you give? I think the answer is obvious. I am asking whether you can get that sort of informed note on this for us.
  (Mr Denham)  Well, it is very important to get this into perspective. If we were talking as though up until this point pensions had never featured in divorce and the courts had never in the last 20 years taken pensions into account, then I think the change would be much bigger, but we are talking about 20 years now of experience of divorces in which pensions are taken into account. The problem is they are not taken into account adequately and we do not have the right legal procedures to allow the former spouse to gain access to her fair share of the rights and that all makes a difference clearly, otherwise we would not be doing it, but it is not as though something brand new has come along and up until now a man's pension rights were treated as his and his alone and had no impact in the divorce case and then suddenly we are bringing about a revolutionary change which must mean men are going to look at the whole business totally differently, so I am a little bit sceptical that we may be really overstating the impact.

  78.  Well, so am I, John, but I put it to you that over those 20 years, we have seen the decline in first marriage rates and second marriage rates and the rise of co-habitation, particularly co-habitation following first divorces. Now, that is a correlation and I am not saying there is a causal relationship, but I think although it is very difficult territory, it would be unwise not at least to raise the possibility in the future that that may make an impact.
  (Mr Denham)  If the Select Committee wanted to look at it and express its views on it, I think we would find that very interesting, but we have not ourselves been able to see any evidence that there is, for example, a correlation between the introduction of pensions into the divorce process in the early 1970s and the failure of the divorcing couple to remarry and choosing to co-habit, but if there is, I am sure we would be interested to see it.

Chairman

  79.  To support the point Malcolm has made, I think that pensions in my day when I was doing divorces were ancillary, rather a secondary issue and they certainly will not be that in the future.
  (Mr Denham)  But there has been some change already in the Pensions Act and the issues around the Pensions Act which, I think, did lead not just to some, I think, inadequate changes in the law, but much greater education amongst solicitors dealing perhaps with family law so that they were much more aware of it, although I do not think any of us would be sanguine about saying that pensions are now always properly taken into account even under the existing law. The pensions and divorce study that the Department published in 1996, I believe, actually showed quite a remarkable disparity between the proportion of solicitors who said that the pension had been taken fully into account and the number of former spouses who simply thought that it had not been, so the level of understanding in the process was not as clear as it should be and I think it should be much better as a result of this.

  80.  But I think we may be reflecting on some of the issues Malcolm has raised. Could we spend the last ten minutes just looking at the process of the pre-legislative scrutiny and I want to ask Patricia Hewitt if she will lead that discussion, but could you just start by telling us a wee bit about the timetable? Are we up to speed and are you reasonably confident that we are able to do all of this in time to get a report that will be helpful and available at the same time as the legislation actually starts its legislative passage?
  (Mr Denham)  I think we are, and we cannot preempt the Queen's Speech, as you will understand, but I think that if we were to be successful in the Queen's Speech, my understanding of your timetable at the moment is that it will enable us to gain value from the process.

Ms Hewitt

  81.  I think we all were very pleased by the Government's decision to introduce this new pre-legislative scrutiny using select committees and we were very pleased to be chosen as a pilot project for this. What would make this process a success for you or indeed what would make it a failure? How are you going to evaluate the success of this process in contributing to the Pension Sharing Bill?
  (Mr Denham)  I think I would put it in a number of ways. From what I have seen of the legislative process both in opposition and briefly this year as a Minister, many of the types of discussions which we have had this morning, not about perhaps the fundamental principles, but the detailed choices, only really arise with other Members of Parliament once you are in standing committee. When you are in standing committee, not only does it become a sort of macho thing that any acceptance of amendments is greeted by the Opposition as a U-turn or as a climb-down or something of that sort, but you are actually up against really very serious legislative timetable pressures and actually taking something away for another look and still delivering to the timetable of the House is difficult. So what I think would make this a successful process for me, whether the process leads to change or to confirmation of what we are doing, is the ability to be talking through these issues and anticipating those types of debates well in advance so that if there is a need to change, we can do that. The second thing is I think the potential advantage of going into standing committee with many of these issues previously discussed, not with the select committee to resolve what the standing committee will do, but having had a good debate and the report and consideration of them, so that the time of the House can be spent effectively on the most contentious issues which perhaps will be points of principle between members of a standing committee. The third thing is that if the whole process, not just your own scrutiny, but the outside consultation, means that the legislation can work, then that is quite a big gain and we are already, I think it is referred to in the consultation paper, finding in the earmarking and attachment provisions that the information which goes from the court to the schemes is not necessarily everything the scheme needs to do, so the scheme then has to go back and try and sort the thing out, so everyone is wasting money. Now, if we could be sure about the arrangements we are putting in place for the information to go to the scheme at the right time and all the right information so it is a simple administrative exercise, it will be much more cost-effective for the divorcing couple, it will be better for the scheme and it will get credit from it, so if we can get the legislation right in practical terms, it will be an advance.

  82.  In terms of the timetable, I gather the Department is conducting its own consultation at the moment and we have asked, I do not know whether it is you or civil servants, but the Department to come back and give evidence to us in September. At our next evidence session with you, will we be able to be given a preview of the results of the Department's consultation?
  (Mr Denham)  It is something I would like to consider, but in principle I would want to share as much information with the Committee as possible. We will, for example, have, I think, some of the research results of the work on earmarking and attachment available for you for September. I would like to be as helpful as possible in this process and if we are beginning, which I cannot anticipate now, but if we are beginning to pick up areas where we think we need to rethink an approach, then I certainly want to be able to come to the Select Committee and say, "Forget what I told you in June. We are going to do it this way", and I think we would want to keep that process as open as possible.

  83.  Good, that is very helpful. Obviously we will consider when we have considered our process what recommendations, if any, we want to make in terms of the actual draft Bill. Can you give us any indication at this point of how you would wish to approach a response to our recommendations?
  (Mr Denham)  The formal process is that we would respond to the Select Committee in the normal way in the normal procedure. At the very least, if you were recommending something different from what we have put in front of you as draft legislation, we would want to consider that as part of the response and I think it would simply be a matter at this stage of looking at that very closely. It would provide us the opportunity to revisit what I described earlier as the finely-balanced judgments that we have made so far and clearly at the end of the day the Government will have to take the responsibility of whether we come to the Committee and say, "Well, we are grateful for the Select Committee's views, but nonetheless we are still persuaded by these arguments" or to say that we would want to change the legislation. I could not for you now work through the detailed timescales as to whether your report might require us to consider amendments to legislation which had been brought before the House or whether we could complete that process before the legislation had been brought in.

  84.  On that point, if you are successful in the bid for the Queen's Speech, do you have any indication of when the brief and the current draft Bill would go back to the parliamentary draftsman?
  (Mr Denham)  I think that would be premature, to be honest, given that we do not know exactly and I cannot anticipate the Queen's Speech and I certainly cannot anticipate the order of business in the Houses of Parliament.

  85.  Do you think that the Child Support Act would be different if it had gone through this process?
  (Mr Denham)  That sounds like a benignly simple question, but I suspect it is a leading question. I am sure that there is a great deal of legislation that would be better if it had been through this sort of process and I am just very grateful for the opportunity to be part of it this time around and hopefully between us we can show that it does make a difference to what comes out.

Ms Hewitt:  Very diplomatic. You should be in the Foreign Office!

Chairman

  86.  There are just a couple of supplementaries to that. The working documents that we have already been given access to are very, very helpful, and the primary legislation is all there in draft, but of course there is a lot of detail that will be left to the secondary legislation, orders in council and statutory instruments. Can we ask you to make sure that as much of the briefing material and working assumptions that will be put into those regulations will be part of and a continuing and ongoing part of the process as far as the consultation that we are going through in our report and the publication is concerned? Can we rely on you to give us as much as you possibly can even if it is only options? We understand that there are limits to what you can do, but it would be very helpful to us bearing in mind that this is a two-stage process too.
  (Mr Denham)  Yes, it is and I hope, Chairman, the Committee recognise that the notes on the draft clauses are very different in style and language from the notes on the draft clauses that some of us are used to and they do make a genuine attempt to explain that and also to indicate what we think we will be using regulation for at a much earlier stage in the process than we normally have. Again I would want to be able to consult on regulations and it is standard practice in the DSS to consult widely on pension scheme regulations in any case. We would need to look at the practicalities of bringing regulations formally back to the Committee, but I am certainly happy to say that I want to keep the process as open as is possible with you.

  87.  Absolutely. We must be careful we do not just completely subvert the proper legislative process. Are you making special arrangements with this piece of legislation, for example, with the Opposition spokesmen and teams that it might be available if they make requests? Would they get access to ministers and would you be able to be as open as you are with the Select Committee?
  (Mr Denham)  I am, as a Minister, trying to be as open to Opposition spokespeople to come and see me as they wish to do to talk through things. The documents here are published and we do see, I think, the Select Committee as the cross-party focus for the sort of detailed discussion that you are now undertaking.

  88.  Is there anything that you think at this stage that we should be looking at which would help you from the position that you are in at the moment? That might be something you want to reflect on, but if there is, I can tell you that I know that my colleagues would positively respond to any particular steer where you thought that we had some kind of unique way or special way of dealing with questions that you may be wrestling with behind the doors of the Department, so if there is anything now or anything in the future you think we could particularly assist with, we would be very pleased to hear about that.
  (Mr Denham)  The only two reflections that I would make as an immediate response to today's discussion is that I think that the process that was touched on at several points of working through what this would actually mean in practice at each stage, and we have talked about charges and administration and who has to send the information to the scheme and so on, I think it is useful to have a second view of how this will actually work if you are actually undergoing this experience of running a pension scheme because, to take the CSA analogy, that is actually where the focus, not on the principle, but what it is going to feel like is so important. I would suggest that for the Committee to form its own view, getting a clear understanding about what the purpose of this legislation is and how its pension policy purposes fit in to the family law procedures is very important. There is clearly a job of understanding there that we all need to take on.

  89.  Can I reinforce the invitation that we have extended to your officials that at any stage even for very brief periods of time during the course of our inquiry, if there is anything you want to come and clear up if you think we are going off the beaten track or if you want to come yourself, even just dropping into a session here, you would be very welcome to come for 15 or 20 minutes to explore a single question. That would be of assistance to us to understand that that is a possibility.
  (Mr Denham)  Thank you very much for that.

Chairman:  Finally, can I specifically ask you to say thank you to your own officials for being so well disposed to the Committee in making themselves available. We have had two very full briefings now and I must say that we are getting the impression that they are making every effort that they can to try and assist us in this difficult but very important process. We are very grateful for that and we want you to make that clear to them, if you will. Thank you for your time this morning. I think that the session has been very useful and it may well be the start of a new historic process in the way that we conduct legislation and people will look back to this very day and say that this was the point at which all things suddenly became sensible. Thank you very much.


2   Note by Witness: "The Government propose to enable SERPS to be shared on divorce. It will also remain possible for SERPS to be earmarked (though not attached) as now." Back


 
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