Memorandum submitted by
the National Association of Pension Funds (PS 12)
INTRODUCTION
1. The National Association of Pension Funds
(NAPF) welcomes the opportunity to give oral evidence to the Select
Committee about pension sharing on divorce. As the leading organisation
providing information and representation for those who operate
and advise occupational pension schemes, NAPF is keen to assist
the Government in framing legislation that is clear and workable,
fair to all parties and does not impose too onerous a burden on
scheme administrators and trustees. NAPF's 1,400 members include
most of the largest employers in the private and public sectors
as well as many medium and smaller organisations and most of the
leading UK providers of professional and related services to pension
funds. NAPF member schemes provide pensions for over 7 million
employees and 4 million people in retirement, and account for
more than £450 billion of pension fund assets.
2. NAPF has always supported the principle that
pension assets should be taken into account in financial settlements
on divorce even though this adds to the complexity of both the
divorce process and pension administration. We also support the
principle of a clean break for the divorcing couple. We, therefore,
welcome the pension sharing approach proposed by Government in
the consultation documents. However, in the time available since
publication of the documents it has not been possible to go through
the detailed legislation to see whether it achieves the policy
intention. We will be doing this over the coming weeks and commenting
on the detail in writing both to DSS and the Select Committee.
Consequently, the following paragraphs summarise our initial comments
and concerns. These may be increased or allayed as we study the
draft Bill.
THE LEGISLATION
3. The Process
NAPF welcomes the approach taken by Government
in developing the legislation. We believe that a genuine consultation
process, with the opportunity, as now, to comment on legislation
in draft, should result in better law.
4. The Balance
We are, however, concerned that the right balance
should be struck between primary legislation and regulation. In
the past, we have criticised the use of regulations because they
have been issued long after the passing of an Act, thus imposing
almost impossible deadlines on schemes to comply with their detailed
provisions. It seems to us that in the draft Pension Sharing Bill
there is a great deal of detail that could be more appropriately
contained in regulation. The complexity of pension sharing makes
it almost inevitable that certain aspects of the legislation will,
in practice, prove deficient; some statutory provisions will have
to be amended and the process will be much more difficult if the
amendments required further primary legislation.
5. Over-riding legislation
In order to implement pension sharing in the
way set out in the draft legislation, scheme rules will have to
be substantially re-written. This will be a time-consuming exercise,
particularly for those schemes with a complex benefit structure.
All pensions lawyers will be occupied with this task and it is
unlikely to be completed by April 2000. It is essential, therefore,
that the main legislative requirements are over-riding so that
trustees and administrators are able to give effect to pension
sharing orders, although under the rules of their scheme they
are not permitted to do so.
SIMPLICITY
6. Clean break and rebuilding pension rights
The provision of pensions by employers for their
employees has become complex and its administration expensive.
It is essential that pension sharing does not increase that complexity
any more than is absolutely necessary. If it does, the long term
effect could be a reduction in the number of occupational pension
schemes (and, particularly, final salary schemes) as employers
decide that the administrative difficulties are too great to warrant
their continuing. We will be looking closely at the detailed proposals
to identify areas that could be simplified. However, one such
area is immediately apparent to us, as explained below.
7. NAPF has long advocated the principle of
a clean break in divorce cases and, consequently, we have supported
pension sharing in preference to earmarking. We are disappointed,
therefore, that the Government's stated policy intention is not
carried through into every aspect of the new arrangements. Specifically,
the inability of the member to rebuild his/her rights following
a pension share is contrary to the principle of separate taxation
and does not achieve a "clean break". For example,
— whilst it is right that the member
should be fully informed of the impact of pension sharing on his/her
pension benefits, each benefit statement will include a deduction
for a "negative deferred pension" and will be a reminder
of the failed marriage;
— the pension at retirement will be
reduced, in some cases to a trivial amount because the member's
age at divorce has meant that there was almost no opportunity
to increase his or her benefits even to the pre-divorce Revenue
limit;
— dependants' pensions are normally
based on a percentage of the member's pension so that the surviving
second spouse of a divorced member is likely to end up with a
very small widow(er)'s pension.
8. It seems to us essential that the Government's
stated policy intention to introduce pension sharing and achieve
a clean break for divorcing couples can only be properly realised
if, following the pension share, the member is allowed to rebuild
his/her rights fully, excluding the proportion allocated to the
former spouse. Members should, at least, be allowed to pay contributions
up to the maximum (15 per cent) level, regardless of benefit limits,
to rebuild their pensions. The Exchequer will be required to defer
receipt of taxation until the pension is received but this is
the price Government must be willing to pay to achieve its policy
objective and avoid creating a new generation of poor dependants
of divorced members.
9. There would be a second benefit if the present
policy were to be changed. The need to regard the member as still
being entitled to the share of the pension allocated to the former
spouse, so as to prohibit rebuilding, adds to the administrative
complexity. It this requirement was removed. the administration
would be simplified and the clean break principle would be fully
achieved.
10. Training and communication
Unless family lawyers are properly trained in
pensions issues generally and pension sharing in particular they
will be unable to explain the principles to the divorcing couple.
We see this as vital if disputes are to be avoided between schemes,
the member and the former spouse, potentially years after the
divorce, when benefits come into payment. We also believe that
the couple should be offered FDA-regulated financial advice and
that the advisers themselves should be trained in pension sharing.
The NAPF has considerable experience in pensions training and
would be willing to participate in training initiatives to help
achieve this.
LIABILITY AND
DISCHARGES
11. Trustees already have onerous responsibilities.
These will be increased with the introduction of pension sharing.
The respective duties of trustees, in-house pension managers,
third party administrators and annuity providers must be made
absolutely clear in the legislation. The Courts and family lawyers
must be left in no doubt about whom to contact for information
and who is responsible for implementation of the order.
12. Clarity of responsibility should ensure
that pension sharing is properly implemented in accordance with
an order. Once this has been done, trustees and/or administrators
should be fully discharged from any further liability. We have
a particular concern about the default procedure where trustees
decide to purchase an insurance policy or annuity contract for
the former spouse without consent.
PENSION CREDITS:
SCHEME MEMBERSHIP
OPTION
13. NAPF supports the principle of pension sharing
and we have said that we will recommend to our members that they
should offer former spouses an internal scheme membership option,
provided the detailed arrangements are practicable. NAPF is anxious
to ensure that it is easy for schemes to offer internal membership
and that they are not dissuaded from doing so by unnecessary complexity
or prescription. Schemes who make this option available should
be able to determine the nature of the benefits to be provided
for the former spouse, subject, of course, to these always being
equal in value to the cash equivalent transfer value. We understand
that this is the intention but we are not yet certain that this
is reflected in the draft legislation.
COSTS AND
TIME SCALES
14. We believe that the draft legislation is
not sufficiently clear about the methods by which schemes will
be able to recover their administration costs and how these have
to be explained to the parties. We note that schemes may recover
"reasonable costs". These costs will vary significantly
from scheme to scheme depending on its size, its administrative
arrangements, the complexity of the benefit structure and the
incidence of divorce amongst the membership. Consequently, it
would be inappropriate for Government to publish a recommended
scale of "reasonable costs".
15. The four-month period proposed for implementing
pension sharing is likely to cause difficulty for some schemes
since, generally, a recalculation of the cash equivalent is required
when the order is received. Although cash equivalents are calculated
on standard bases and scheme administrators are used to the concept,
in small schemes they are frequently referred individually to
the scheme actuary. A further delay on the part of the former
spouse in providing the scheme with relevant information about
the destination of the cash equivalent could cause the scheme
to miss the deadline. We would prefer the clock to start ticking
after the expiry of the 21 day appeals period.
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