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Examination of witnesses (Questions 140 - 159)
WEDNESDAY 8 JULY 1998
MR PETER
MURRAY, MR
PETER THOMPSON and MRS
JANE MARSHALL
140. Just a final technical
question from me before we move on to the area of costs and charges
which we, as a Committee, are interested in, I looked with interest
at paragraph 5 of your evidence, in which you talk about the main
legislative requirements in this piece of legislation over-riding
what exists in the meantime. Could you just clarify what you meant
by that?
(Mr Murray) Perhaps before I go to Jane to deal
with that in more detail, we recognise, of course, that although
we very much support pension sharing it will mean more work for
our members. That is fine; we recognise we have a social responsibility
and we are anxious to discharge that. What we are very anxious
to avoid, though, is the pension fund and the trustees getting
embroiled in disputes. We would like to have a situation where
the orders which we receive from the courts are clear, where the
trustees have the power to discharge those orders, and having
discharged those orders they are not open to disputes either immediately
following the settlement or—worse still—20 years later
when one of the parties receives less pension than they were,
perhaps, erroneously hoping for. So that is one of our main areas
of concern, and many of the points in our submission are actually
addressed to that. Can I defer to my colleague here on the reason
why we believe legislation should be over-riding.
(Ms Marshall) I have been looking at the draft
Bill. From a practical viewpoint, one of the introductory parts
of the Bill makes it clear that the Government wants to make sure
that this is workable, practical and easy for everybody to operate
because it will be successful if it is all those things. Crucial
to the concept of the Bill is that if a pension share order is
made, or an agreement is made, a credit will be given to the former
spouse and the pension scheme member's pension will receive a
debit. Pension rights are governed by the rules of each particular
pension scheme. So, unless either the pension scheme rules are
amended or the legislation is over-riding then the member, conceivably,
could mount an argument that even though a pension share has been
made he, under his pension scheme rules, is still entitled to
the pension under the formula. So, it is simply a practical point
about how pension schemes—employers and trustees—will
need to modify their rules. Bear in mind that many pension schemes
have been undergoing a big round of changes anyway, because of
the Pensions Act, and we were concerned that schemes who were
late in amending rules, or something of that sort, could find
that they actually could not perform what the Bill was intending
they should do.
Ms Stuart
141. That is very useful, and I was interested,
Mr Murray, to hear you say that you did not want to get involved
in disputes—which I fully understand. One of the things
which has been concerning this Committee—and even when we
asked the learned judge we got no answer to this—is that
there has been a recent judgment in a case called Landau
which allowed trustees in bankruptcy access to self-employed pensions.
The Pensions Act excludes access to pensions for trustees in bankruptcy,
but what worries me is the potential that if we start to create
a new class of deferred members when we look at property rights,
is there a danger of pension rights being made accessible to trustees
in bankruptcy. Is that something you have given any thought to,
or looked into?
(Ms Marshall) We have not given thought to this
particular question, but we have been looking at a number of ways
in which pension disputes could arise, and the one you mention
is, clearly, one such. It is the nature, I think, of being a lawyer
that you tend to think of the problems, but that is the way it
is and so we have been looking ahead to potential problems. That
is why we have stressed the need for clarity and for the practical
consequences of it to be thought through, and why I have been
looking very carefully at how schemes will implement this. We
all understand the intention—NAPF is happy with the policy
intention, as Peter has just said—but it is the detailed
implementation where we do not think it would be in anybody's
interests, either the member, the former spouse or the scheme,
for there to be test cases and protracted disputes on something
which actually should be—and this is the purpose of the
consultation process—easy to operate and, therefore, successful
because it is easy to operate.
Chairman: Can we turn
to costs and charges? Could I ask Chris Pond to ask a few questions
in that area.
Mr Pond
142. In your very useful evidence, under
the section on "Simplicity", paragraph 8, you say: "It
seems to us essential that the Government stated policy intention
to introduce pension sharing and achieve a clean break for divorcing
couples can only be properly realised if, following pension share,
the member is allowed to rebuild his/her rights fully, excluding
the proportion allocated to the former spouse." You go on
to say that even if members were allowed to rebuild to the maximum
15 per cent level there would be a small cost to the Exchequer.
Do you have any estimates of what that cost might be?
(Mr Murray) No. I think the short answer to that
is we do not, but I would like to pick up on that, because that
is one of the major concerns that we have. Necessarily, a pension
share order will reduce the pension of the member. However, we
believe that some people have under-estimated the extent to which
the member's eventual pension will be reduced and have over-estimated
the scope within Inland Revenue rules, as amended by this proposed
Bill, to rebuild. If I can give you a very simple example: say
we have someone who enters a scheme at age 20 (it is a typical
scheme, 1/60 for each year of service) and, also, coincidentally,
marries at 20. He is divorced at age 40, in England, with a 50/50
pension settlement; he remarries immediately and divorces again
at the age of 55 with a 50/50 settlement (because, as I think
we all know, there is a greater probability of a second marriage
failing than a first one). The individual, had he or she not been
divorced, would have received a pension of two-thirds of the final
salary. If domiciled in England, after two divorces, the employee
would receive 17.5/60—in other words, just over a quarter.
They would have lost most of their pension, they would have 43.75
per cent of their original target pension. If domiciled in Scotland,
the employee would receive 22.5/60, or 56 per cent, of the target
pension. Under the example which I have given, the individual
would have absolutely no scope, under Inland Revenue rules, which
took account of the negative deferred pension which this former
spouse would have, to rebuild at all—unless, of course,
he had pay which was not pensionable. (In some cases not all pay
is pensionable.) So to the extent that there was pay over and
above pensionable pay, then there would be some scope for rebuilding.
I give that example to illustrate the fact that deducting the
negative deferred pension from the member, in our view, makes
it very difficult for that member to rebuild their rights. On
the other side, we could easily have a situation where we have
a former spouse who is already reasonably well provided for with
their pension, and they could actually receive a pension which
was well in excess of Inland Revenue limits. Our main concern
is that one effect of this measure, if pension rebuilding is not
allowed, is that there will be a number of people ending up with
very poor pensions, who might possibly end up a burden on the
state. So that is one major concern we have.
143. Is not one of the difficulties with
the rather chilling example you have just given us that it does
not take account of salary increases over the life-cycle described?
(Mr Murray) I think there are a number of other
circumstances which would provide a bit more headroom, but I have
taken a simple example in order to produce the figures. The main
reason why there might be a little bit more headroom would be
that many people do not serve 40 years in their pension schemes,
and therefore there is a bit more headroom there. In addition,
of course, there is the issue of salary increases as well. The
point I am trying to make is not that there will be no scope for
rebuilding pension (although there is no scope in this particular
case) but that the scope for rebuilding is very much less than
I think most people realise.
144. I think we have to say, though, that
to make an assumption that there would be no salary increase over
that period of 35 years is, perhaps, a little unrealistic.
(Mr Murray) No real salary increase, yes.
145. Can I just put it to you again that
given the many eminent actuaries, including Mr Thompson sitting
next to you, you have in your membership and, no doubt, involved
in NAPF, is it not possible to come up with an estimate of what
the likely Exchequer cost would be of your proposal, and, perhaps,
allowing for rebuilding by the member?[2]
(Mr Murray) We would be happy to
take that away and look at it, but I think people in the Treasury,
with the assistance of the Government Actuary's Department, are
likely to have much more access to the kind of figures which would
be needed in order to enable that calculation to be done. Let
me make it clear that our proposal is not just that you should
disregard the negative deferred pension of the former spouse,
but that the negative deferred pension of the former spouse should
be taken into account in calculating the Inland Revenue limits
for the former spouse. We want to see the Inland Revenue gets
their pound of flesh, but we would like to see that divided more
equitably.
146. Jane Marshall mentioned the 1995 Pensions
Act which, obviously, did impose additional compliance costs on
the funds. To what extent is it likely that those additional compliance
costs will encourage more employers to close existing final salary/defined
benefit schemes and offer in future only money purchase or defined
contribution schemes? Is there a danger there?
(Mr Murray) Clearly there is a danger. The occupational
pensions movement is in a very delicate state at present, and
there is a significant movement away from final salary schemes
towards money purchase schemes, which not only puts the investment
risk on the individual but, typically, of course, companies contribute
at a substantially lower level to money purchase pension schemes.
Therefore, the individual will end up, normally, with a lower
benefit. So one then has to try and put that in context. Our view
is that provided these measures are made simple to operate and
we avoid—and we particularly try and avoid—pension
scheme trustees being embroiled in disputes, and provided pension
schemes are allowed to charge for the cost of doing this administrative
work, then we believe that the effects will be very limited. There
are three important provisos there.
147. One of those was that schemes are allowed
to make charges for the administrative costs. Is it not the case
that at the moment schemes are obliged by law to provide, without
charge, first of all the benefit statements and the cash equivalent
transfer value quotation? I think it is true to say that very
few schemes include charges for accepting transfers in.
(Mr Murray) Yes.
148. Therefore, why should schemes need
to make charges for the administrative costs of processing pension
sharing on divorce?
(Mr Murray) Can I just start off by saying that
I do not believe that all schemes will charge. I think schemes
which use third-party administrators—and, therefore, receive
a bill for each transaction—will be more likely to want
to charge than those with in-house administration of its own.
There are, clearly, potentially, significant extra costs involved
in setting up systems to handle pension sharing as it is proposed
to be implemented in this Bill. Where the spouse remains in the
scheme—and we would certainly encourage our members to offer
scheme membership to the former spouse—then you are taking
on the cost of an extra member who will be with you for 20 years
and you will have to pay his or her pension for a period. So I
think we are looking at costs which are significantly higher than
the costs that would be involved in any of the items which you
have mentioned. We would not envisage schemes charging for the
original CETV quotation, but it is really for the administration
involved in handling the alteration of the member's pension, on
the one hand, and setting up a separate pension—or, indeed,
a separate transfer value—for the spouse that we would be
looking for the ability to charge.
149. Would the National Association consider
issuing guidance, or a scale of charges, to members?
(Mr Murray) Yes, we would be happy to do that
once we have more information in the regulations and so on. We
have done this sort of thing in the past and we would be very
happy to do that here. If I can mention one other related item,
one observation we would make is that we believe that the set-up
costs—the costs of setting up systems—to implement
this measure is likely to be very much higher than the £5
million which is in the compliance costs assessment. Again, in
the absence of detail it is difficult to make accurate estimates,
but I have asked my own systems people what it would cost us to
change the railways pension scheme system in order to implement
this, and the cost of setting up systems to do this, they believe,
would be not less than £100,000. That is just for our scheme.
So I think we are looking at very much larger costs.
150. Would it be possible to ask your Association,
therefore, to give us your estimate of what the across-the-board
costs might be?[3]
(Mr Murray) Yes, we would be happy
to do that.
Ms Hewitt
151. Could I come back to this issue of
the pension fund member trying to rebuild pension contributions
after pension splitting, and the example you gave? I suspect part
of the Treasury's concern, as well as the possible costs of tax
relief, has to do with equity between the individual who stays
married and the individual who gets divorced. In the case of the
example you gave, two-thirds of final salary is presumably designed
to look after the individual and the spouse (and, indeed, subsequently,
a widow or widower), but this gentleman has made provision not
only for himself—albeit inadequately—but for two former
wives. What is the case for saying that across his lifetime he
should get more tax relief than somebody who has not divorced—in
this case not just once but twice?
(Mr Murray) I think there are two points that
we would make here. First of all, in our view, once a couple has
divorced they are not a couple any more and, therefore, we see
this concept of subtracting from the member's Inland Revenue limits
the negative deferred pension as being, really, a rather illogical
concept. Also, if we compare the situation of a couple who have
lived together with a couple who have married and divorced, why
should a couple who have married and divorced—particularly
an individual—have less favourable tax treatment than people
who have merely lived together without marriage. We just feel
that it is a rather illogical way of looking at it. Our major
concern, as people who are trying to ensure that individuals have
properly provided for their futures—and, indeed, the futures
of their second or third family for that matter—is that
divorce is a financially damaging process and we would like to
ensure that the damage could be mitigated by people making additional
voluntary contributions to try and put themselves back a little
bit more where they would have been if this had not happened.
152. Just so that I am absolutely clear
on this, what you are proposing is the contributions limit for
tax relief of 15 per cent would remain in place, and the benefit
limit of two-thirds would remain in place but for the individual
scheme member, not taking into account the bit that had been subtracted.
(Mr Murray) That is right.
Ms Stuart
153. Can I come back to the costs element.
I confess to be highly suspicious when I get this pleading that
"It is terribly difficult and will cost us a lot of money".
Could you give me some clear indication why an ex-spouse would
be any different from the way you now treat someone who has left
the scheme and is a deferred member?
(Mr Murray) It is not the ex-spouse in isolation
we are talking about, we are talking about setting up a system
which will change the member's benefit, will keep records of what
the negative deferred pension is (so that is one aspect) and then,
secondly, you are then introducing, where there was one member
before, a second member. It costs more to run two members than
it does one member. So the effect of the divorce is, if the ex-spouse
remains, that you are looking after two members, not one.
154. It is quite a marginal cost, I think,
at the end of the day. Going to your own scheme, you said you
anticipated extra costs of about £100,000.
(Mr Murray) That is just for setting up the systems.
155. Which is a one-off cost.
(Mr Murray) Yes.
156. Can you tell me how that is, in relation
to your overall administrative costs? Also, most IT systems, at
the end of the day, have a lifetime of about seven years and then
people go back and need to re-do them anyway. So you probably
would be in a cycle—given that you have got a few years
of running—where you would be looking at these schemes again
anyway, and the true cost of this marginal cost is probably much
smaller than you indicate.
(Mr Murray) I have quoted the £100,000, not
in the context of our overall IT spend (which is about £1
million a year) but to try and illustrate the point that because
it will cost one scheme £100,000 to change their systems
then, it seems to me, that the figure of £5 million—which
is the set-up costs for all schemes—is likely to be an under-estimate.
That is the context.
157. You still have not explained how the
£100,000 arises.
(Mr Murray) The £100,000 arises because we
have to reprogramme our computer systems in order to alter the
calculation of members' benefits to deduct from them this negative
deferred pension, and, also, to take a transfer in from someone
who is not an employee and set up a slightly different deferred
pensioner's record for that individual.
158. But given that you continuously make
changes to your systems anyway, as tax regulations change, I think
there is a tendency to over-emphasise that. Coming back to your
own scheme, have you done an assessment of how many new members
you would anticipate having within one year?
(Mr Murray) I think the short answer to that is
no. We have only recently seen the paper here which assumes, I
think, 50,000 pension splits a year. Clearly, we will not get
very many—probably 50 to 100 a year.
159. Which means you will not even notice
the marginal cost of extra members.
(Mr Murray) The point I am trying to make is this:
I very much doubt if my scheme will actually make a charge, but
there will be schemes —typically, small schemes—where,
if something like this happens to them, they will have to go outside
for resources to actually do the calculations, and the costs may
be significant in the context of a small scheme. I do not want
to commit myself at this stage but I do not believe we will charge
for this, and I think quite large numbers of schemes will not
make a charge, but what I am saying is that some schemes will
find this difficult to do, they will incur costs and they may
wish to charge. It seems to me it is only reasonably equitable
that they should.
(Mr Thompson) May I add a comment? My firm, amongst
other things, operates third-party administration for a large
number of pension schemes, typically medium size to smaller pension
schemes. Typically we charge our clients for this work by a fee
related to the movement; so we charge them so many pounds for
someone leaving service, so many pounds for setting up a new pensioner,
and so on. It follows from that that we shall charge a fixed amount,
but we do not know what it will be, for handling a pension share
on a divorce. That cost will be passed back to the client as part
of our administrative charge for the work. It is likely, I think,
that some of our clients will say "If the company or the
employer or the pension scheme normally bears the administrative
costs, we do not really see why we should bear the costs arising
out of a member's divorce, and we would prefer to pass those on
to the member". So I think those sort of cases are the ones
where the cost is more likely to be passed on, where it is specifically
identifiable. "We have dealt with the pension share for member
X, it has cost this amount", and I think our clients will,
in a lot of cases, be looking to pass that on. We do not see why
they should bear it.
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