Select Committee on Social Security Minutes of Evidence


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.


2   Not available at time of publication. Back

3   Not available at time of publication. Back


 
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