Memorandum submitted by
the Association of British Insurers (PS 11)
1. INTRODUCTION
1.1 The Association of British Insurers (ABI)
supports the principle of pension sharing, which is about fairness
and about the narrowing of the pension provision gap between men
and women. Currently it is not legally possible to share a pension
on divorce. The proposed legislation addresses this situation.
A convenient and workable solution needs to be found to recognise
the value at divorce of pension rights and include that agreed
value in any share of property. Whilst facilitating the clean
break principle, unnecessary changes to existing divorce and pensions
principles need to be avoided.
1.2 Accordingly, ABI has worked extensively
with DSS, through representation on both their consultation panel
and technical consultation group, to develop a framework to introduce
a fair and workable solution with legal certainty and appropriate
safeguards.
1.3 ABI has around 100 members engaged in life
and pensions business, representing bout 99 per cent of the insured
market. There are approximately 3.7 million members of occupational
schemes run by life insurance companies and around 21 million
individual pension policies are in force. Life offices paid out
over £20 billion on behalf of pension schemes in periodic
payments, death claims, lump sums or as refunds during 1996. Insurance
companeis insure approximately 73 per cent of all occupational
pensions schemes and carry out investment for a further 25 per
cent. DSS suggest that there could be around 50,000 divorces a
year involving pensions sharing. Form this we anticipate that
half of these cases a year are likely to involve insured pension
arrangements, so the implementation of the pensions sharing on
divorce legislation is of considerable interest.
1.4 The Association will be providing a detailed
response to the DSS consultation on the draft Bill. It would be
pleased to provide further (written) evidence to the Select Committee,
if that would be helpful.
2. SIGNIFICANT ISSUES
Complexity—Legislation
2.1 Proposed legislation to implement pensions
sharing will amend existing pensions and family law legislation,
which is already extensive and complicated. Achieving what is
intended in the legislation is therefore no easy task. We welcome
the opportunity to develop the legislation and believe that the
move towards scrutiny of draft Bills by the House should help
to ensure workable legislation.
2.2 Legislation should provide the framework
only. Over-prescriptive legislation and regulation is likely to
be inflexible and could be unworkable.
2.3 It is understood that as part of its overall
Pensions Review, the Government wants to simplify pensions legislation.
Such simplification could only improve the understanding of divorcing
couples and increase their ability to make use of the pensions
sharing legislation satisfactorily.
Education and Advice—Understanding by End
Users
2.4 There are a large number of possible ways
to share the assets fairly on divorce. Sharing the pension does
not have to be included in the agreed solution, only in the valuation
of assets. The parties concerned need to have a clear understanding
of how their benefits will be affected if the pension is shared.
Because of the complexity of the legislation it is likely that
advisers and courts may need access to training, concentrating
on the aspects which are pertinent to the issue of financial support
and sharing.
2.5 ABI is concerned that proper advice, including
advice on suitable alternative contracts, should be readily available.
The cost of this is akin to other professional advice the couple
may need and should not be confused with the administrative costs
of sharing the pension. The divorcing couple need to consider
the pension share in the context of their overall future financial
needs.
2.6 We see particular difficulty in getting
the parties involved to understand the implications of sharing
pensions, e.g., sharing the value (as opposed to the income stream)
of a pension in payment. However it is important to judge just
what information the parties need to have to reach an informed
decision so as not to suffer information overload. ABI will play
a full part in developing appropriate information and training
packages to ensure the parties concerned have sufficient understanding
to make informed decisions.
2.7 The parties also need to understand that
the value of the pension will change between the time an initial
indication of the value is given and the date the pension is actually
shared, which could be two years later. In the case of a final
salary scheme the salary, and therefore the promised benefit,
is likely to have increased. In the case of a money purchase scheme,
where the member bears the investment risk, the value will change
due to the investment return.
Costs
2.8 The administrative costs of sharing the
pension should be borne by the divorcing parties. It is not appropriate
for other policyholders or members to bear the costs of divorcing
couples. These will include the cost of providing information,
documentation, amending records and setting up new records or
arranging for a transfer elsewhere, etc. A distinction needs to
be drawn between these extra costs and the normal ongoing costs
arising from scheme membership.
2.9 While in some cases the provider may not
charge a fee for processing the share, or any fee would be modest,
there will be cases and situations where considerable extra costs
are incurred. Providers will need to make a charge so the cost
does not fall on other scheme members. Setting a cap on such charges
would result in levelling up, i.e., the cap would become the normal
charge. This would result in higher overall costs with the simple
cases subsidising the complex.
2.10 Where a transfer is made to a completely
new arrangement, there will be set up costs. For many single premium
contracts set up costs are low (e.g., possibly 5 per cent of the
transfer value or on a sliding scale which restricts the overall
cost). There may be no charge at all on some contracts where the
former spouse remains with the same provider and the transaction
is simple.
Tax Position
2.11 The natural desire of a member to make
up the shortfall in pension caused by the sharing will lead to
problems with Inland Revenue maxima, as the former spouse's share
continues to count against the member's maximum. It is important
that this value should be fixed at the time of divorce, as any
requirement to keep tabs on the value of the former spouse's pension
for maxima checking purposes would increase costs considerably
and would not comply with the clean break principle.
Provision of Information
2.12 There is a need for sensible forms, for
providing information, standardised as far as possible without
being too inflexible. ABI has contributed to the development of
pension sharing forms covering a negotiated agreement, the court
order and information for the member and former spouse.
3. Conclusion
3.1 ABI is committed to making this Bill work.
We will continue to work closely with DSS and other bodies.
1 July 1998
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