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Examination of witnesses (Questions 187 - 199)
WEDNESDAY 8 JULY 1998
MR LAURIE
EDMANS, MR
BRIAN ARRIGHI and MR JONATHAN
BLACK
Chairman
187. May I welcome our second group of witnesses
from the Association of British Insurers, again a very high-powered
team led by Laurie Edmans, who is the Chairman of the ABI Pensions
Committee, Brian Arrighi, from the ABI Pensions Committee and
who is a friend from the Prudential. We welcome him, and Mr Jonathan
Black from the ABI Pensions Divorce Group, and Scottish Equitable.
Laurie, maybe you could, if you would, spend a moment introducing
in more extensive terms both Brian and Jonathan and what they
do, and say a bit about the membership and interests represented
by the ABI and how you are funded and that sort of thing so that
we can get the context from which your perspective comes?
(Mr Edmans) Certainly. Thank you, Chairman. As
well as being the Chairman of the Pensions Committee of the Association
of British Insurers, I am also the Deputy Chief Executive of NPI,
one of the longest established providers of personal and, within
the relatively limited insured area, occupational pensions. I
also sit on the Life Insurance Management Committee, which is
the senior committee of the ABI representing life and pensions
interests, because I have this role on the Pensions Committee.
Brian Arrighi is Head of Group Policy Development at Prudential.
He is also a member and former Deputy Chairman of the Pensions
Committee. He represented ABI on the DSS Pensions on Divorce Consultative
Group. Jonathan Black, as you say, is from Scottish Equitable.
He is Chairman of the particular group that worked on pensions
and divorce on technical issues. Together with the ABI representation,
the ABI represents about 450 insurance companies, some 98 per
cent of the total business of insurance companies in the United
Kingdom, and between us we transact something of the order of
99 per cent of all new life and pensions business in the United
Kingdom. We have in specific terms of pensions some 21 million
personal pension policies in force, but as the NAPF made clear
earlier, although they have the bulk of the membership in terms
of numbers of schemes, we have the bulk of the occupational pension
schemes. Something like 73 per cent of all occupational pension
schemes are run by insurers representing some 3.7 million people.
Just a word about our backgrounds: I am really a sort of pensions
"maid of all work", very much a generalist; Brian and
Jonathan are both actuaries and in terms of the technical detail
of pensions on divorce I will, Chairman, with your indulgence,
probably be referring to them.
188. So the hard questions go to them?
(Mr Edmans) The hard ones on the particular technical
aspects. Some of the others I suspect are for me.
189. Thank you, that is very useful. Tell
us a bit about what, to date, you have had by way of participation
in the consultation process with the DSS? How have you found that?
(Mr Edmans) We have been closely involved with
the DSS, particularly both Jonathan and Brian, in that process
and as a member of a number of other working groups. Perhaps Brian
could give a bit more detail of the exact involvement.
(Mr Arrighi) Yes, certainly. There is an organisation
particularly that I would want to bring to your attention called
the Occupational Pension Schemes Joint Working Group, which brings
together the insurers, the ABI, the National Association of Pension
Funds, the Association of Consulting Actuaries, the Association
of Pension Lawyers and the Society of Pension Consultants. In
this particular context you can see that that, other than the
pure judicial side, covers a lot of the scope of pensions and
divorce. It so happened that the ABI took the chair, which rotates
within that group, and had the chair at around the time that the
DSS were talking about this process. We were very supportive of
it. Particularly, we know of the complications that there are
in pensions, and whilst what we were attempting to do here was
to make pensions and divorce, where they overlap, as simple as
possible, we know we have to accommodate the complications that
there are in pension schemes. So in terms of the process to be
able to see the Bill as drafted—and a lot of the discussion
was certainly about defined benefit schemes—what we now
need to make sure is that all these other different sorts of arrangements
that exist, some quite old, can also be accommodated within the
legislation. So we believe that in this case this process is precisely
right.
190. Without looking for differences artificially,
are there any substantial points of difference in your perspective
from that which the National Association of Pension Funds have
been taking? Is there anything that you would like to draw to
our attention that we should pay attention to?
(Mr Edmans) Broadly not, because, first of all,
as Brian said, we are very supportive of the general direction
of the proposals and there has been a great deal of work done
across all the different parts of the pensions industry to try
and arrive at something which is deemed workable. Our differences
of emphasis would really come more from the difference in nature
of the type of pensions that we are involved with from those of
the NAPF.
Chairman: Could we
turn to external transfers, an important issue for the Committee.
Mr Edward Leigh?
Mr Leigh
191. There are going to be a lot of ex-spouses
coming on to the market with their pension credit and they are
going to be looking for products from your members. Will there
be appropriate and wide-ranging, attractive products available
for them to pick up?
(Mr Edmans) "Attractive" and "wide-ranging"
are words which really lead you to say, "What is attractive?"
"Is it fair and reasonable?" is what I think lies behind
your question. I think there certainly will be attractive and
wide-ranging products available but the problem which the industry
has, and which I think at the moment is far superior to where
we were, going back to the depths of the mis-selling problems,
is actually making sure that we do manage to make the connection
between the people who need those products and those products.
They are there in the marketplace but the process by which a connection
is made, although enormous strides have been taken over the last
few years, is still problematic and it will be glossing over the
issues to suggest that it is not still problematic.
192. Are we going to have scandals of salesmen
getting big commissions from selling inappropriate products?
(Mr Edmans) I should certainly hope not because
we do have a much stronger regulatory regime. The industry has
also, in the large majority, learnt a great deal from those lessons.
Rather in the same way that the NAPF have had to answer the question
about Maxwell and the fact that you cannot give absolute guarantees
about human behaviour, there is such a difference now from the
position that appertained in 1988-89, one would hope that the
situation would be a lot better, but I do not want to sit here
and essentially whitewash. It is a complicated issue. One of the
key problems is that the ordinary person simply does not understand
these issues. It really is at the base of a lot of the problems
and one of the things they do not understand is just how important
this is. I do not know how long you would like me to go on on
that theme but getting understanding on the part of the parties
concerned is really key to making sure that good value is being
delivered and that leads to one of the key issues for me in all
of this, which is, how is the advice going to be delivered to
the people at the point that the divorce is going through, because
it is a difficult enough area anyway. At the point when the divorce
is going through and you have 999 other things on your mind, a
lot of which are much more important than this, to get somebody
to sit down and understand some of the magnitude of these issues
is really very difficult.
193. But you think you can do it, can you?
You can explain this in ordinary English?
(Mr Edmans) I am really very reluctant to give
you a nice "of course, we've got it all cracked" answer
because I think it is really very difficult. For example, how
you sit down with somebody who has to make a choice, say, between
whether or not—assuming the thing has just been dealt with
in terms of total value—they opt for taking the house or
whether they opt for taking the pension rights is, to most people,
quite a difficult set of things to understand. It might be easy
for us, with deference to my actuarial colleagues here, to reduce
both of those things to a present value and say the house is worth
£50,000 and the pension is worth £50,000 so they are
on a par, but actually there is a whole bundle of emotional things
attached to both of those. Particularly there is not much comprehension
of the fact that even though the present value today might be
equal, the value of the house over a period of between now and
pension age might go up at rate x and the value of the pension
might go up at, whatever, x, it could be plus, it could be minus.
Ideally for somebody to make the right call in those circumstances
they have got to understand all of that. As I think has become
quite clear through the work by the Pensions Education Working
Group the majority of people out there really do not understand
those things. To make what I would like to make, which is a really
positive assertion that of course we can cope with all of that
and deal with it, I do not think I can do that. I think what we
can do is identify just how significant it is as an issue here
as it is for other pensions matters and say it is critical that
as we do the broader pensions review we really do spend some good
time on that and get the best answer we can.
194. Obviously we want insurance salesmen
to be giving the best objective advice. I wonder, therefore, whether
you might consider removing the sales commission, removing the
incentive to sell?
(Mr Edmans) It is certainly something that could
be done. Removing the commission does not necessarily remove the
costs. One of the issues that bedevils the industry in trying
to get this sort of thing straightened out is that although advice
is of paramount importance there is a great reluctance on the
part of most people to actually pay for it. The commission mechanism
is there as much because it is finding a way around people's reluctance
to pay for the advice that they need as for any other reason.
Legislate it out and there would be less danger of the products
being mis-sold certainly. There is also the possibility that less
advice might be available as a consequence because people are
not prepared to pay for it. It might be a good thing because what
we actually need is a behaviourial change on the part of quite
a few people, not just the industry, so they appreciate that if
advice has got a value then it has also got a cost. I do not think
it is to the industry's particular credit that over the years
we have been quite prepared to shelter behind the fact that advice
is desirable, whereas persuading people to save is not so desirable,
trying to wrap it all up and call it advice.
(Mr Arrighi) Could I add to that. I think at the
particular time that we are talking about on divorce the couple's
personal circumstances are changing, obviously all of their financial
circumstances are changing, and we could take that as just about
the most important financial change in that person's adult lifetime.
The one word that we have not mentioned is the word fee. Laurie
has mentioned that it is somewhat difficult to get people to pay
fees at this particular point. Given that fees are being paid
for other things and that people are getting a lot of the legal
advice they need, a lot of the personal advice they need and the
financial advice they need, it might well be that the market takes
us towards, at least at that stage an acceptance that the fee
for general financial advice is what is required rather than specifically
something that is commission driven relating just to one element.
Mr Leigh: That is
a very interesting point and it might be worth coming back to
that in our report. We have had various comments about the expertise
of lawyers. Do you have any comment to make on whether divorce
lawyers are adequately trained to give the advice that is needed?
What is your practical experience? Perhaps you do not wish to
comment on another profession.
Chairman: You are
not protected by parliamentary privilege I have to tell you.
Mr Leigh: You are.
Chairman
195. You are in fact. The Chairman is a
lawyer, you have to understand that.
(Mr Edmans) Clearly there are some lawyers who
do have this expertise. I am taking the risk, if you like. This
is a pretty specialised area and I would have thought anyone giving
advice on this would really need to have quite specific understanding
of the sorts of issues. For example, take the value of a house
now and pension now versus pension and house in the future. I
have had a look at some numbers. If the last 15 years' experience
is repeated going forward, which it will not, that is the one
thing we can be sure of, then the rate of increase in the value
of the typical pension fund over the last 15 years has been eight
per cent per annum higher than the rate of increase in the value
of the average house. That means that of the two pots which would
have started identically 15 years ago the pensions one would now
be worth three times the value of the house. Clearly the person
has had the utility of the house in the meantime, so it is not
a straight comparison, but for all that that is the kind of thing
that somebody making the choice, house for pension, has to make
at the time they are calling the shots. They have got to realise
that might mean in 15 years' time they are looking across to where
their ex-spouse is who is sitting there with a pot which is worth
three times the value of their house. It is perfectly within the
competence of a lawyer to be able to explain that but it is not
normally the kind of area where one strays across lawyers, that
is more proper financial adviser territory.
Ms Stuart
196. If I have to leave in about five minutes
it is nothing personal, it is just that I have an adjournment
debate in the House and I think I need to be there. Assessing
the transfer value, cash equivalent transfer value, I would like
you to comment on two things. One is that whilst we recognise
it has its shortcomings I think we are coming to the conclusion
that it is probably the best of a bad job, but I would like to
hear your comments. Also I would like to hear some comments on
the difference between revenue flow and assets when people make
their very sophisticated decisions about pensions. Could you say
something on that?
(Mr Edmans) Maybe I will have a go at the first
level and then ask Jonathan to come in particularly on the second
of those. My view is that the cash equivalent transfer value is
exactly what you have said, it is the best of a bad job. I think
the original intentions when they were introduced were thwarted
to quite a substantial degree by the way in which those were interpreted.
One of the issues in the transfer mis-selling problem is that
there was a degree of doubt about exactly how the original actuarial
guidance on transfer values ought to be interpreted and whether
credit ought to be given for past practice in discretionary benefit
increases, for example. That guidance was subsequently changed
and it is, as I understand it, now more generally applied in a
consistent fashion across schemes. For all that my personal view
here, rather than the ABI one, is that the resultant move towards
consistency constituted a levelling down rather than necessarily
what I believe the intention of the legislation was originally,
which was fair. Consistent is part of fair but it is not all of
fair. Against that background I would agree with you in practical
terms and you have to bear in mind the other side of my wish that
we could get to "fair". On the point the NAPF made about
the fact that final salary pension schemes in particular are voluntary
acts, I think they are very good things, I would want everyone
to have one if I had my way, but there comes a point when you
say "that is as far as it is reasonable to go", and
that is where I think the cash equivalents are.
(Mr Black) I would just add to what is said there
about the cash equivalent. I think it is very consistent within
a final salary scheme that the cash equivalent is given as a value
for a pension that is going to be given up by the member. Similarly,
if a membership option has been offered to the spouse within the
scheme the consistent turn around of that cash value back into
a fair pension is something that means that everybody is getting
something fair and it is all consistent. I think from that point
of view the figure itself, when purchasing within the scheme,
is not a particularly important one. It is more about how do you
go from a pension for the member to a pension for the spouse and
from that point of view it is all fairly consistent. Moving on
to your second point, may I clarify that your question is about
the value of money now?
197. Yes?
(Mr Black) And that the return from that is something
that is potentially 20 or 30 years in the future?
198. It particularly concerns me in terms
of men and women, when we then go into annuities and the purchasing
of life expectancy issue, and whilst you are addressing that,
you might also want to address whether you would want some medical
evidence, but that may be a separate issue. It is the gender issue.
(Mr Black) Yes. I will cover that as two separate
points. Again it comes back to the importance of getting proper
advice, that we are talking about a value of an asset, just the
same as a value of an asset of a pension, a value of an asset
of a home or whatever, and it needs to be part of the advice that
both individuals get at the point of divorce as to what is the
most appropriate split. It may not necessarily be the split of
the pension is the right thing to do, if other assets can be split,
and it is more appropriate for the requirements of each of the
two parties. But taking your point more specifically, yes, for
a given value of fund, that will give in general a higher pension
for the male partner than it will for the female partner and that,
understandably, is a feature of life expectancy and I think that
is something that again needs to be understood at the point at
which the advice is being given and a fair split is being assessed.
It is important for the female member to understand that that
same value will not buy them the same amount of pension and they
need to take that into consideration when they decide what the
split is going to be. To take your second point about medical
evidence, I think there is one particular situation where we think
that might be appropriate. In general it is not something that
is going to be an issue.
199. Not even for annuities?
(Mr Black) For annuities in payment. I think that
is the point where it might come into play, if there is someone
who has been in receipt of a pension for some time and that has
been purchased with a life office and it was purchased at the
point of retirement on a certain assumption of what the medical
situation was, I think it is important to understand that the
value can only reflect the amount of pension that is expected
to be paid. Therefore, if someone is in very poor health, the
value of that pension, even if it is a large pension, might be
minimal because it is only expected to be paid for a month or
so. I think we have to weigh up the cost of that medical evidence
at the point that the data have been collected by the divorcing
couple to decide how the split is going to be done. So the important
thing that we have is that the court can be given a value for
a pension in payment but we would wish to reserve the right to
ask for underwriting evidence if the split were to go ahead. There
is no point in charging for that at the point that the evidence
is being given as that would probably just add extra cost, but
everybody needs to be aware that if there is a medical problem
in one of the parties, then that will affect the value, and if
they do propose to go ahead and they understand that there is
a problem with medical evidence, that should be disclosed and
it will ultimately change the value of the pensions.
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