Select Committee on Social Security Minutes of Evidence


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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