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Examination of witnesses (Questions 200 - 219)
WEDNESDAY 8 JULY 1998
MR LAURIE
EDMANS, MR
BRIAN ARRIGHI and MR JONATHAN
BLACK
200. Could you say one sentence
about those ones with a revisionary entitlement attached, whether
you think they should be treated differently? I would have thought
you would need medical evidence there more than ever?
(Mr Black) Yes. The important point is that we
make sure that the basis on which a pension is turned back into
a cash value and then that cash value is turned back into a pension
is consistent. So as long as we are using fair assumptions on
either side of that transfer, then I think the process is consistent.
Ms Hewitt
201. If I could ask a supplementary on the
cash equivalent transfer value and specifically the gender issue:
is the cash equivalent transfer value calculated on a gender neutral
basis or not?
(Mr Black) No.
202. So for a man and a woman both in a
final salary pension scheme, the same scheme, who have paid identical
contributions on identical earnings and both divorcing, will the
cash equivalent transfer value be different? The woman's will
be higher?
(Mr Black) Yes, because it is a fair value of
the pension that is expected to be paid.
203. Because it is a fair value of the pension,
the cost of the pension that will be paid. That is fine. The second
question on that: I understand when you are calculating the cash
equivalent transfer value there is an assumption built in about
the probability of the scheme member being married at the time
of his death, in other words, the value of the subsequent spouse
survivor payment. Do you have a view on what assumption should
be made on that issue when you are calculating the value for someone
who is about to get divorced?
(Mr Black) Generally within most bases there will
be a broad assumption across all the membership and that might
be that, say, 90 per cent. are assumed to be married at the point
of retirement, and I think it is fair. As long as that is used
on both sides of the calculation then that is fine.
Chairman: Could we
turn briefly to charges. Chris Pond?
Mr Pond
204. I am still worried about these because
the proposals do give the right of pension providers of schemes
to recover the administrative costs from the couple involved directly.
It is a principle we all accept and it states that it should be
reasonable. In your evidence you said that you do not think there
should be a cap on that because, as you have explained, you feel
that that results in a levelling-up rather than a levelling-down,
but from our point of view the responsibility of Parliament is
obviously to make sure that divorcing couples are not exploited
by the setting of unreasonable charges. How would you advise us
to go about making sure that was the case if we cannot do it through
a cap?
(Mr Edmans) To try and answer the last part of
that question first and then perhaps explain why, I think that
this is something which the broader review of pensions needs to
deal with for the question of pensions in general as well in the
area of pensions on divorce. I think it is a general issue which
is particularly sensitive in the area of pensions on divorce rather
than something which is, if you like, pensions on divorce specific.
This question of how do we achieve charges that are deemed fair
and reasonable is a tough one.
205. May I say one reason why I think it
is difficult, because in general with pensions schemes, of course,
when contracting into a scheme you know in advance what the charge
is going to be. In this case you will have people who have been
in schemes for some years who will not know what the charges are
going to be once pension sharing is implemented?
(Mr Edmans) I think that is perfectly true and
I think it is a matter of judgment and that is what you are here
to do, I entirely appreciate that. Whether one says pensions on
divorce is different and, therefore, demands different treatment,
if that is the view that is taken, then there are means of getting
there. I guess the most obvious example that we are working on
at the moment is the benchmarking procedures, the CAT marking
procedures, for charges, access and terms that are currently being
worked through in respect of the individual savings account. There
is a process which at the moment is being worked through. I am
not quite sure what will emerge but certainly the concept of saying
that for a particular target group of people for a particular
type of product then it is appropriate to set some benchmarks,
which would be capable of being enforced or, equally, are capable
of being published and the provider has to state that they are
either in or outside those measures. So if it were decided that
was something appropriate to apply to pensions on divorce, then
there is a tool that could be used. The thing which exists at
the moment, which is intended to arrive at a fair and reasonable
answer, is the quite substantial legislation and regulation that
exists with regard to disclosure of costs and charges and that,
of course, is there and is in place and is being, I believe, very
assiduously followed, although I have to say I have my doubts
as to how comprehensively it is being understood by the people
who are on the other end of it. But it is disclosure. Disclosure
is what we need most. Perhaps with education, perhaps with greater
understanding it will be more effective than it seems to be. So
benchmarking is a possibility, but the next question after you
have applied it to pensions on divorce would be, why pensions
on divorce and why not people leaving service for other reasons
who equally have transfers that they are taking somewhere else,
for example, and there is a string of supplementaries. So I can
very well understand why pension on divorce could be a special
case. Ideally I would like to see it dealt with as part of the
broader pensions review perhaps as well.
Mr Wicks
206. How much are you going to charge, I
do not understand? What sorts of figures are we talking about?
It will not be a percentage of the fund, will it, it will be a
flat rate fee?
(Mr Edmans) Charges will ultimately have a connection
with the costs that are incurred. I say "ultimately"
because one of the whole features of insurance is that it is a
big process of cross-subsidies and it can get quite complex, not
just pensions, that is just the way insurance works, the whole
thing is essentially a cross-subsidy by its nature. What is deemed
fair really boils down to a value judgment as to which of those
cross-subsidies feel okay and which do not. The sorts of places
in a pension share where costs can be incurred are under three
heads. One of them is at the point of provision of information.
One of them is at the point that advice needs to be given on what
the options are so that people understand whether to make the
house/pension choice, to simplify it. The third one, the costs
with relation to whatever pensions vehicle it is that they move
to from the one that they were in or, in the case of the ex-spouse,
not in. As far as charges are concerned I think what might be
fair needs to be considered really under those heads. In terms
of charges at the point of provision of information, as I think
the NAPF made clear, there are costs that arise at that point
and as far as occupational pension schemes are concerned, of which
we run quite a lot, that would be the major area where the costs
would be incurred. As regards those occupational pension schemes
which we run, on which we essentially make a charge implicit in
our premium terms to the members and in respect of personal pensions,
I personally would be surprised if there were many instances of
specific charges for the provision of that information. We already
have to provide a lot of that information in any event. We already
do provide, even though we do not have to by any legislation,
a lot of similar information in terms of values, alternatives.
People phone us up. Just in my company we have something like
300 to 400 phone calls a day from people who say "I am thinking
of changing my job. I am thinking of putting in some more money".
207. Why do you need to charge at all?
(Mr Edmans) In this respect?
208. Yes.
(Mr Edmans) I suspect we probably will not charge
specifically for this.
209. The National Provident Institution
will not?
(Mr Edmans) I think in general terms I would be
surprised if specific charging for the information provision aspect
will be a big feature. I think there might be an outcrop whilst
it is new.
210. What about the other aspects? Will
you be charging for those?
(Mr Edmans) I think in respect of advice I would
refer back to what I said earlier on. There is a cost there. There
is a tremendous value there which in general is not appreciated.
Ideally that advice would be paid for, as I think Brian has suggested,
by way of it representing one of the pieces of advice the divorcing
couple get and will be paid for by fee in the same way as the
other legal advice that somebody is expecting.
211. Suppose you have got a pension fund
of £50,000, give us an idea about what we are talking about
here? £100 fee?
(Mr Edmans) The cost of the advice is actually——
212. No, for everything. I know you want
to split it into three things but altogether what are we talking
about for this to happen?
(Mr Edmans) I really do not think I can easily
deal with it because the answers will be quite different. For
example, when the split has emerged from the other end of the
process the answer will be quite different if, for example, the
person——
213. We heard that some occupational pension
funds may not charge anything but in terms of personal pensions
you see an opportunity for charging.
(Mr Edmans) After the sharing the money will be
split two ways and each of those lumps of money, if they go into
an individual personal pension, will be subject to the kinds of
charges that apply generally to personal pensions. The defined
benefit occupational pension scheme tends to take its costs from
the employer or from the investment return rather than making
specific charges to the member.
214. Is there a danger that hidden commission
costs and annual admin costs could eat up quite a bit of the value
of pension credit under this?
(Mr Edmans) There is some of that risk. Perhaps
one of the things we could do for the Committee is to send you
a note on what the typical charges are for transfer plans expressed
in relation to the overall rate of investment return that might
be achieved so that you can see how much of that might be eaten
up under typical circumstances and the range of charges that apply
across the industry. I hope the answers will be quite reassuring
on that front.
215. We would like to see those.[8]
(Mr Edmans) I will happily make those
available.
216. Are there circumstances where the ex-spouse
would not be better off staying in a company scheme?
(Mr Edmans) Anywhere ever? There probably are
circumstances where she would be better off. Most company schemes
are excellent. As I say, my personal belief is that from the employee's
point of view and from the member's point of view, a scheme where
you have a guarantee as to the value of your benefit in real terms
beats one where you have got an uncertainty. Not all company schemes
are like that and not all company schemes are fully funded. Again,
one comes back to the question of advice. Where it is a good company
scheme I think the answer is the member is almost universally
better off in there but there are exceptions and it is important
to spot them.
217. The Civil Service Scheme?
(Mr Edmans) Absolutely.
218. So you will not be trying to lure people
away as you did in the past to personal pension schemes?
(Mr Edmans) No.
219. I think it would be useful if we could
get something on costs because I am less clear in a sense what
costs you are going to charge than I was with the occupational
pension sector.
(Mr Edmans) There are two areas where we can really
be clear. One is at the point of provision of information where
I suspect there will be low or no costs. The other is at the point
where the money moves into the new personal pensions vehicle where
I think that the costs will be relatively low. These are usually
single premium products and I think you will find they look like
good value, although it is a free market so there are some that
are and some that are not. The area which is more problematic
is how is the advice that is so essential going to be funded.
That is the one where I am going to find it much more difficult
to give you comprehensive answers than in either of the other
two.
8 Not available at time of publication. Back
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