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Examination of witnesses (Questions 220 - 233)
WEDNESDAY 8 JULY 1998
MR LAURIE
EDMANS, MR
BRIAN ARRIGHI and MR JONATHAN
BLACK
220. There are costs for
you but there are also opportunities, are there not, in terms
of a split which doubles the market in terms of that household
unit? Why do you not just see it as that sort of opportunity and
cover the costs yourselves?
(Mr Edmans) There will be companies that see it
exactly that way. That is a commercial decision. There will be
companies that see it that way. We cannot, as an Association,
prescribe that they work that way. To an extent the concept of
introducing benchmarks might be one way of encouraging that kind
of behaviour.
221. Thank you.
(Mr Arrighi) If we take Laurie's three way split:
the bit we think is covered by disclosure which probably has zero
additional cost to it, the middle one I would like to come back
to which is advice, particularly in comparison with what the NAPF
were saying earlier, and the third one is if you have got an existing
personal pension and you cut it in half then it comes down to
how much additional cost is associated with that.. You might well
find with schemes that do not have a policy fee, a flat fee, again
you have no additional cost for that because, as has already been
pointed out, the marketing opportunity of having an additional
customer is probably one you would want to take. In comparison
with the answer we have given and on what you might have heard
earlier we are describing a situation of advice which I suspect
a large occupational scheme is not providing. What it is doing
is administering. It is giving all the information it needs, so
it is doing one and three. It is not giving the advice element.
So I am suggesting that a couple within an occupational scheme
will still require that advice and they will probably be paying
for that separately. I think that is where we have difficulty
in bringing this together into a single figure.
222. Because people are suspicious about
this issue of charges for some reason, I am not sure why. Do you
understand the suspicion?
(Mr Arrighi) Yes.
(Mr Edmans) Absolutely.
Ms Hewitt
223. I am sorry to come back to this point
but I have been puzzling around this issue of gender and cash
equivalent transfer values. As I understand the Bill, what is
going to be shared between the scheme member and the former spouse
is the cash equivalent transfer value, not—and Gisela was
raising this point—the value of the future pension in payment.
If you come back to my example of the two scheme members, both
happening to get divorced, let us say that the man's value is
£100,000, cash equivalent transfer value, and the woman's,
for equal years of service on equal salary, is a higher CETV,
let us say £120,000 and in both cases the court has awarded
a 50/50 split, the divorcing wife of the male scheme member will
get £50,000, the divorcing husband of the female scheme member
will get £60,000. The £50,000 that the ex-wife gets
is, first of all, a lower cash sum and in any case is worth less
to her because she is going to live longer and the annuity she
will be provided with is lower. The ex-husband is getting a higher
sum and will be able to buy even more with it because his assumed
life expectancy is less. Therefore, should not the Bill in fact
be aiming to calculate a value in payment and then work back to
the appropriate cash value rather than splitting the cash value,
when the consequences are so very different between a man and
a woman?
(Mr Black) I think it is important to consider
that what you have is a value of an asset and that asset for a
male member of a pension scheme is that they will be paid X pounds
per month once they reach the age of, say, 65, until they die.
So you are trying to put a cash value on that asset. Now there
are two ways in which you can split it. You can either take that
cash value and split that in half or whatever. Again there is
no requirement for that to be split in half; that needs to be
part of the divorce settlement. So to allow for the concern that
you have, it might be that the split is 70/30 or 60/40. The other
option is to go back to what we had with the earmarking orders,
where you actually took that income stream of X pounds per month
and said, "Half of that goes to the ex-spouse," but
you are not actually changing the value there because again that
might well only be payable for the lifetime of the member. Therefore,
the value of it is reduced. If the spouse lives longer then they
reach a point at which they have no income from that at all. So
it is important to consider that you are actually trying to value
an existing asset which is X pounds per month and that is where
you are starting from, and if there is a concern that that 50/50
split means one person gets more per month for the length of their
life, then in the legal advice they take at that point, and perhaps
financial advice comes into it, they need to consider that on
each side and as part of the negotiations for the divorce to say
that split should be different.
224. But the problem with this is that the
value of the asset is gender-specific. A house is worth the same
amount whether it is owned by a man or a woman. A pension is worth
a different amount according to whether it is owned by a man or
woman?
(Mr Edmans) Yes, that is true of defined benefit
plans.
225. That is what I am focusing on. With
money purchase you are only talking cash but I am talking about
final salary schemes. The cash equivalent transfer value is higher
for a woman than for a man on equal contributions. The value of
what you can buy with X thousand pounds of pension fund is lower
for a woman than for a man, so you have a double gender bias,
as it were, or gender factor influencing the value. Now the implication
of that, I think, and of what you are saying is that the courts
and the solicitors should always be negotiating if, let us say,
the only asset is the pension fund—ignore the other ones
for the moment—a higher percentage for the woman than for
the man, regardless of whether she is the scheme member or the
wife, because in order for her to get the equivalent pension in
payment she is going to have to have a higher fund and it is the
pension in payment that is the real value of the pension fund,
not this notional cash value, because you are not actually going
to be spending the fund; it is the pension in payment that is
the benefit that you get from this asset.
(Mr Edmans) Could I bring Brian in on this.
(Mr Arrighi) I think your example actually helps
and within it it shows how the calculation should be done. Without
making it harder I believe what your example shows is that the
woman should always ask for a cash equivalent transfer value on
two bases, one as a man and one as a woman. You take the difference
out of the fund first and then you split the rest. I think that
overcomes your problem.
226. You are thinking of the woman as the
scheme member?
(Mr Arrighi) Yes. So in your example you would
take the £20,000 out and give that to the woman and what
you have got left is then what you would split 50/50.
227. Is this an issue that needs to be addressed
in regulation or in guidance since gender is the essence of the
issue?
(Mr Black) I think it depends on how you want
to look at the asset, whether it is a cash value or an income
stream. I think it is fair to look at it consistent with everything
else that is split at the point of divorce and to put a cash value
on it. To take the thing to a slight extreme, if someone got the
house then the spouse will expect to get the value of that house
for longer because they will expect to live in it longer. That
is taking the thing to an extreme. The whole concept of how you
are trying to split assets at divorce is to put a cash value on
it and then to use that as a means of splitting it. You cannot
look at the thing simply as to what a cash value is, you need
to look at it as to how the two parties come out the other end
and exactly where they are going. It is important that they get
the appropriate advice at the time.
Chairman: Can we spend
the last few moments looking at the impact of the process. Can
I ask Frank Roy to introduce the section on that.
Mr Roy
228. I think, first of all, could I ask
you to summarise the key points that you would like this Committee
to take consideration of when we draw up the recommendations?
(Mr Edmans) If I could just lead on that and perhaps
I could ask Brian to add his comments. Our primary concern is
with fairness and with workability. We do not think that we can
achieve perfection but we do think this takes us a long way further
forward. We are extremely keen to try and avoid complexity if
we can. One of the reasons why the advice issue we have already
touched on is as difficult as it is is because it is a complex
issue. The whole world of pensions is complex. If we can find
a way of avoiding making it yet more complex that would be a real
boon.
(Mr Arrighi) There are two points I would like
to make. One is high level and one is rather more detailed. We
are specifically talking about where pensions and divorce overlap.
By looking at pensions and divorce I think as a Committee you
are bound to see things that you observe are wrong with pensions
and you will observe things that are wrong with divorce. What
we are trying to do within this process is to use existing mechanisms
wherever possible, hence the cash equivalent transfer value already
exists, disclosure of information already exists, to use that
as much as possible at this period of divorce. That does mean,
as I say, you might find things that to your mind are wrong with
either but we certainly have done our best to concentrate on where
there is the overlap between the two. The point of detail is the
additional piece that we are asking for is the information that
has to be given to the couple. We are doing our best to work on
some standard forms which will keep the costs as low as possible
and keep the information as standard as possible for the other
professionals who are needing to work with it. We believe that
has got to be very much a two-way process. We are working on it.
I think it is hard to exaggerate the importance of getting those
forms right.
229. Would you be able to send a detailed
analysis of your main focus points before September?[9]
(Mr Arrighi) Yes.
(Mr Edmans) Absolutely. We intend to make a full
response by the 7 August target date to the DSS and, as the previous
witnesses, we would be very happy to send a copy of that through
which will cover those points.
230. Could I come back on another point.
Could you tell me how you normally go about assisting Members
of Parliament who seek your advice on the details of the Bill?
(Mr Edmans) We have quite a substantial amount
of contact between the ABI and Members of Parliament at all levels.
Having myself chaired this Committee now for a period of only
four months, I am not precisely clear on every single organ. Brian,
you have been on the Committee longer than I. Could you give us
a succinct answer?
(Mr Arrighi) Within the ABI there is a process
obviously of answering any enquiry that comes and obviously any
enquiry from a Member of Parliament is taken as seriously as possible.
As well as that, we believe that it is actually in everybody's
interests, without giving a biased point of view, to try to make
as clear as we can how we see things across the whole pensions
range because not only do we provide products but we are probably
employers that have a large occupational scheme ourselves, so
we are prepared at any stage to provide background into what we
think and why we think it.
Chairman
231. It is an interesting answer but you
have your own established procedure for producing quite high-quality
briefings at Standing Committee stage and you have done in the
past. Do you think that is going to change in any way since we
have had the advantage of, if you like, a preliminary canter round
the course in terms of the quality of the briefings that you might
be able to give to the poor victims who are placed on the Standing
Committee to do the actual legislative process of the Bill—and
it will be none of us?
(Mr Arrighi) My obvious answer to that has to
be most certainly. I think what we need to do is to help by adding
to whatever other briefing you have from, for example, the DSS.
We would not want to put up a counter-position in private, as
it were, so I think it is important that we understand how we
can help with that. Perhaps the thing to do is for us to do the
first teach-in and the DSS to correct it rather than the other
way round.
Mr Goggins
232. This is a simple request. Mr Edmans,
before you said you have been looking at some data which compared
the rates of increase in the value of houses and pensions. I wondered
if you were able to provide us with the data?1[10]
(Mr Edmans) Yes, I would be very
pleased to do that.
Chairman
233. May I say this has been a very useful
session for us. It is a very technical subject but both yourselves
and the National Association this morning have made it very clear
and the way you have presented your case is concise and comprehensible
even to people like ourselves, who are still lay people in this
process. Thank you very much for your attendance and for your
submissions and we look forward to continuing the dialogue in
future. Thank you for coming.
(Mr Edmans) Thank you very much indeed for asking
us.
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