House of Commons - Social Security

Select Committee on Social Security Minutes of Evidence

Memorandum submitted by Fairshares (PS 38)

1. This document is FAIRSHARES' submission for consideration by the Social Security Select Committee.

2. It outlines the background to FAIRSHARES' approach to consideration of the Consultative Document: details members' concerns about the basis of pension valuation, provision of information, legal training and monitoring the effect of the Family Law Act.

3. A number of recommendations are made which we hope the Select Committee will consider positively.

1. Background

1.1 Much has been made of the majority of divorces being instigated by women. There is a simple explanation for this. If the main salary earner leaves the marriage and refuses to meet ongoing daily expenses of the marriage, the other spouse has to file a petition for divorce or Judicial Separation in order to get those ongoing financial needs met until a settlement is reached.

1.2 The inequality created by this situation is furthered by the ability of the main salary earner to retain the services of the best legal advice, while the one who has been in the caring role must needs rely on the lottery of provision locally available and Legal Aid. As is well known, negotiations are conducted against a greater burden of stress on the spouse who did not elect to leave the marriage.

1.3 Pension sharing is not necessarily synonymous with a "clean break" settlement. Clean break settlements have no place when there are dependent children involved. Nor should they be imposed when there is a great disparity in the assets/income of the divorcing parties or of future prospects. This has a special validity in the case of a long marriage with older spouses where the capacity to build up independent pension entitlement is simply not there. These circumstances seem to be given more consideration in London than in the provinces.

1.4 The loss that a non-salary earning, non pension member faces on divorce should be identified. The five elements of the pension and ancillary benefits that may be lost are:—

(i) On retirement: The indirect benefit and quality of life arising from the husband/wife's pension in respect of pensionable service or pension contributions prior to the divorce.

(ii) On death in retirement: The prospect of obtaining a widow/er's pension based on pensionable service or contributions in a continuing marriage.

(iii) On death before retirement: The prospect of obtaining a lump sum and a widow/er's pension upon her/his husband/wife's death before retirement based on pensionable service or contributions.

(iv) Future increases on past accruals: Benefits corresponding to the above elements but based upon statutory increases or investment returns after the date of the divorce. Even if redundancy or early voluntary retirement is in prospect, this often carries enhancements through added years benefits.

(v) Future pay increases, pension accruals and contributions; Benefits corresponding to the above elements but based upon pensionable pay, past and future pensions accruals or contributions at the date of retirement or earlier death or withdrawal and not the date of divorce.

1.5 A platform which provides both partners with a foundation of allowing them to provide for future pension entitlement must have a basis which fully takes into account provision to compensate the partner with poor future income-stream prospects for the benefits lost on divorce.

2. Transfer value

2.1 The CETV may not reflect the "true" value of the benefits, e.g. because the discretionary benefits are excluded. The CETV will vary over time because of the changes in market conditions, benefit improvements, funding levels and actuarial assumptions. We propose that the definition of a cash equivalent transfer value (CETV) must include the requirement that the CETV includes an element for discretionary benefits foregone.

2.2 The pension schemes hold funds invested to pay for future benefits which must include contributions collected and held to pay survivors' benefits. If as a result of using the CETV these funds are not utilised the pension fund will be in surplus at the cost of those whose entitlement it should have been.

2.3 Another problem with CETVs is that many women, post divorce, through lack of marketable skills will be forced into low paid jobs that can lead to a low pensionable salary and so a negligible pension. Their husbands on the other hand will retire on higher pensions as their final salary—immediately before retirement—will be higher thus giving a high pension. We are concerned that an integrated pension scheme might leave a post-divorce spouse with a savagely depleted and uncertain pension entitlement.

2.4 Women statistically live longer than men, and in most cases are younger than their husbands. The amount allocated to them as a "share" of the pension on divorce must need to stretch farther than that of their erstwhile spouse. FAIRSHARES believes that the basis for assessing the pension loss on divorce should recognise this longevity and make the necessary adjustments. Twice as many men remarry after divorce than women, predominantly to women who have not been previously married. These statistics would seem to support the popular perception of "trading in for a younger model". (Source: Office for National Statistics FM2 98/2 23 July 1997.) That there are 1,250,000 women of a pensionable age solely dependent on income support as against 250,000 men cannot be a coincidence. We are an ageing population. This is an opportunity to give those who have foregone their careers to take up a caring role in the family to grow old with dignity.

2.5 Carers include men too. With the changes in work patterns and society, one must not forget "house husbands" who have been married for a long time and for whom the lack of a decent survivor's pension will equally mean social isolation through financial disadvantage.

2.6 Those who have curtailed their own career aspirations to reconcile the conflicts of the demands of job and family may have part-time or subordinate jobs to supplement the family income, so the marital assets might include pensions from both spouses. However, payment of contributions to a widow/er's pension is mandatory in some schemes, despite divorce, with the fund retaining the accruing capital until retirement. This leads to deprivation of income at a time of ill-affordability and the added insult of a capital sum on retirement eroded by inflation and charges, the pension fund having retained the benefit of the past investment of those moneys. If this practice persists it must be taken into account in the pension sharing arrangements.

2.7 The NAPF is encouraging private sector schemes to offer "transfer in" to ex-spouses. Given the recent mis-selling of personal pensions we believe that this is the right track to follow as the charges in a personal pension scheme could drastically reduce the ex-spouse's allocation.

3. Legal training and related issues

3.1 We have a respectful concern regarding the knowledge of the members of the Judiciary and Legal professions who will be acting for those going through a divorce. We would like to see an objective standard set. Mandatory training would help prevent on-the-job learning in court at the expense of the hapless litigant. Specific provision could be required for ongoing training to keep up with any changes to the regulations and innovations in the pensions industry.

3.2 A system of monitoring the system from a random sample of those divorced under the new regulations (say) a year or eighteen months after the divorce, would give a clear indication of whether what the court had intended had happened in fact.

3.3 A specialist appeals/complaints channel for matrimonial cases would be welcome. The existing system is very slow and convoluted and increases the disadvantage and hardship endured in many cases. All those concerned with matrimonial law should be accountable.