APPENDIX 13
Memorandum submitted by the National Association
of Pension Funds (PS 29)
1. INTRODUCTION
1.1 The National Association of Pension Funds
(NAPF) is pleased to have the opportunity to comment on the draft
Pension Sharing Bill. We understand Government's wish to proceed
as quickly as possible with the proposed reform but, as a result,
the timetable given for comment has been extremely tight. Some
of the comments in this paper are, therefore, our preliminary
observations and we anticipate continued discussion with DSS over
coming months "to make sure that the legislation will work
in practice".[4]
1.2 We support the objective underlying the
draft Bill of a clean break between the divorcing parties. We
also welcome the Government's acknowledgement that the arrangements
must be clear and easy for schemes to operate, and that the cost
should be borne by the parties rather than the pension scheme,
the employer or other scheme members. Government is aware that
occupational schemes have recently had to take steps to comply
with the Pensions Act 1995 (PA95) and its associated regulations.
While employers and schemes have welcomed the objective and principles
underlying that legislation, there is no doubt that compliance
has added considerably to the continuing cost of providing good
pension provision. In addition, employers, schemes and individuals
are still assessing the long term cost and benefit implications
flowing from the removal of ACT tax credits on dividend income.
Further regulation on divorce, if difficult and expensive for
schemes to comply with, would have an adverse effect on the willingness
of employers (particularly medium and smaller employers) to continue
with their occupational schemes.
1.3 Although there is a great deal of detail
already contained within the Bill, there are many matters that
will fall to be dealt with by detailed regulations. They are integral
to the smooth working of the legislation and we therefore hope
that draft regulations will be available as soon as practicable.
Schemes will have considerable difficulty meeting the timetable
for the introduction of pension sharing because of the changes
required to IT systems at a time when software providers are preoccupied
with Year 2000 compliance. (In this connection, we believe the
£5 million compliance cost estimate for non-recoverable scheme
set-up costs is likely to prove an understatement.) In addition,
scheme documentation will have to be amended to incorporate the
new arrangements. Work on both the IT and administrative processes
needs to begin at an early date and it is, therefore, essential
that the detailed regulations are available by the end of 1998.
1.4 There has been much material to go through
in the eight weeks or so allotted for initial consultation and
NAPF is concerned at this stage about the possible consequential
effects on other pieces of legislation which may not be apparent
at first examination. The foreword to the consultation paper,
says: "The challenge is now . . . to translate broad principles
into practical and workable arrangements in areas —pensions,
family and tax law—which are notorious for their complexity."
There must be adequate time for proper consideration of the
legislation so that its wider impact can be assessed. It also
needs studying to ensure that it does not contain significant
drafting errors such as occurred recently in the Social Security
Bill[5]
and this process will take time. We have listed our initial drafting
comments and queries in the annex to this paper and would like
to discuss them in more detail in due course with DSS. NAPF's
objective is to see the implementation of legislation that is
clear and workable, is fair to all parties and does not impose
too onerous a burden on scheme administrators and trustees. NAPF
will work with all interested parties to achieve that aim.
2. THE LEGISLATION
2.1 NAPF welcomes a genuine consultation process.
The approach taken by Government for pension sharing consultation
- including the consultation panel - has NAPF's full support and
we hope that it will set a pattern for future legislation. The
advantages of this process are:
— consultation makes the process more
transparent;
— it should prevent `unwelcome surprises'
at the inception of the parliamentary process;
— it should eliminate major difficulties;
— it should make it easier for all
parties to plan and prepare.
2.2 We found the explanatory notes particularly
helpful.
2.3 NAPF is concerned about the balance between
primary legislation and regulation. The complexity of pension
sharing makes it almost inevitable that certain aspects of the
legislation will, in practice, prove deficient. Some statutory
provisions will have to be amended and regulations will be easier
to amend than primary legislation. The draft Bill is lengthy and
includes provisions that could be in regulations. Some examples
are as follows:
— Safeguarded rights as contained in
Clause 11. Contracted-out rights will become "safeguarded
rights" if transferred to the former spouse. The draft Bill
envisages that occupational schemes will need to apply for a separate
"safeguarded rights certificate" if they wish to keep
or accept such rights. As well as moving the provisions of the
Clause to regulations we believe that there is considerable scope
for simplification in this area. We cannot understand why, if
a scheme has met the requirements for contracting-out, it cannot
be allowed, automatically, to keep or receive safeguarded rights.
We comment further on this in paragraph 2.5.2.
— Pension Credit Benefit: Chapter
II of Clause 12: the detail on the transfer of pension credits.
— State Scheme rights: Clauses
22 and 23.
2.4 NAPF is concerned that trustees should be
able to give effect to pension sharing orders from the effective
date of the new legislation. In most cases it will not be possible
to rewrite scheme rules or other documentation within the time
available. There may also be some aspects of the legislation that
are ultra vires for trustees. To ensure the timely implementation
of the new arrangements, trustees should be given power (possibly
limited to specific clauses) to amend scheme rules by resolution
to the extent necessary to comply with the Bill, as permitted,
for example, under s68 of PA95.
2.5 We should like to discuss with DSS which
of the main legislative requirements should be overriding. We
note that the provisions of Clause 6 - Pension debits - are overriding
and agree that this is necessary. We recognise the potential difficulties
with overriding provisions but would like to discuss whether this
should be applied to other areas of the legislation. Two possible
areas for further consideration are:
2.5.1 Pension Credits: mode of discharge.
Schedule 2, paragraph 1(2) allows Trustees to
discharge their liabilities by conferring "appropriate rights"
on the former spouse in the member's scheme. "Appropriate
rights" are defined in paragraph 6 as being rights which
are equal in value to the credit i.e. the percentage of the CETV.
Whilst this appears to allow trustees to decide the benefits applicable
to former spouses, NAPF considers it essential that wide powers
are given to trustees with overriding effect, to determine precisely
the benefits to which a former spouse will be entitled. We are
anxious to eliminate any potential for conflict between the domestic
provisions of a scheme in respect of deferred members, and possibly
under general trust law, and the entitlements of former spouses,
if a separate membership class is created.
2.5.2 Part IIIA: Safeguarded Rights
NAPF queries why if schemes are already contracted-out
they cannot automatically be allowed to take safeguarded rights.
If a scheme complies with the rigorous legislative and regulatory
requirements necessary to obtain a contracting-out certificate
it should be deemed capable of accepting safeguarded rights without
further action. The extensive amendments required to scheme rules
seem unnecessary in these circumstances. We are concerned that
if the requirements for providing safeguarded rights prove too
onerous, schemes will not accept former spouses as members and
will insist that they transfer elsewhere. This would be contrary
to the wishes both of Government and NAPF.
2.6 We fully support the principle that pension
sharing should only apply to divorce proceedings that begin after
the implementation of the policy and should not apply retrospectively.[6]
However, we are not certain that the draft legislation fully achieves
this policy intention. It appears to allow couples who were divorced
prior to the effective date of the Act to apply to the Court for
a pension sharing order.[7]
NAPF considers it essential that the legislation should be absolutely
clear that this is not permissible.
3. CLEAN BREAK
AND REBUILDING
PENSION RIGHTS
3.1 NAPF has always supported pension sharing
in preference to earmarking because under the latter the spouse's
benefit remains conditional on the member's retirement or death.
This does not achieve a clean break. However, the draft Finance
Bill clauses also do not achieve a clean break because of their
treatment of scheme members who become subject to a pension share.
For Inland Revenue purposes, the pension which has been diverted
to the former spouse is still to be treated as belonging to the
member.[8]
The result is that members may be unable, within the scope of
Inland Revenue contribution and benefit limits, to rebuild an
adequate retirement pension.
3.2 Paragraph 27 of the consultation document
states: " . . . the scheme member will be able to rebuild
their rights within the existing benefit limit rules", implying
that there will be considerable scope for scheme members to rebuild
their rights. However, NAPF believes that the ability of scheme
members to rebuild has been over-estimated. Although the majority
of people do not reach their absolute Revenue maximum at retirement,
many reach 50 per cent of it - and a substantial proportion achieve
considerably more. It would not be unusual for those affected
by a pension share to lose 50 per cent or more of their entitlement
and many will be able to make good only a small percentage of
the `loss'. The problem will be particularly acute in cases:
— when the member divorces late in
his career;
— where a substantial percentage of
the member's pension is allocated to the former spouse.
3.3 In defined contribution schemes, the effect
of compound interest means that contributions made in the early
years can provide a disproportionate amount of a member's fund
in relation to the size of those contributions. This means that
for a member divorcing in middle age, there is the double blow
of the `loss' of his/her full pension accrued to date and a lack
of time in which to build up sufficient pension provision by retirement
age.
3.4 Even if there is scope for some rebuilding
within existing benefit limits, the Revenue rules for an occupational
pension scheme restrict the amount of contributions payable by
the member to 15 per cent of remuneration. As the average employee
contribution rate is just under 5 per cent,[9]
the net additional contribution permitted is likely to be about
10 per cent. For an older member, even paying total contributions
of 15 per cent may not allow him/her to reach the maximum.
3.5 NAPF is concerned about the risk that members
might transfer out of occupational schemes and into personal pensions
to take advantage of the higher contribution limits of the latter
arrangements. This could have some potentially serious consequences
for individuals. The member would, inter alia, lose the
employer's contribution, give up the employer's defined benefit
guarantee (if this were applicable) and incur costs and commission
on the transfer. This is yet another example of the possible detrimental
effect of the inability to rebuild.
3.6 NAPF is concerned that once scheme members
realise the effect of what is proposed, many will be reluctant
to agree to pension sharing orders. While the Court has power
to make an order in the absence of agreement, the general effect
may be to reduce the number of orders, and the Government's objective
of improving income levels of women in retirement could be adversely
affected in this way as well.
3.7 Spouse's and dependant's pensions are usually
based on a proportion of the member's own pension. Consequently,
restricting the member's own benefits is likely to have a material
adverse effect on second families on the member's subsequent death.
This result would be in direct contradiction to the Government's
stated aim of improving the income of women in retirement.
3.8 A number of arguments have been cited against
allowing rebuilding. The Government's view appears to be that
a divorcing couple should not be able to enjoy greater overall
tax benefits than a couple that remain together. In NAPF's opinion
a couple, once divorced, are two separate individuals. They will
have separate personal income tax allowances and there is, therefore,
no logic in retaining a joint allowance for pension purposes.
It is contrary to the principle of separate taxation for husbands
and wives. NAPF also cannot understand why a couple who have married
and divorced should be in a worse pensions position than a couple
who have never married but have lived together. The latter will
be treated as separate individuals and have two tax and pension
allowances.
3.9 The Government is also concerned about the
potential loss of tax revenue if the member was allowed to rebuild
his/her rights, ignoring the pension share. However, the Revenue
would not be incurring additional expenditure but would simply
be deferring its collection of tax until the member received his/her
pension, in the same way that the member is postponing the benefit
of the additional pension contributions. The likelihood is that
by allowing rebuilding when the member is working and has a disposable
income the State will be relieved of benefit payments to second
families following the member's death.
3.10 A consequence of allowing rebuilding by
the member without reference to the pension share allotted to
the former spouse, is that the share should count towards the
former spouse's IR limit. There will therefore be a restriction
in his/her pension contributions and/or benefits that would not
otherwise have applied.
3.11 NAPF has considered whether the ability
to rebuild pension is likely to encourage changes in social behaviour
because couples decide to divorce for financial advantage. Our
view is that a significant change in behaviour is unlikely, given
the new requirements for a statement of marital breakdown, a period
of reflection and the overall costs and implications of divorce.
The advantages to society as a whole of allowing full rebuilding
outweigh any small risk of changing patterns of behaviour.
4. TRAINING AND
COMMUNICATION
4.1 We have already referred to the complexity
of pension sharing arising from the inter-relation of pension,
tax and family law. It is essential that divorcing couples receive
comprehensive and accurate advice, or disputes will arise both
during the period of divorce and years later when pension benefits
are paid. Judges, family lawyers and financial advisers will need
thorough training, not just on the details of the Pension Sharing
Bill but on pensions issues generally. NAPF understands that training
schemes are being put in place but we are concerned about their
adequacy and the extent of their coverage.
4.2 NAPF members have experienced at first hand
the problems that arise as a result of poorly drafted earmarking
orders. Orders have often been unclear and difficult, or sometimes
impossible, to implement. Schemes have had to seek further clarification
from the Courts, incurring extra costs and delays for the scheme
and the divorcing couple. We welcome the current attempt to improve
the earmarking legislation but believe lessons must be learnt
from the experience so that similar problems do not arise with
pension sharing. The legislation must be clear and in `plain English'.
Parts of the draft Bill are very difficult to interpret (see,
for example, our comments in paragraph 8 of the annex). Clarity
in the wording of the legislation and other documentation, combined
with thorough, mandatory and on-going training for lawyers and
financial advisers, will go a substantial way towards ensuring
the smooth implementation of pensions sharing.
4.3 Many of these problems with earmarking have
arisen because matrimonial lawyers and Courts have not sufficiently
understood how pension schemes work. For example, even if a CETV
is divided between the member and former spouse in the ratio 50:50,
the member's negative deferred pension and the spouse's pension
will be quite different unless the two parties are the same sex
(which is not covered by legislation) and the same age. Unless
the Courts and family lawyers understand the effect of actuarial
concepts on the value of a pension share they will be unable to
implement pension sharing successfully; nor will they be able
to explain the principles to the divorcing couple. We regard this
latter point as vital if disputes are to be avoided between schemes,
the member and former spouse potentially years after the divorce
when benefits come into payment. We also believe that the couple
should be offered FSA-regulated financial advice and that the
advisers themselves should be trained in pension sharing.
4.4 NAPF has a highly regarded pensions training
capability and is happy to offer its resources for training initiatives
- perhaps in conjunction with the Solicitors' Family Law Association,
Family Bar Association, Association of Pension Lawyers and the
Judicial Studies Board. We will incorporate pension sharing into
our normal training courses for scheme administrators. Some of
our basic courses could, however, be adapted for financial advisers
and family lawyers to gain an understanding of how occupational
schemes work.
5. LIABILITIES AND
DISCHARGES
5.1 We have already referred to the importance
of clarity in the legislation. All parties must be able to understand
their obligations and liabilities in respect of pension sharing
orders and how those liabilities can be discharged. Once the required
action has been taken, there should be no scope for disputes.
The first step in achieving this is, as outlined in paragraph
4.2 above, clear and standardised pension sharing orders so that
the problems which have arisen with ear-marking orders are eliminated.
5.2 We note that it is the Government's intention
that pension sharing agreements (as opposed to orders) will have
to satisfy requirements set out in regulations by the Lord Chancellor.[10]
They will have to take a particular form, contain prescribed information
and must have been produced to the Court before being passed to
the pension arrangement concerned. We support this attempt to
ensure consistency and clarity and wish to continue to participate
in vetting such forms in draft.
5.3 If pension sharing orders and agreements
set out clearly the action required, the next step is to ensure
that there should be a clear method of enforcing the pension share.
We believe the expression `person responsible for the arrangement'
contained in many clauses in the Bill will result in uncertainty
as to who is responsible for implementing the pension share. The
wording is too wide and could encompass third party administrators
as well as pension scheme trustees or personal pension and annuity
providers. We assume the latter is the intention. NAPF suggests
that a more precise definition is needed. The same point arises
in Clause 4(1)(6), 8(2)(6) and paragraphs (2) and (3) of Schedule
2.
5.4 The means by which trustees may discharge
their liabilities towards a former spouse must be unambiguous
and effective. NAPF notes and welcomes the opportunity for funded
schemes to choose whether or not to provide the pension share
within the scheme or externally. NAPF also welcomes the intention
that, except in limited circumstances (i.e. underfunding) schemes
will be able to transfer pension share rights out under a default
option.
5.5 The draft Bill[11]
has provision for a transfer payment to be made with the former
spouse's consent or in accordance with regulations. The intention
as set out in the explanatory notes to the Bill is that where
the former spouse does not provide details of an alternative scheme
or arrangement to which the scheme can discharge its liability
for the pension credit and the scheme does not wish to give the
former spouse rights within its own scheme, it can act without
the former spouse's consent. We believe that if a trustee has
acted reasonably in these circumstances he ought to be given a
valid discharge by the legislation. However, we have some concerns
about the effectiveness of this option because of Financial Services
Act (FSA) 1986 implications for schemes and trustees.
5.6 A personal pension would not appear to be
an appropriate vehicle to receive a pension share without the
former spouse's consent, as it has to be taken out by an individual.
A "Section 32" policy can, in theory, be taken out by
the trustees without the consent of the former spouse. However,
such a policy could represent a switch from a defined benefit
to a money purchase benefit and, as such, it is unlikely that
any insurance company would set up such a policy without the signature
of the beneficiary. We regard it as unlikely that the Financial
Services Authority would accept a situation where a policy could
be set up without the former spouse's agreement, and therefore,
in theory could never be mis-sold. This leaves the option of a
without-profit deferred annuity set-up to replicate exactly benefits
otherwise provided under the scheme. Although this appears unobjectionable
on compliance grounds, it is an expensive option and is not likely
to appeal to trustees. There is also the risk that former spouses
will object to the type of benefit purchased, once they realise
the implications in years to come.
5.7 The proposed regulations must set out the
parameters for the buy-out option and give trustees a clear discharge,
or schemes will have no other choice than to offer the former
spouse an in-scheme deferred pension - a position NAPF would find
unacceptable. If Trustees do everything that is reasonable to
implement the pension share they should be protected from the
possibility of any subsequent legal action. Trustees will also
need assurance that the external default options, once determined
in detail, neither constitute day-to-day investment business under
s191 FSA, 1986 nor fall within the ambit of s36 PA95.
5.8 One option NAPF hopes will provide a good
value and secure alternative for the former spouse's share of
the CETV is a Stakeholder Pension. Government has said that these
arrangements will be flexible and secure, and provide good value
for their members. They would, therefore, appear to be eminently
suitable for this purpose.
5.9 NAPF has a further concern about the position
of trustees. A member may attempt to frustrate the effectiveness
of a pension sharing order by exercising his right under existing
legislation[12]
and requesting a transfer out of the scheme before the order takes
effect. If such an attempt ultimately succeeds, the member may
damage his own pension rights in the process. The former spouse
is also likely to feel aggrieved with the trustees of the scheme
in these circumstances. NAPF seeks an assurance that in such situations
schemes will be able to obtain a complete discharge in respect
of the member's pension rights, and will not be involved in disputes
and further work and expense as a result of the member's actions.
5.10 We have a general point about trivial benefits.
We suggest that a pension sharing order should not be able to
specify a share of a pension in payment of less than the triviality
limit—currently £260 a year—or a share of a CETV
of less than 10 times that limit (i.e. currently £2,600)
to either party. A trivial benefit limit is essential if the costs
of transferring small amounts externally or creating internal
membership rights for former spouses are not to be greater than
the value of the pension share.
5.11 NAPF is also concerned that there should
be a total discharge for trustees in the event of a 100 per cent
CETV order in relation to a deferred member or pensioner. Schemes
will wish to avoid the administration involved in keeping records
for a member whose only benefit is a 100 per cent negative deferred
pension.
6. PENSION CREDITS:
SCHEME MEMBERSHIP
OPTION
6.1 NAPF supports the principle of pension sharing
and we have said that we will recommend to our members that they
should offer internal membership to former spouses, provided the
detailed arrangements are practicable. We cannot of course require
our members to take a particular course of action and it is therefore
important that all the arrangements in place for pension sharing
are clear and unambiguous and that the conditions attaching to
internal membership are not too onerous for schemes. We do not
envisage trustees being willing to take the risk of getting involved
in disputes with the member or former spouse if the internal option
is complex.
6.2 We have some concerns about the benefits
to which former spouses will be entitled as a result of an internal
transfer. We expect most schemes to want to mirror deferred pensioner
benefits but some may not, perhaps because of the peculiarities
of their scheme or because they do not want to offer discretionary
benefits not included in the CETV. It is important to ensure that
the Bill incorporates the principle, stated in the consultation
document,[13]
that schemes can provide a package of benefits for the former
spouse if an internal transfer is chosen. The overriding principle
must be that of equivalent value with the cash equivalent proportion
ordered or agreed. There is no employment relationship between
the company and the former spouse, and it is therefore unreasonable
that ancillary benefits which may be appropriate to a member in
service are automatically passed on to the former spouse unless
they clearly fall within the calculation of the cash equivalent.
While the Bill provides that the pension credit/debit calculation
is linked to items which fall within the cash equivalent, the
description of former spouses' rights as "broadly similar
to those of a deferred member" in the accompanying notes[14]
might give the impression that they are entitled to more. We give
some examples in the following paragraphs.
6.3 First, a member whose pension is subject
to a pension share falls ill 6 months later and is awarded a full
incapacity pension under the scheme rules. These provide that
the member is credited with full potential years of service that
he would have received had he been able to work until normal retirement
date. The resulting pension will not be as high as if the pension
share had not been made, but because the pension share will have
been calculated at a date before the member became incapacitated,
no element of that additional benefit would be reflected in the
pension share payable to the former spouse. This must be right
in principle, since the former spouse was entitled to a share
of the value of the accrued pension at a particular date. One
can imagine, however, a dispute in which the former spouse challenges
the amount or date of payment of her own benefits. Assume the
former spouse then herself becomes incapacitated and is unable
to find a job. Might she argue that she, too, is entitled to a
credit to compensate her in some way for being unable to work?
This would be wholly illogical, but depending on the scheme rules
defining the benefits payable on incapacity for a deferred pensioner
it might be possible for an argument to be made. It must be possible
for the clean break to be made both for the individuals and for
the scheme. This depends on making it clear that the former spouse
is not automatically a deferred pensioner.
6.4 A second example relates to special early
retirement options. Assume that a member has a right, subject
to receiving his employer's consent, to retire early on generous
terms. In such circumstances, the cash equivalent will not reflect
that option, since it is dependent on receiving the consent of
the employer. While this may therefore work in terms of the Bill,
there is a possibility of dispute. Disputes themselves generate
cost for schemes. An amendment to the Bill, expressly providing
that subject to giving value for the cash equivalent, the trustees
can determine the benefits payable is desirable.
6.5 A third example relates to death benefits.
The Inland Revenue (according to the explanatory notes) proposes
to amend its discretionary practice to allow up to 25 per cent
of the former spouse's pension to be payable as a lump sum on
her death. Some schemes may wish to provide that option. Others
would not, since most deferred pensioners are not given substantial
death benefits if they die in the period of deferment. It must
be clear in the Bill that it is the scheme who can decide whether
or not to take up the extra flexibility given by the Revenue.
There must be no expectation on behalf of such spouses that they
have a right to this.
6.6 The key point is that the regulations under
Schedule 2, paragraph 1(2)(b) must be drafted to give trustees
flexibility in this area.
6.7 We note that regulations will set out how
pension share rights are to be treated on the death of a former
spouse after a pension sharing order has been received but before
it is implemented. The intention is that in such circumstances
the former spouse will be treated "as if they had become
a member of the arrangement in question".[15]
We have some concerns about this proposal. For example, would
this apply if the scheme in question did not normally offer internal
membership? Why could not the default option be used in such circumstances?
The benefits on the death of a deferred member are frequently
confined to a refund of contributions. We would like to discuss
with DSS how this proposal would apply in practice.
7. CASH EQUIVALENTS
7.1 NAPF has reservations about the proposed
introduction of further regulations with regard to the calculation
of CETVs which would substantially duplicate existing regulations.
Clearly some new regulations are needed, but it is suggested that
they be confined to the sharing of pensions in payment. All other
calculations could be done on the basis of the existing regulations
and GN11.
7.2 Consideration also needs to be given as
to whether the calculation of CETVs in respect of pensioners should
be subject to the provision of medical information by the member.
We suggest that schemes should have the power, if they wish, to
ask for evidence of good health before they provide CETV quotes
for pensions in payment and that, where appropriate, actuaries
should be able to take account of the health of a pensioner member
in calculating the CETV.
8. COSTS
8.1 Clause 15 allows schemes to recover their
initial charges for implementing a pension share and Clause 16
allows schemes to recover the costs of paying a pension to a former
spouse member. Schemes will not be able to recover set-up costs,
which we believe will be substantial for many schemes. We expect
schemes to adopt different policies towards charging for on-going
costs. For example, those with third party administrators are
more likely to charge because the administrator will levy a charge
for each transaction. In-house managers may take a different view.
8.2 NAPF has some concerns about the methods
by which schemes will be able to recover administrative costs
and the way in which these have to be explained to the member.
We note that the intention is to allow the divorcing couple, by
regulation, to pay the charges at the outset. In our view this
is the option most schemes would favour, and we would prefer this
to be the standard method, with schemes having the right to refuse
to give effect to a pension share if their costs have not been
met. However, we recognise that some schemes may prefer to deduct
costs from CETVs to avoid having to raise invoices etc and this
should, therefore, be retained as an option. If, under the proposed
arrangements, the parties opt to pay at the outset there must
be clarity about how and when the costs will be recovered. If
they are not paid what action will schemes be able to take, other
than to charge interest for late payment as envisaged in Clause
15(4)?
8.3 We have some concerns about the disclosure
of administration costs to the parties. It would not, in our view,
be reasonable to expect schemes to incur the expense of having
to notify their members and former spouses of the charges in specific
and separate letters. It would be preferable if the charges could
be set out by schemes in their general disclosure information
and be revised from time to time, as necessary. The details could
be included in the documentation sent to the solicitors when the
CETV is first requested so that the parties are aware of the cost
implications when they are considering a pension share.
8.4 We note that schemes may recover `reasonable'
costs (Clause 15). These costs will vary significantly from scheme
to scheme depending on its size, its administrative arrangements,
the complexity of the benefit structure and the incidence of divorce
among the membership. For this reason we welcome the fact that
the Government is against prescribing costs due to these wide
variations. Because of the difficulties incumbent in a `reasonableness'
test, NAPF would be prepared to consider—after consultation
with our members and other pension organisations—recommending
a scale of charges that would be appropriate for implementing
a pension share. A charge coming within the recommended range
would be presumed `reasonable' and thus we would hope that potential
disputes with scheme members and former spouses could be prevented
at the outset.
8.5 Clause 16 makes provision for an occupational
scheme to recover the cost of paying benefits when a former spouse
is given rights in the member's scheme. The cost can be deducted
from the benefit as long as notice is given of the proposed deduction.
We propose that this information should either be included in
a scheme's documentation and disclosed at the time of the divorce
or be in the form of one notice, at the commencement of payment
of the pension. It should not be a monthly requirement.
9. TIME LIMITS
9.1 We have some general concerns about time
scales. We have referred in paragraph 1.3 to the difficulty schemes
will have in amending their administration, documentation and
IT systems by the autumn 2000. It is, therefore, crucial to the
implementation of the legislation that the draft regulations are
available by the end of 1998.
9.2 Once a pension sharing order has been received,
trustees will have four months to comply with it. We note and
welcome the intention in the explanatory notes[16]
that, to allow time for appeals, the order will not take effect
until 21 days after it is made. However, some schemes might still
find difficulty complying with this extended period and a six
month period might be more appropriate. We are thinking particularly
of small or medium sized schemes that refer CETV calculations
to the actuary, and those that have to get contracted-out details
from COEG. We are concerned because there are heavy penalties
for trustees who fail to meet the four-month deadline, although
we note that under Clause 8(3) OPRA may extend the implementation
period.
10. JURISDICTION
ISSUES
Many pension schemes have members or former
members who live in more than one UK jurisdiction. It is essential
that schemes can implement sharing orders without difficulty,
and are not drawn into lengthy correspondence with solicitors
acting for one or both of the divorcing parties about jurisdiction
issues. We would like to know how jurisdiction issues would be
resolved, and how is it intended that an order in one jurisdiction
cannot be challenged on a jurisdiction point by the other party.
Our concern is that these matters should be resolved before an
order is made so that the scheme is not involved. This is another
issue which we would like to discuss further with DSS.
11. MISCELLANEOUS
11.1 The position of closed schemes needs special
consideration, particularly where there is no employer to meet
set-up costs. Earmarking would appear to be more appropriate in
such circumstances.
11.2 The calculation of CETVs for schemes with
benefit structures which are integrated with overseas benefits,
whilst it will arise only very infrequently, is likely to prove
complex.
6 August 1998
ANNEX
1. Clause 40A(2) MCA (Schedule 1 paragraph 9)
refers to "the person subject to liability". Does this
mean trustees or administrators? A theme running through the Bill
is where the actual liability for the pension credit lies. The
Bill requires clarity in a number of instances - we have given
specific examples in paragraphs 3, 4, 10 and 12 of this Annex.
2. Clause 40A concerns the powers of the Court
to which an appeal is made, where the appeal is begun on or after
the day on which the Court Order takes effect. Clause 40A(4) enables
the Court to make such orders "as it thinks fit", for
the purpose of putting the parties, as nearly as possible, in
the position they would have been in, had the order not been made
or, as the case may be, had it specified the percentage the Court
considers appropriate. NAPF requires clarification as to how this
would work in practice.
3. Clause 3(6) refers to "person responsible".
Is this the trustee or administrator?
4. Clause 4(1)(b) refers again to "person
responsible". Who is responsible? The words could be interpreted
as meaning third party administrators, rather than trustees or
providers which we assume is the intention.
5. Clause 4(4) includes all benefits as relevant
benefits, whether actually in payment or due on some future date.
It excludes survivors' benefits however. We believe that the words
"or future" on the second line should be deleted. Whilst
we appreciate that they are probably intended to refer to the
date on which benefits may become payable, they are potentially
misleading. The same point applies to Clause 6(2).
6. Clause 4(5) refers to "occupational
pension scheme". Would it be more accurate to amend this
Clause to read "salary related scheme"?
7. Clause 5 proposes the introduction of further
regulations with regard to the calculation of cash equivalents
which would substantially duplicate existing regulations. NAPF
has suggested that any new regulations be confined to the new
element i.e. with regard to pensions in payment.
8. We found many problems interpreting Clause
6. There appear to be particular difficulties in relation to the
interpretation of the term "appropriate percentage"
and how it is to be calculated. One specific problem seems to
be ill-health early retirement. The CETV does not include ill-health
early retirement but this would mean that if the pension debit
order reduces the "relevant benefits" by the appropriate
percentage, the member's ill-health early retirement pension would
not be reduced, whereas the rest of his benefits would. Indeed
how are early retirements generally to be treated?
Due to the complexities of this problem, we
would appreciate further discussion as we believe that this is
the only way to resolve the difficulties. One further suggestion
is to include worked examples within the legislation itself. There
is already an example of this in the Consumer Credit Act.
9. Another drafting concern is that relating
to the use of the word "entitled" in Clauses 4(4) and
6(2)(a). "Entitlement" is not defined in the Pensions
Act 1995 but in contrast to "accrued rights" appears
to relate to rights which are available without reference to the
length of pensionable service, such as lump sum death benefits.
By contrast "accrued rights" is specifically defined
in S124(2) Pension Act 1995 and contemplates calculation at a
particular point in time. By analogy, Clause 6(3) which defines
relevant benefit, excludes a lump sum death benefit. We are concerned
at the use of the word "entitled" in this context and
would appreciate further discussion on the drafting.
10. Reference in Clause 8(1) to "a person"
and then at Clause 8(2)(b) to "any trustee or manager"
requires clarification.
11. Clause 12 inserts a new provision into the
Pension Schemes Act 1993. It refers to discharge of liability
for GMPs by insurance policies or annuity contracts at Section
101E. This Clause requires clarification as it refers to "members".
Should it not refer to former spouses?
12. Schedule 2 paragraph 3(3) again refers to
"the person responsible". NAPF requires a definition.
- Clause 15 refers to a "reasonable charge".
This drafting is not sufficiently clear. Also Clause 15(2)(b)
refers to charges which "appear likely to be incurred in
relation to the transferee". These will be difficult to quantify.
4 Pension sharing on divorce: reforming pensions for
a fairer future Part 1, p. 2, para 4. Back
5
Social Security Bill 1998, amendment to s. 42A, Pension Schemes
Act 1993. Back
6
Consultation document, part 1, chapter 2, para 21. Back
7
Schedule 1, Clause 3, 24C(4)(b). Back
8
Consultation document, part 1, para 27; draft Bill Clause 1, schedule
1, para 1(3)(bb). Back
9
1997 NAPF Annual Survey p. 11. Average member contribution excluding
non-contributory schemes: A final salary (i) private sector 4.7
per cent; (ii) public sector 5.5 per cent: B. money purchase 3.7
per cent. Back
10
Clause 3(2)(b). Back
11
Schedule 2 1, sub-para 3(c). Back
12
Pension schemes Act 1993, s.94 as amended by ss. 152-154 PA95. Back
13
Part 1, p.14, para 11. Back
14
Part 1, p. 18 para 26. Back
15
Consultation document Part 2 p. 14, note on Clause 10 subsection
2. Back
16
Consultation document, part 2, p. 8, 2nd para. Back
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