House of Commons - Explanatory Note

Welfare Reform and Pensions Bill - continued	House of Commons

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Parts III-IV: Pensions On Divorce And Nullity

BACKGROUND

Since the 1970s, the courts have been required to have regard to the value of pension rights so that these can be offset against other assets. The Pensions Act 1995 allowed courts:

in England and Wales, to require pension arrangements to pay maintenance from a member's pension directly to a former spouse;

throughout Great Britain, to order part or all of a lump sum payable on the death or retirement of a member to be directed to the former spouse.

These provisions, which are generally known as the earmarking or attachment provisions, have been little used. They do not allow a clean financial break in a divorce settlement or on nullity of marriage and they leave former spouses vulnerable in that they lose their intended or actual retirement income if their former spouse dies before them. Pension sharing will provide an additional option for couples ending their marriage, to ensure that assets can be divided fairly on divorce. It will make it easier for divorcing couples to achieve complete financial independence through a clean break settlement. It should provide many former spouses, most of whom are likely to be women, with greater security of income throughout retirement.

The Government published a public consultation paper in June 1998 that included a draft Pension Sharing Bill and complementary draft legislation containing the necessary changes to tax law. The draft legislation was also scrutinised by the Social Security Select Committee as part of the pre-legislative scrutiny of Bills recommended by the Select Committee on Modernisation.

The Social Security Select Committee published its report on 28 October 1998. Many of the issues raised by the Committee echoed those raised by the 82 respondents to the consultation exercise. The Government responded to the report on 12 January 1999. Copies of the response and the non-confidential replies to the public consultation are available in the Library of the House of Commons and the Record Office of the House of Lords. Although the Committee and the great majority of respondents were firmly in support of the principle of pension sharing, the provisions in this Bill reflect the changes made in response to Committee's recommendations and the concerns expressed by other commentators about some aspects of the draft legislation.

In particular, the provisions in the Bill have been amended to put beyond doubt that pension sharing will be available only to those who begin proceedings for divorce or annulment after the legislation has been brought into force. The Government also agrees that "attachment/earmarking" should be retained as an alternative to pension sharing, and the Bill includes changes designed to improve the current legislation which formed part of these arrangements. The Bill also includes provisions extending sections 25B to 25D of the Matrimonial Causes Act 1973 to overseas divorces etc.

The Government has also made a number of technical amendments in the light of recommendations by the Committee and/or responses to the consultation exercise. To enable schemes to simplify the administration of a pension in payment to a former spouse, schemes will have the discretion to impose a single "indexation" requirement on the whole of the pension to protect its value against inflation during retirement. Similarly, to simplify administration and reduce the costs to pension schemes, we have dispensed with the requirement for pension schemes contracted-out of the state scheme to obtain separate certificates to hold "safeguarded rights" (that is contracted-out rights which form part of a pension share).

The Government has noted the views of the Committee that former spouses of members of unfunded public service schemes should be allowed to choose to transfer out of such a scheme, a point that was also mentioned in some consultation responses. However, former spouses will enjoy the same levels of security and inflation-proofing as other scheme members of a public service scheme and, without this restriction, public expenditure would be brought forward. So, the provisions in this Bill continue to prevent former spouses from transferring out of such schemes.

The pension sharing clauses

The main purpose of the pension sharing clauses is to introduce the option of pension sharing on divorce or nullity of marriage. This will allow pension rights to be treated like other assets and a proportion, or the whole, of their value to be transferred from one spouse to the other as part of the financial settlement. Pension sharing will not be compulsory - it will still be possible to offset pension rights against other assets or to use the current earmarking and attachment arrangements.

Pension sharing will be open to couples where the pension rights exist under an occupational pension scheme, a personal pension scheme, the State Earnings Related Pension Scheme (SERPS), or other pension arrangements. Pension sharing will not apply to the basic state pension, where one partner may already substitute their former partner's contribution record for their own in the event of divorce.

The rights created from the value transferred will belong to the person for whom they are created. The eventual payment of the pension will be direct to them and will no longer depend on the circumstances of their ex-spouse.

Pension sharing will apply only in relation to proceedings for divorce or annulment that begin after the new arrangements come into force. The costs of pension sharing will be recoverable from the couple.

Structure of the provisions about pensions on divorce and nullity

Part III

This amends existing matrimonial and family law to enable the court to make pension sharing orders in relation to divorce and annulment. It also makes provision amending the earmarking and attachment provisions, and extends the England and Wales provisions to overseas divorce and nullity.

Part IV

Chapter I sets out how, in relation to a pension arrangement, a pension share is effected and the result. Chapter II makes similar provisions in relation to SERPS.

Part VI

The general provisions for the Bill in Part VI contain some measures relating specifically to pension sharing. In particular, see

-- Clause 68 part (regulations and orders)

-- Clause 69 (consequential amendments relating to Parts III and IV)

-- Clause 70 part (transitional provisions)

Summary of pension sharing provisions

Part III

Clause 15 (and Schedule 3) amends Part II of the Matrimonial Causes Act 1973. The effect of the amendments is to enable the court in England and Wales to make pension sharing orders in relation to divorce and nullity of marriage.
Clause 16 makes corresponding provision for Scotland.
Clause 17 (and Schedule 4) amends the sections about pensions inserted in the Matrimonial Causes Act 1973 by section 166 of the Pensions Act 1995.
Clause 18 extends the earmarking and attachment provisions, included in the Pensions Act 1995, to applications for financial relief after an overseas divorce or annulment.
Part IV
Chapter I
Clause 19 sets out the scope of the pension sharing mechanism relating to rights under pension arrangements.
Clause 20 activates the pension sharing mechanism (see clause 21) following a pension sharing order by the court or an agreement between the divorcing couple.
Clause 21 provides, as a result of the pension sharing order or agreement, for the pension rights of a person with rights under a pension arrangement to be subject to a debit and the former spouse to become entitled to a corresponding pension credit in the form of a right against the person responsible for the arrangement.
Clause 22 provides a power to specify the calculation of the cash value of the member's pension rights (the "cash equivalent").
Clause 23 specifies how the member's pension rights should be reduced as a result of the pension share.
Clause 24 deals with the effect of pension sharing on contracted-out rights (that is, the rights built up by members of contracted-out schemes that replace the state earnings related pension scheme (SERPS)). Clause 24 reduces contracted-out benefits to take account of a pension share. It also ensures that the state does not have to meet the cost, in the form of payment of extra additional pension, because of the reduction in the member's benefit.
Clauses 25 and 26 specify the time limit within which the person responsible for a pension arrangement must discharge his liability in respect of a pension credit. Clause 25 also provides that the Occupational Pensions Regulatory Authority (OPRA) must be notified if an occupational pension scheme fails to carry out the pension share on time and enables OPRA to either impose fines in such cases or extend the time allowed for carrying out the order.
Clause 27 (and Schedule 5) sets out the ways in which persons responsible for pension arrangements can discharge their liability for a pension credit. In the case of pension schemes, this is by creating rights for the former spouse within the scheme itself or by making a transfer payment to another suitable pension scheme or arrangement. The clause also provides for cases where the person entitled to the pension credit dies before the pension share has been implemented.
Clause 28 sets out the special requirements in relation to any part of a former spouse's pension rights derived from the member's contracted-out employment. These rights are called "safeguarded rights". The clause also sets out the requirements that schemes wishing to hold safeguarded rights must meet.
Clause 29 sets out the general rules relating to the pension rights obtained by the former spouse following a pension share where the rights are provided under an occupational pension scheme. It also provides former spouses with transfer rights except in the case of unfunded schemes.
Clause 30 makes provision for pension credit rights when a pension scheme winds up.
Clause 31 provides for pensions payable by public service schemes to former spouses following a pension share to be fully protected against inflation ("indexed"). This mirrors the protection enjoyed by other members of public service schemes.
Clause 32 provides that the Secretary of State may regulate to make indexation provisions for pensions payable to former spouses by private sector occupational schemes and pensions or annuities derived from safeguarded rights held in personal pension schemes.
Clause 33 confers power enabling the Secretary of State to make regulations enabling the person responsible for a pension arrangement to recover pension sharing costs from the parties to the pension share.
Clauses 34 and 35 contain technical provisions necessary to enable public service and judicial pension schemes to comply with pension sharing orders or agreements.
Clause 36 disapplies a common provision in pensions legislation, which prevents the pension rights of an individual from being passed on to another person (except on death), to enable a pension sharing order or agreement to be carried out. The disapplication also extends to any corresponding provisions of pension arrangements.
Clause 37 contains a regulation-making power to require pension schemes to disclose information relevant to a pension share.
Clause 38 defines some of the terms used in Chapter I. Chapter II
Clause 39 sets out which state scheme rights may be subject to pension sharing.
Clauses 40, 41 and 42 (and Schedule 6) provide for pension sharing to apply to the additional pension built up in SERPS. The additional pension rights obtained by a former spouse following a pension share are called the "shared additional pension".
Clause 43 defines some of the terms used in Chapter II.
Part VI
General
Clause 69 gives effect to Schedule 9, which makes consequential amendments etc. relating to Parts III and IV.
Clause 70 contains transitional provisions
Clause 73 gives effect to Part III of Schedule 10, which repeals some existing legislation in consequence of the pension sharing provisions.
These clauses are described in the commentary on Part VI, towards the end of this document.

COMMENTARY ON CLAUSES

PART III - PENSIONS ON DIVORCE ETC.

Clause 15: Pension sharing orders in England and Wales

This clause gives effect to Schedule 3, which amends the Matrimonial Causes Act 1973 to enable the court to make pension sharing orders in connection with proceedings for divorce or nullity of marriage in England and Wales.
Clause 16: Pension sharing orders in Scotland

This clause amends the Family Law (Scotland) Act 1985 to enable the court in Scotland to make pension sharing orders in relation to divorce and nullity of marriage in Scotland.
Subsection (2) inserts into section 8(1) (which sets out the types of order for financial provision a court may make in an action for divorce) a new type of order named "a pension sharing order".
Subsections (3) and (4) insert various definitions into section 27 (interpretation). These definitions largely correspond to the equivalent definitions for England and Wales at Schedule 3, paragraphs 2(3) and (4). The sole point of difference occurs at subsection (3)(b) in the definition of "pension sharing order". This provides for the percentage value or the amount of the shareable rights to be transferred. Allowing the transfer of an amount reflects substantive law and current practice in Scotland in relation to orders for financial provision on divorce.
Clause 17: Sections 25B to 25D of the Matrimonial Causes Act 1973

This clause gives effect to Schedule 4 which amends the sections about pensions inserted in the Matrimonial Causes Act 1973 by section 166 of the Pensions Act 1995. These provisions reinforced the courts' existing duty to take account of pensions in divorce settlements and gave courts in England and Wales new powers to require that, when a pension comes into payment, part of it shall be paid by the pension scheme direct to the former spouse.
Clause 18: Extension to overseas divorces etc.

This clause amends Part III of the Matrimonial and Family Proceedings Act 1984 to extend the earmarking and attachment provisions, introduced by the Pensions Act 1995, to applications for financial relief after an overseas divorce or annulment.
Subsection (2) amends section 18 to require the court, when deciding whether and how to exercise its powers, to have the same regard to pension benefits in relation to paragraphs (a) and (b) of section 25(2) of the Matrimonial Causes Act 1973 as it does under section 25B(1) of that Act.
Subsection (3) defines pension arrangement and benefits under a pension arrangement.
Subsection (4) amends section 21 of the 1984 Act by inserting two new paragraphs into what was section 21, but which, as a result of the Bill, will be section 21(1). Section 21 of the 1984 Act applies provisions of the 1973 Act to financial relief orders under section 17 (financial provision and property adjustment orders) of the 1984 Act. The additions made by subsection (4) apply to section 17 orders the same provisions about earmarking and attachment as apply under the 1973 Act where, having regard to any benefits under a pension arrangement, the court makes a financial provision order on divorce or nullity.
Subsection (5) inserts new subsections (2) to (6) into section 21 of the Matrimonial and Family Proceedings Act 1984. Of these new subsections:
(2) excludes the new section 21(1)(be) and (bf) in cases where the only link with England and Wales is the matrimonial home;

(3) applies section 25D(1) of the Matrimonial Causes Act 1973 (transfers of rights between pension arrangements) to pension attachment orders under the new section 21(1)(be) and (bf); and

(4) allows the Lord Chancellor to make regulations equivalent to those which may be made under section 25D(2) to (2B) and (2D).

(5) allows the Secretary of State to make regulations equivalent to those which may be made by him under 25D(2C) to (2E) of the 1973 Act

PART IV - PENSION SHARING

Chapter I - Sharing of Rights under Pension Arrangements

Clause 19: Scope of pension sharing mechanism

This clause sets out the scope of the pension sharing mechanism.
Subsections (1) and (3): pension sharing may extend to a "person's shareable rights" (defined in subsection (2)) in any pension arrangement other than an excepted public service scheme. We intend to use the power in subsection (3) to except the Great Offices of State.
Subsection (2): most pension rights will be shareable. We intend to use the regulation-making power to exclude survivors' benefits payable to a member in his capacity as a survivor (such as, a widow's or widower's pension payable in respect of a former marriage), an injury benefit, compensation payment, and incidental benefits such as travel concessions.
Clause 20: Activation of pension sharing

Subsection (1) lists the circumstances in which the pension sharing mechanism is triggered:

(a) a pension sharing order under the Matrimonial Causes Act 1973;
Note: In England and Wales a pension sharing order will be stayed (and so not take effect) for a period in accordance with the level of the court in which the jurisdiction is exercised. The stay provides time for the parties to appeal. If an appeal is begun during the stay period, the order will be further stayed until the appeal is disposed of. In Scotland the appeal process must be completed before the extract decree or declarator is issued. Thus, any appeal in Scotland will be disposed of prior to triggering the pension sharing mechanism.

(b) a qualifying agreement corresponding to such a pension sharing order effective on the dissolution of marriage under the Family Law Act 1996;
(c) a qualifying agreement corresponding to such a pension sharing order effective after the dissolution of marriage under the Family Law Act 1996;
(d) an agreement corresponding to such a pension sharing order made on an application for financial relief in England and Wales under Part III of the Matrimonial and Family Proceedings Act 1984 following an overseas divorce or annulment of marriage.
(e) a pension sharing order made under the Family Law (Scotland) Act 1985;
(f) an agreement to share a pension that is included in a qualifying agreement negotiated between the parties that takes effect on divorce or nullity in Scotland. The Secretary of State is given a regulation-making power to prescribe the form in which the pension sharing agreement must be made;
(g) an order corresponding to a pension sharing order in paragraph (e) made on an application for financial relief in Scotland under Part IV of the Matrimonial and Family Proceedings Act 1984 following an overseas divorce or annulment of marriage;
(h) a pension sharing order under Northern Ireland legislation;
(i) an order corresponding to such an order made on an application for financial relief in Northern Ireland under Part IV of the Matrimonial and Family Proceedings (Northern Ireland) Order 1989 following an overseas divorce or annulment of marriage.

Subsection (2) defines the type of agreement in England and Wales that qualifies under subsections (1)(b) and (c). Such an agreement is one that:

(a) has been entered into in such circumstances as the Lord Chancellor may prescribe by regulations. We propose to use the regulations to ensure that the parties have given prior notice to the person responsible for the pension arrangement of their intention to pension share and that their agreement has been reached following mediation or other form of negotiation involving a third party;
(b) satisfies requirements prescribed by the Lord Chancellor. We intend to establish that agreements must meet requirements as to form, contain prescribed information and must have been produced to the court before being passed to the pension arrangement concerned.

Subsection (3) defines the type of agreement in Scotland that qualifies under subsection (1)(f). It requires an agreement to be entered into in such circumstances as the Secretary of State may prescribe and also registered in the Books of Council and Session before it can trigger the pension sharing mechanism.
Note: In Scotland, parties who divorce commonly make Minutes of Agreement to settle as many issues as possible before going to court. This allows parties to reach their own decisions (with legal advice) about the division of assets. A Minute of Agreement is conventionally registered in the Books of Council and Session (a public register kept in Edinburgh by the Keeper of the Registers of Scotland in which a variety of deeds may be registered). Deeds are usually registered for preservation and execution. This allows either party to compel the defaulting party to fulfil his or her obligations under the deed without returning to court.

Subsection (4) provides that subsection (1)(b) does not apply:

a. when the pension arrangement is the subject of a pension sharing order when the agreement takes effect, or
b. the pension arrangement to which the agreement relates has already been the subject of pension sharing by the couple.
Subsection (5) prevents an agreement that falls within subsection (1)(c) triggering the pension sharing mechanism in circumstances where-

(a) the couple were divorced under section 3 of the Family Law Act 1996 and, prior to divorce, had demonstrated that they had settled their future financial arrangements in one of the ways mentioned in section 9(2) of the Act;
(b) there is a pension sharing order, made in relation to the marriage, which relates to the same pension arrangement or the pension arrangement to which the agreement relates has already been the subject of pension sharing by the couple;
(c) there is an earmarking/attachment provision under section 25B or 25C of the Matrimonial Causes Act 1973.
Subsection (6) provides that subsection (1)(f) does not apply if there is in force an order under section 12A(2) or (3) of the Family Law Scotland Act 1985 relating to the pension arrangement to which the provision relates.
Subsection (7) to (9): the effect of these provisions is that a pension sharing order or agreement in Scotland will be treated as ineffective if the person responsible for a pension arrangement to which the order or agreement relates does not receive copies of the pension sharing order or agreement, and the relevant decree of divorce or declarator (as well as the information referred to in clause26(1)(b)(i) & (ii)) within two months of the date of the extract of the decree or declarator. In the case of overseas divorces, the relevant documents should be provided within two months of the date of disposal under section 28 of the Matrimonial and Family Proceedings Act 1984. The procedure will be that the burden of sending the relevant documents to the person responsible for the pension arrangement will rest with the parties to the divorce (or annulment). This would normally be the person who would benefit from the pension sharing.
Subsection (10) makes provision for the court to extend the two month period in exceptional cases.
Clause 21: Creation of pension debits and credits

This important clause provides for the member's pension rights to be subject to a debit and for his former spouse to become entitled to a pension credit equal to the amount of the debit.
In England and Wales, the amount of the debit will be a percentage of the current cash equivalent of the member's pension rights in the scheme or arrangement. The percentage will be that stated in the pension sharing order or agreement.
In Scotland, the pension sharing order or agreement may specify that the pension sharing legislation is to apply in relation to a specified amount, rather than a percentage, of the member's pension rights (see clause 16) and in that case the amount of the debit will be that specified amount or, if less, the current cash equivalent of the member's rights.
The method for calculating the cash equivalent for these purposes (see clause 22) will be similar to the well-established method used for calculating cash equivalents of the pension rights of members who wish to transfer those rights.
In determining the cash equivalent of pension rights available for pension sharing, only those rights accrued up to the day immediately before the day on which the pension sharing order or agreement takes effect are included in the calculation.
Subsection (1) provides for the shareable rights of a scheme member (the transferor) to become subject to a debit of an appropriate amount, and the former spouse (the transferee) to become entitled as against the person responsible for the pension arrangement to a credit of the same amount.
Subsection (2) provides that where the pension sharing order or agreement expresses the value to be transferred as a percentage, the appropriate amount will be that percentage of the cash equivalent of the transferor's rights.
Subsection (3) provides that where the pension sharing order or agreement expresses the value to be transferred as a specific amount (as may be the case in Scotland) rather than as percentage, that amount is the appropriate amount. But, if that amount is greater than the cash equivalent of the transferor's rights, the amount of the cash equivalent is the appropriate amount.
Subsection (4) provides a special rule for determining the benefits by reference to which the cash equivalent is to be calculated where the transferor is currently accruing rights in an occupational scheme (that is, he is an "active" member). In that case, the calculation is to be based on the hypothetical rights to which he would have been entitled had he ceased to be an active member immediately before the day on which the pension sharing order or agreement takes effect.
Subsection (5) provides that in all other cases the benefits by reference to which the cash equivalent is to be calculated are those to which the transferor is entitled by virtue of his shareable rights under the pension arrangement at that time.
Subsection (6) provides a regulation-making power to enable any description of benefit to be disregarded for the purposes of subsections (4) and (5) above.
Subsection (7) defines the valuation date for the purpose of calculating the cash equivalent of the relevant benefits. It provides scope for the person responsible for the pension arrangement to choose the day that the valuation will be made, provided that the day chosen falls within the period allowed for implementing the order or agreement. This flexibility broadly follows the existing provisions for the calculation of cash equivalent values for early leavers.
Clause 22: Calculation of cash equivalents

There is already a well-established method for valuing the pension rights of early leavers from occupational pension schemes or members of personal pension schemes who wish to transfer their accrued rights to another pension scheme or arrangement. The regulations for the calculation of the cash equivalent in pension sharing cases will broadly reflect the principles set out for calculating cash equivalents for early leavers. These provisions are in regulation 7 of the Occupational Pension Schemes (Transfer Values) Regulations 1996, and regulation 3 of the Personal Pension Schemes (Transfer Values) Regulations 1987.
In particular, in the case of salary related schemes we intend that cash equivalents for pension sharing, including cash equivalents of pensions in payment, will have to be calculated in a manner approved by a qualified actuary (for example, a Fellow of the Institute of Actuaries or a Fellow of the Faculty of Actuaries). In cases where members have accrued rights in public service schemes, the manner of calculation will be approved by the Government Actuary. The actuary will be bound by professional guidance (see subsection (2)).
Where a salary related occupational scheme is subject to the "minimum funding requirement (MFR)" introduced by the Pensions Act 1995, there will also be a requirement that the cash equivalent must be of at least a minimum amount, consistent with the methods and assumptions used for calculating the MFR, adjusted, where appropriate, to take account of the fact that a cash equivalent calculation for pension sharing is made on an individual, and not a collective basis. The requirements in relation to discretionary benefits will be the same as for ordinary transfer values (see regulation 8(2) and (3) of The Occupational Pension Schemes (Transfer Values) Regulations 1996).
Subsection (2). We intend to use this subsection to prescribe that where the cash equivalent relates to salary-related benefits, then it should normally be calculated and verified in a manner approved by the scheme actuary; and in accordance with guidance published by the Institute of Actuaries and the Faculty of Actuaries. The Department of Social Security will be in discussion with the Institute of Actuaries and the Faculty of Actuaries about whether the material needed to accommodate the introduction of pension sharing should be in a new stand alone note or an amendment to the actuarial profession's guidance note on Transfer Values (GN11).

Prepared: 11 february 1999