Select Committee on Social Security Fifth Report


FIFTH REPORT

The Social Security Committee has agreed to the following Report:--

PENSIONS ON DIVORCE: PARTS III AND IV OF THE WELFARE REFORM AND PENSIONS BILL


1. This Report supplements our previous ground-breaking Report on Pensions on Divorce,[1] which piloted pre-legislative scrutiny by departmentally-related select committees as one of the strands in modernising the legislative process.[2] The legislation to implement pension sharing on divorce is contained in Parts III and IV of the Welfare Reform and Pensions Bill, which was recently given a Second Reading and committed to a Standing Committee. This Report is intended to serve as a handbook for the Standing Committee, by highlighting unresolved issues, updating references to reflect the Bill as it is currently before the Standing Committee and giving interested parties a further opportunity to express their views and concerns in writing.

2. The key dates in the process to date of introducing pension sharing on divorce have been:

14 March 1995    House of Lords amends Pensions Bill

 4 March 1996    House of Lords amends Family Law Bill

29 July 1996      Green Paper The treatment of Pension rights on Divorce (Cm 3345)

26 February 1997  White Paper Pension rights on Divorce (Cm 3564)

 5 June 1997      Consultation Panel established

 8 June 1998      Consultation Paper, Draft Pension Sharing Bill and Explanatory Notes published

28 October 1998    Social Security Select Committee Report (HC 869) published

14 January 1999    Government Response to Select Committee (HC 146) published

10 February 1999  Welfare Reform and Pensions Bill — First Reading

11 February 1999  Explanatory Notes on Welfare Reform and Pensions Bill published

23 February 1999  Welfare Reform and Pensions Bill — Second Reading

24 February 1999  Standing Committee nominated

 2 March 1999    Standing Committee first meets

3. We invited interested parties to submit a further paper after the publication of the Bill, to include:

  • a brief summary
  • description of the organisation on whose behalf the paper is presented
  • general comments on pension sharing
  • specific references to individual Clauses and Schedules, including the wording of any proposed amendments
  • comments on the recommendations made by the Select Committee's Fifth Report and the Government's Response
  • comments on other relevant issues.

4. We are grateful to those who are able to respond within a very limited time. A list of those papers we have decided to publish is at page iii. A Table showing the differences between the Draft and the Bill is annexed to this Report.

5. We are grateful once more to our specialist advisers Mr Allan Martin of the consulting actuaries Hymans Robertson, and Ms Maggie Rae, formerly of Mishcon de Reya, solicitors and now of Clintons, solicitors, for their help in elucidating technical issues in this area.

6. The Government's Response to our Report[3] was helpful and constructive. Several of our recommendations were accepted, including:

  • making absolutely clear that pension sharing will be available only to those who begin divorce proceedings after the legislation has been brought into force[4]
  • giving schemes the discretion to impose a single indexation requirement on the whole of a pension credit[5]
  • allowing the Pensions Ombudsman to rule on the reasonableness of administration charges imposed on the divorcing couple[6]
  • evaluating and monitoring the impact of pension sharing legislation.[7]

Other substantive issues are reviewed below.

Earmarking "Death in Service" Benefits

7. In its response[8] to our Report, the Government said that they did not believe that earmarking and pension sharing should be permitted in respect of the same marriage and the same scheme. As we explained in our Report,[9] death-in-service benefits could be usefully earmarked or attached in certain circumstances giving the former spouse valuable protection where maintenance/aliment is being paid, without substantially affecting the value of the pension credit.[10]

Unfunded Public Service Pension Schemes

8. In our Report[11] we explained why we recommended that the Bill should be amended to extend to former spouses of fire-fighters, teachers, soldiers, civil servants, nurses, police officers and others covered by public service schemes the same rights of choosing how to take a pension transfer as will be available to former spouses of funded schemes. The Government did not agree with this recommendation although it accepted that not many members currently opted to transfer out of unfunded public service schemes on changing jobs.[12] The Explanatory Notes to the Bill point out that former spouses will enjoy the same levels of security and inflation-proofing as other scheme members of a public service scheme.[13] There remains a Treasury concern that public expenditure could be bought forward if former spouses were given the right to take a pension credit out of the public service schemes.[14]

Time Limits

9. We recommended that further consideration should be given to ensuring that the proposed statutory limits should be reasonable, fair and achievable.[15] The Government considers that our concerns may be adequately addressed by the provision that the Occupational Pensions Regulatory Authority may extend the implementation period in appropriate circumstances.[16]

Transfer Values

10. As we pointed out in our Report,[17] the cash equivalent transfer value (CETV) method is not without its drawbacks in a small but important proportion of cases. The Government recognises that courts may have to adjust the amount of a member's CETV to be transferred to the former spouse where anomalies arise from a standard CETV.[18] The Explanatory Notes[19] state that the DSS is in discussion with the actuarial profession on the form of detailed guidance which will be required to accommodate the introduction of pension sharing.

Unmarried Survivors

11. The Government accepted[20] our proposal[21] that any amendments to require pension schemes to extend to unmarried survivors the same rights as widows and widowers should be within the scope of the Bill.

Implementation of the Legislation

12. In our Report we stated that we would like to see the pension sharing legislation coming forward in the 1998-99 parliamentary session, but we recommended that the Government should consult interested parties on the possibility of delaying the implementation of the Act and the regulations to be made under it until April 2001.[22] The Government has been discussing this issue with the pensions industry.[23] Clause 73 of the Bill provides for the Lord Chancellor to appoint the day when pension sharing comes into force. We note that the pension sharing legislation is designed on the assumption that the Family Law Act 1996 will be brought fully into force.[24]

Priorities of the Courts

13. We recommended that the courts should give greater priority to the prospective incomes on retirement of each of the divorcing couple when appointing financial settlements on the dissolution of a marriage.[25] The Government does not consider that legislation is needed to require the courts to give higher priority to retirement incomes.[26]

Bankruptcy

14. Our Report[27] recommended that the same degree of protection should be provided against bankruptcy for all kinds of pension provision. Clauses 10 to 12 of the Bill address this issue, following consultation carried out by the Government as part of the Pensions Review.[28]

Costs of Pension Sharing

15. We recommended that the financial and administrative impact on occupational pension arrangements of occupational pensions legislation and framing law should be minimised.[29] The

Government decided to dispense with the requirement for pension schemes contracted out of the state scheme to obtain separate certificates to hold "safeguarded rights" (contracted out rights which arise from a pension share).[30]

Other Issues

16. There are several issues raised in our Report which do not directly concern the pension sharing provisions in the Welfare Reform and Pensions Bill. These include:

  • the exact mechanism for recovering a legal aid statutory charge from someone who received a pension share as part of a financial settlement on divorce[31]
  • the relaxation of tax limits to allow any scheme member whose pension has been shared to rebuild it fully[32]
  • training of lawyers and judges[33]
  • the role of the new Financial Services Authority in protecting investors using their pension shares.[34]

A significant amount of work remains to be done by secondary legislation[35] and in drawing up professional guidance.

17. We have noted with interest the detailed changes which have been made to the Bill as compared to the Draft, many of which address technical points raised by the organisations which gave evidence to this Committee and/or responded to Government's consultation process. We will watch with interest to see whether further technical amendments prove to be necessary to the pension sharing Clauses during the passage of the Bill. Annex A to the Explanatory Notes gives a helpful overview of how Part II of the Matrimonial Causes Act 1973 will look after the enactment of the Welfare Reform and Pensions Bill.[36] Consideration might be given to consolidating and replacing this legislation and also the Pension Schemes Act 1993, once the current wave of pension legislation following the Pensions Review has been concluded.[37]

18. Pre-legislative scrutiny by departmental select committees is only one of the strands of modernising the House of Commons being piloted during this Parliament. The Government has benefited from prior exposure of its proposals and has responded to technical points raised by interested parties. Much has been done to improve the transparency of the process by which interested parties are consulted in the formulation of Government legislation. The ultimate test by which these procedures will have to be judged is how well the new law works in practice when it comes to affect individuals coping with the financial consequences of divorce.


1   Fifth Report from the Social Security Committee of Session 1997-98, Pensions on Divorce, HC 869. Back

2   Select Committee on Modernisation of the House of Commons, The Legislative Process, HC190, paras 22 and 23. Back

3   First Special Report from the Social Security Committee, Session 1998-99, Pensions on Divorce - The Government's Response to the Committee's Fifth Report of Session 1997-98, HC 146. Back

4   HC 869 paras 33-37; HC 146 para 6. See Appendix 3 para 2.2, Appendix 6 para 3.1 to 3.6, Appendix 9 para 2.6. Back

5   HC 869 para 49; HC 146 para 8. Back

6   HC 869 para 50; HC 146 para 13. Back

7   HC 869 paras 15-17, 25, 55, and 62; HC 146 para 19. Back

8   HC 146 para 7. Back

9   HC 869 para 27. Back

10   Appendix 3 para 2.1. Back

11   HC 869 paras 67-70. Back

12   HC 146 para 10. Back

13   EN 44 page 25. Back

14   HC 146 para 10 and EN 44 page 25. Back

15   HC 869 para 66. Back

16   HC 146 para 11. Back

17   HC 869 para 45-49. Back

18   HC 146 para 12; see Appendix 3 para 3.2 and Appendix 9 para 4.1(a). Back

19   EN 44 page 35. Back

20   HC 146 para 14. Back

21   HC 869 para 38. Back

22   HC 869 para 71; see Appendix 11 para 4. Back

23   HC 146 para 15. Back

24   Appendix 3 para 2.3, Appendix 5 paras 9.1.to 9.3 and Appendix 10 para 1. Back

25   HC 869 para 24. Back

26   HC 146 para 17; see Appendix 6 paras 4.1 and 4.2. Back

27   HC 869 paras 40-44. Back

28   Strengthening the pensions framework: a consultation document, DSS December 1998, paras 28.1 to 28.13. Back

29   HC 869 para 56. Back

30   HC 146 para 26; see Appendix 11 para 5. Back

31   HC 869 para 32; HC 146 para 29; see Appendix 3 para 6.2. Back

32   HC 869 paras 58-59; HC 146 para 28; see Appendix 1 para 2.3, Appendix 9 para 4.1(b), Appendix 11 para 8, Appendix 12 para 4.1 and Appendix 17. Back

33   HC 869 paras 28-30; HC 146 paras 23-24; see Appendix 5 paras 10.1 to 10.4, Appendix 9 paras 2.8 to 2.10, Appendix 11 para 6. Back

34   HC 869 paras 31, 52-55, 57; HC 146 paras 20-23. Back

35   Appendix 11 para 3. Back

36   Appendix 16 para 2.1 Back

37   Appendix 4 paras 4.2 to 4.4. Back


 
previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries

© Parliamentary copyright 1999
Prepared 15 March 1999