Select Committee on Social Security Fifth Report


APPENDIX 1

Memorandum submitted by the Association of British Insurers (PS 5)

1. INTRODUCTION AND SUMMARY

  1.1 The Association of British Insurers (ABI) welcomes the opportunity to make this further submission on pension sharing on divorce to the House of Commons Social Security Committee, following publication of the Government Response to the Committee's Report on this subject and the Welfare Reform and Pensions Bill.

  The following is a summary of the main points we wish to make:

Need for legislation to be overriding

  1.2 It is very important that the pension sharing legislation should be wholly overriding (i.e. that it overrides any conflicting provision in the rules of pension schemes or arrangements) if timely implementation is to be achieved. We had understood from the DSS that this was the intention, but we are very concerned to see that at present certain clauses only of the Bill are overriding.

  1.3 If the legislation is not wholly overriding the industry will have great difficulty in making the substantial amendments needed to very large numbers of scheme rules in time for the start date. Where scheme rules had not yet been amended disputes could arise as to the legal effectiveness of pension sharing orders, and schemes trustees would be put in the unenviable position of not being empowered by their rules to implement pension sharing orders but facing penalties from the Occupational Pensions Regulatory Authority (Opra) if they do not. It is also worth noting that the successful implementation of the Pensions Act 1995 was due in no small measure to the fact that this was overriding legislation.

Implementation date

  1.4 An important issue still needing to be resolved is the implementation date. Our position in the past has been that an April 2000 start date was feasible provided that the detailed provisions to be contained in regulations were available by the end of 1998, and that the legislation is overriding. The regulations are needed before the industry can begin work on the systems and administrative changes needed.

Money purchase schemes

  1.5 We commented in last year's consultation exercise that the position of money purchase schemes was not fully addressed, and we still think this is the case. Our comments on Clauses 21 and 23 in section 3 of this paper deal with this in detail—reference needs to be made to the Explanatory Notes as well as to the clauses in order to understand the points made.

Secured benefits: pensions in payment and buy-outs

  1.6 More detail will be needed about the position of buy-out policies and about how pensions in payment under annuity policies are to be dealt with. It appears however from Schedule 5, paragraphs 4 and 6 that this will be covered in the secondary legislation.

  1.7 ABI has around 100 members engaged in life and pensions business, representing about 99 per cent of the insured market. There are approximately 3.7 million members of occupational schemes run by life insurance companies and around 21 million individual pension policies are in force. Life offices paid out over £25 billion on behalf of pension schemes in periodic payments, death claims, lump sums or as refunds during 1997. Insurance companies insure approximately 73 per cent of all occupational pension schemes and carry out investment for a further 25 per cent. DSS have suggested that there could be around 50,000 divorces a year involving pensions sharing. From this we anticipate that half of these cases a year are likely to involve insured pension arrangements, so the implementation of the pensions sharing on divorce legislation is of considerable interest to ABI.

2. GENERAL COMMENTS

  2.1 ABI welcomes the introduction of legislative provision for pension sharing on divorce in the Welfare Reform and Pensions Bill. We strongly support the principle of pension sharing on divorce and worked closely with the Department of Social Security through representation on their consultative groups to develop a framework for a fair and workable system.

  2.2 Paragraphs 1.2 to 1.6 above summarise our views on the issues of major importance: the need for the legislation to be overriding, the implementation date, money purchase schemes and the position of benefits secured under annuity and buy-out arrangements.

  2.3 We are disappointed that the Government has rejected arguments that the ex-spouse's pension share should not count towards the member's Inland Revenue limit, although we note that this will remain under review. Assuming there is no change, it is important that the value of the ex-spouse's share should be fixed at the time of divorce, with perhaps an assumed rate of future investment growth. Any requirement to keep track of its value in the future would add considerably to costs and would not comply with the clean break principle.

  2.4 We support the Committee's view that the courts should have a limited discretion not to use the standard cash equivalent transfer value in some circumstances, and we comment further on this in section 4, paragraph 12.

3. DETAILED COMMENTS ON THE WELFARE REFORM AND PENSIONS BILL

Clauses 21 and 23—pension debits.

  3.1 We commented in our response to the consultation on the draft Bill that the treatment of money purchase schemes was not fully addressed. The distinction between defined benefits (including pensions in payment under a money purchase scheme) and money purchase benefits (including income drawdown under a personal pension scheme) where there is a "pot" remains problematic under Clause 23.

  3.2 Where there is a defined benefit, it is the reduction of benefits under Clause 23 that is important. (Under Clause 23, the percentage of the cash equivalent is also used as the factor in calculating the reduction. The actual amount available to provide the pension credit is not however used in calculating the reduction. In the example in the Explanatory Notes, 40 per cent is the key figure and not that the 40 per cent gave the former spouse a pot of X thousand pounds). The reduction under Clause 23 is made at the date that the benefit calculations are made on the member's events (i.e. retirement, death or transfer) and NOT on the transfer day.

  3.3 Where there is a money purchase "pot", the reduction is made on the transfer day and is the same cash equivalent as was used to provide the former spouse's pension credit. There is no need for the concept of a "negative deferred pension". Covering money purchase "pots" under the "reduciton in benefits" provisions of Clause 23 is, at best, irrelevant and, at worst, implies that there is a further reduction once the member uses his "pot" to buy his benefits. We therefore need a "negative benefit" approach for defined benefits under Clause 23 but not for money purchase "pots".

  3.4 Under Clause 21, there is a pension debit and a pension credit of the same amount (based on a cash equivalent) but, unlike Clause 23, there is no express provision that the rules of the scheme are overridden. This puts the position of money purchase benefits in doubt.

  3.5 We believe that Clause 21 should be restricted to the creation of pension credits and that Clause 23 should deal with the two types of pension debits (being the "negative benefit" approach and the reduction in the money purchase "pot").

Clause 23—negative deferred pension

  3.6 In Clause 23, the DSS have adopted a "negative benefit" approach and, in the case of an active member in an occupational pension scheme (Clause 23(2)) a "negative deferred pension" approach. This involves the member's benefit being calculated as if the pension sharing had not taken place and the benefits being reduced. We do not think that Clause 23(2) is clear, despite the fact that this is a key clause.

  3.7 Our doubts can be illustrated by raising a number of questions based on the example set out in the Explanatory Notes.

    (a)  If the member retires at his normal retirement date as the example assumes, is it really clear that the reduction is:

      40 per cent of £15,000 (£10,000 plus revaluation) = £6,000 rather than

      40 per cent of £24,000 = £9,600?

    (b)  In the example, is it really clear from Clause 23 that the reduction is based on the actual revaluation experienced in the period to retirement rather than the revaluation assumed by the Actuary in calculating the cash equivalent at the transfer day?

    (c)  If the example had been an early (or late) retirement, is it clear that the reduction is:

      £6,000 subject to an early (or late) retirement factor, rather than simply £6,000?

  3.8 We would recommend that after the words "appropriate percentage of the corresponding qualifying benefit", the words "that would have been payable in the same circumstances had his pensionable service terminated immediately before the transfer day" are added.

Clause 23(2)—unintended impact on death in service benefits

  3.9 We commented before that the drafting of this clause appeared to have unintended effects, but there are still two problems. The first is that a spouse's death in service pension which is related to the member's pension will be reduced automatically. The second is that the life office's liability in a case where the life assurance benefit is the greater of a specified amount or the fund is likely to increase if the fund is reduced. The former should not happen and the latter should result in a reduction unless the parties agree otherwise. These problems can be resolved by specifying that where a benefit which is not a shareable right is calculated by reference to a shareable right, any reduction in the shareable right shall be ignored.

Clause 24—GMP and negative deferred pension.

  3.10 In Clause 23 a "negative benefit" approach has been adopted, as noted above. This however is inconsistent with a reduction in the member's GMP as set out in the new section 15A. If the Clause 23 approach is to be followed, the scheme benefits should be calculated on the basis that the full benefits are payable. This would include GMP, revaluation (based on the full GMP) and protection (based on the full GMP). We therefore believe that Clause 24(3) should be removed and that instead Clause 24(4) should refer to a reduction by virtue of a pension debit under the Welfare Reform and Pension Act.

4. COMMENTS ARISING FROM THE COMMITTEE'S RECOMMENDATIONS AND THE GOVERNMENTS RESPONSE

  (Numbered references below are to paragraphs in the Committee's First Special Report of 1998-99 HC146)

    7.  We are pleased to see it is intended that provisions to improve earmarking will be brought before Parliament. It is imperative that the failures in its operation to date are corrected and particularly that court orders are straightforward to implement. These need to be clear and simple, and should also make clear who is entitled to receive information from the pension provider.

    9.  We welcome the Committee's recommendation that pension providers and insurers should have the right to request medical evidence in respect of the sharing of pensions in payment, and are pleased to see that the Government will take this view into account when consulting on the secondary legislation.

    12.  We were pleased that the Committee thought courts should be given a limited discretion to cater for circumstances when the rigid use of a standard cash equivalent transfer valuation (CETV) was not appropriate. This need can arise particularly in cases where scheme benefits are steeply tiered in relation to service or seniority—an initial accrual rate of say, 100ths could be increased to 60ths and backdated on promotion. We believe that Police and Armed Forces schemes are examples, although similar bases might arise in some private sector schemes.


      It would be reasonable to assume that a member of the Police scheme would remain in service for a fairly long period, and so would receive the higher accrual rate. We think what is needed in cases of this sort is for the scheme actuary to give an opinion of the reasonable value of the benefits, bearing in mind career expectations. We therefore wonder whether the proposed remedy, that the court can adjust the shares of the CETV, will be sufficient.

    14.  We are pleased to see that the importance of considering the position of unmarried survivors is recognised.

    15.  The implementation date of the pension sharing legislation needs to be settled quickly. It is very important that the pensions industry has sufficient time after the detailed provisions, to be contained in regulations, are known in order that changes to computer systems and administrative procedures can be made. An April 2000 start date would, to give an indication of the necessary timescale from an insurance company viewpoint, have necessitated the detailed provisions being available from the end of 1998.

    20.  We welcome the stress in the Government's response on the need for full advice, but we hope that efforts to minimise costs (which we also support) will not go so far that full, detailed advice is precluded.

    21.  We think that the requirements for projections of benefits in relation to pension sharing should be consistent with the existing requirements for single premium contracts.

    22.  We note that the Law Society, the Law Society of Scotland and the Law Society of Northern Ireland will set the relevant rules and guidance where investment advice is given by family lawyers. We think the aim should be that transfers on divorce are treated as similarly as possible to other transfers.

    23 and 24.  We are pleased to see the emphasis which is placed on the importance of training in pension sharing for judges and lawyers. The introduction of formal training programmes should be very beneficial, and prevent many of the problems of the limited experience to date with earmarking.

    26.  We welcomed the Committee's recommendation that administrative costs should be minimised, and we are pleased to see that this remains one of the Government's key policy aims. The decision that contracted-out pension schemes will not be required to obtain separate certificates to hold "safeguarded rights" is also very welcome.

    27.  We supported the Committee's recommendation that standard forms should be developed for the disclosure of information, and we will be pleased to contribute to the consultation on this issue.

    28.  Our reponse to the consultation on the draft Bill commented that we thought a fairer approach to allowing the member to rebuild his/her pension following divorce was for the pension credit to count against the ex-spouse's Inland Revenue benefit limit, rather than the member's benefit limit. We are disappointed therefore that the Government appears to be unpersuaded of this, although we note that the matter will be kept under review.


  If the position remains as proposed we think it is very important that the value of the ex-spouse's share should, for the purposes of the member's benefit limit, be fixed at the time of divorce, with perhaps an assumed rate of future investment growth. Any requirement to keep track of its value in the future would add considerably to costs and would not comply with the clean break principle.

4 March 1999


 
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