APPENDIX 9
Supplementary evidence submitted by The
Law Society Family Law Committee (PS 8)
SUMMARY
Introduction
1. This evidence has been prepared by the Family
Law Committee of the Law Society. The Law Society is the professional
body representing solicitors in England and Wales. The Family
Law Committee is made up of practitioners dealing with a variety
of family law cases from across England and Wales. This evidence
builds on the written[51]
and oral[52]
evidence previously submitted to the Social Security Committee
concerning the Government's plans to introduce pension sharing
on divorce, now contained in the Welfare Reform and Pensions Bill.
This evidence only deals with the situation in England and Wales.
The Committee warmly welcomes the Government's commitment to reform
in this area of the law.
General Comments
2. The Committee warmly supports the Government's
approach to the scrutiny of the draft legislation in this area
and hopes the Government will continue to consult widely in the
run up to implementation;
3. The Committee believes that care must be
taken to ensure that the needs of couples (and any children) on
divorce are balanced against their welfare in retirement;
4. The Committee welcomes the flexible approach
adopted to the introduction of pension sharing;
5. The Committee would like consideration to
be given to ways in which the proposals could be extended to those
entering into a judicial separation and cohabitants;
6. The Committee is glad pension sharing will
not have retrospective effect;
7. The Committee believes a long lead in time
is necessary to enable public awareness to be raised and professional
training to take place;
8. The Committee believes it will be essential
under the new financial services regime for solicitors to be able
to place advice about pensions in the context of other advice
given on the financial consequences of divorce.
The Social Security Committee's Report
9. The Committee welcomed the Social Security
Committee's Report,[53]
particularly recommendations 4, 9, 10, 13, 17, 19 and 25.
The Government's Response to the Social Security
Committee's Report
10. The Committee welcomed the Government's
response to the Social Security Committee's Report, subject to
concerns about the Government's views on:
(a) only using the CETV to calculate the
value of pensions;
THE BILL
3. The Committee has the following comments
on the Bill's provisions:
(a) The Committee welcomes the provisions
extending the Bill to cover earmarking and pension sharing in
foreign divorces.
(b) The Committee believes that it should
be clear on the face of the Bill that when the court examines
a consent order or agreement relating to pension sharing it performs
a judicial, rather than administrative function.
(c) The Committee welcomes the provisions
dealing with penalties for scheme trustees or managers who fail
to perform their obligations.
(d) The Committee has concerns about the
level of charges which will be incurred in implementing pension
sharing in individual cases.
1. INTRODUCTION
1.1 The Family Law Committee is one of a number
of Committees of the Law Society concerned with improving law
and procedure and giving practice advice to solicitors. The Committee
is concerned with all aspects of family law and to reflect this
the Committee is made up of both legal aid practitioners and those
with private clients, child care and adoption practitioners, a
local authority solicitor, a justices' clerk, and a lecturer at
the University of the West of England.
1.2 The Family Law Committee has been concerned
at the inadequate legislative provisions governing the treatment
of pensions on divorce for some time. This led the Committee to
put forward proposals for the introduction of pension splitting
in its memorandum entitled "Maintenance and Capital Provision
on Divorce" published in 1991. The Committee has also issued
practical guidance to solicitors on gathering information on pensions
on divorce in the past.
1.3 Before the implementation of the provisions
governing earmarking in the Pensions Act 1995, the provisions
on pensions and divorce were contained in the Matrimonial Causes
Act 1973 (as amended). These state that the potential loss of
a pension is one of eight factors to be taken into account when
the court considers financial provision on divorce. A key principle
governing financial provision on divorce is that the court should
strive to achieve a clean break on divorce (a once and for all
settlement of financial issues). (A clean break is only possible
between the parties to a marriage—not between parents and
children.) However, the courts have been hampered in dealing with
pensions on divorce because of a lack of powers and statutory
provisions which prevented them from taking account of pensions
which could accrue more than five or possibly 10 years in the
future.
1.4 The Pensions Act 1995 led to the introduction
of a system of pensions earmarking in July 1996. Under this system
payments can be made to a former spouse from a pension scheme
following the pension scheme member's retirement. The Committee
welcomed this development as it extended the courts' powers to
deal with pensions on divorce. However, this reform was, in the
Committee's view, insufficient for three reasons. First, it operates
in a manner inconsistent with the clean break principle contained
in the Matrimonial Causes Act 1973. Secondly, it gives no protection
to former spouses following the death of a scheme member. Thirdly,
it leaves former spouses uncertain about how much they will receive
and when this will occur. The Committee is glad that the Government
has demonstrated a commitment to the introduction of pension sharing.
The Committee welcomes the Government's commitment to take steps
to introduce this worthwhile reform as soon as possible.
1.5 In this evidence the Committee makes a number
of general comments about the reform of the law, the Social Security
Committee's Report and the Government's response to the Social
Security Committee's report. It will then examine and make various
comments on the draft legislation. In dealing with the reform
of the law in this area the Committee will deal with the situation
in England and Wales because of the different legislative framework
which operates in Scotland under the Family Law (Scotland) Act
1985. For ease of reference it will be assumed that husbands or
former husbands are or were members of the pension schemes and
that their pensions could be shared between them and their former
wives. It is, of course, recognised that the opposite situation
could and should apply where appropriate. References to the Matrimonial
Causes Act, the Pensions Act, Family Law Act and the Bill are
to the Matrimonial Causes Act 1973 (as amended), the Pensions
Act 1995, the Family Law Act 1996 and the Welfare Reform and Pensions
Bill, unless otherwise stated.
2. GENERAL COMMENTS
THE PROCESS
OF LAW
MAKING
2.1 The Committee warmly welcomes the approach
being taken by the Social Security Committee to the consideration
of the draft legislation on pension sharing. The Committee hopes
that the Government will extend this type of pre-legislative scrutiny
to other areas of law reform. In the Society's 1992 submission
to the Hansard Society on Reform of the Legislative Process the
Society called for a number of improvements to the process of
law making, including greater consultation on draft legislation
at an earlier stage.
The aims of reform
2.2 The Committee has previously supported the
introduction of pension sharing on divorce because of the inadequacy
of the courts' current powers to deal with pensions on divorce
highlighted above. In the past this has meant that large pensions
could not be taken into account on divorce because they would
not accrue within the foreseeable future and/or because the court
lacked powers to make orders governing pensions on divorce. This
has caused substantial injustice to some divorcing women in the
past and has reinforced their weaker economic position. The Committee
has welcomed pension sharing as a remedy to these problems. The
Committee does, however, have some concerns that the Government
may be placing too much emphasis on pension sharing as a means
of addressing women's poverty in retirement. The Committee believes
that in families of low or moderate means pension sharing will
not reap many benefits because of the small size of any pension.
It is essential that the Government takes this on board and communicates
it to the public, otherwise there is a risk of unrealistic expectations
of the effect of reform being raised. It is also important that
scheme rules etc ensure that people are made aware of significant
changes to pension entitlement when this occurs for whatever reason.
2.3 The law on maintenance and capital provision
on divorce is currently contained in the Matrimonial Causes Act.
This provides that, with the exception of child support, a couple's
financial affairs should be settled as a package, first consideration
being given to the welfare of any children of the family under
the age of 18. Couples are then encouraged to enter into a clean
break, where appropriate. The Committee supports the current law
and made this clear to the Lord Chancellor's Ancillary Relief
Advisory Group when it recently reviewed the law on maintenance
and capital provision on divorce. The Committee believes that:
(a) It is important that the primary emphasis
of the law on maintenance and capital provision on divorce should
continue to be the welfare of any children and the need for an
adequate home for them and the parent with care following the
divorce. This may mean that in many families, particularly those
with low or moderate means, the primary emphasis will continue
to be on ensuring women and children have adequate accommodation
in the short and medium term, at the price of providing an adequate
pension in retirement;
(b) Addressing all the issues at once, rather
than singling issues out, gives the court the flexibility to develop
a package of measures designed to maximise the welfare of the
whole family;
(c) Flexibility is crucial. The Committee
therefore welcomes the fact that the courts' current powers to
deal with pensions will be retained and that a 50/50 split where
pension sharing is used will not be automatic. This will allow
couples to make financial arrangements on divorce which do not
take pensions into account where they are insignificant; allow
offsetting pensions against other assets; make use of the existing
provisions on pensions earmarking or use pension sharing;
(d) A combination of measures is needed to
combat women's poverty in retirement—adequate child care,
the removal of pay discrimination, as well as measures to protect
women's position on divorce.
THE SCOPE
OF REFORM
2.4 The Committee recognises that the Bill only
deals with pension sharing on divorce and nullity as this has
been the primary concern at this stage. Nevertheless, the law
on cohabitants generally is unsatisfactory and under review by
the Law Commission. In due course the Committee would like a Governmental
commitment to be given that pension sharing will be extended to
those cohabitants who would like to be able to take advantage
of it. Moreover, the current proposals do not do anything to address
problems which could arise following a separation or a judicial
separation. Under some pension scheme rules trustees do not have
to make payments to widows who were living apart from their husbands
or who had acquired a judicial separation. Despite this the pension
sharing proposals do not extend to this type of case. The Committee
believes the best way of addressing this problem would be to provide
that schemes which did not change their rules to permit payment
in this situation within a certain period of time should lose
their Inland Revenue tax approval. The Committee hopes this will
be taken on board by the Inland Revenue and implemented through
a practice note amendment.
COMPLEXITY
2.5 The Committee welcomes the amount of detail
contained in the Bill and the accompanying explanatory notes.
It is hoped that this will make the system of pension sharing
comprehensible from the face of the Statute. This should encourage
greater Parliamentary and public scrutiny and understanding of
the legislation. The Committee does, however, believe that efforts
could be made to ensure that greater simplicity is achieved.
INTRODUCING PENSION
SHARING
2.6 The Committee is keen that two potential
problems surrounding the introduction of pension sharing should
be avoided if at all possible. The first concerns the implementation
date for pension sharing. When pension earmarking was introduced
under the Pensions Act great confusion was caused by the fact
that very little notice was given of when it would be introduced
and what needed to be done to avoid pension earmarking or take
advantage of it. It was unclear whether a divorce petition should
have been issued before the relevant date or whether an application
for ancillary relief would suffice. The Committee therefore warmly
welcomes the transitional provisions in Clause 70 which make it
clear when pension sharing will or will not available. It is,
however, crucial that the Government announces well in advance
what the implementation date of this aspect of the Bill will be.
This will allow the public and professionals to be educated on
the implications of the new legislation.
2.7 The Committee is concerned to ensure that
any arrangements reached on divorce, whether dealing with pension
sharing or not, are within the terms of the Matrimonial Causes
Act, are effective and enforceable. To ensure that this is the
case, the Committee believes that pension sharing agreements should,
as far as possible, be in a standard form, be checked by the court
and be submitted to pension schemes. All consent orders dealing
with financial provision on divorce should also be checked by
the court to ensure their terms are appropriate, effective and
enforceable. Without these safeguards it will be impossible to
implement pension sharing properly and certainty for the parties
and pension providers will be diminished. The possibility of fraud
will also not be minimised. Delay and difficulty will occur making
it impossible to comply with the timescales set out in the statute.
The Committee is concerned that it is unclear what safeguards
are intended. Clause 20(2) refers to requirements being set out
in regulations governing "qualifying agreements". The
notes for guidance accompanying the Bill[54]
at page 32 refer to agreements being "produced to the court".
It is essential that the meaning of this terminology is clarified
and that adequate safeguards exist to ensure that the system of
pension sharing works as well as possible.
THE ROLE
OF SOLICITORS
2.8 The Society is keen to demonstrate that
solicitors dealing with family law work are competent to do so
and are recognised as such. To this end, the Society launched
an accreditation scheme for family lawyers in January 1999 (the
Family Law Panel). As part of the scheme solicitors seeking accreditation
will be expected to give details of whether or not they have advised
clients in the past in relation to the impact of divorce on pensions.
They will also be expected to give an undertaking to attend courses
on relevant legislation. This will include the Family Law Act,
the Bill and any other relevant legislation forthcoming in the
family law field in the future. The Society has given a commitment
to review the operation of the scheme to ensure that it is working
well and that standards are set at a high enough level to ensure
competence. The Committee is also keen to explore providing guidance
and training for solicitors on pension sharing in due course.
2.9 Under the current financial services regime
provided for by the Financial Services Act 1986, solicitors can
carry out investment business and be regulated by the Society
in this task, subject to fulfilling the necessary requirements.
Advising on and making arrangements for pension sharing would
come within the definition of investment business. The current
regime is being reviewed by the Treasury at the moment and a draft
Financial Services and Markets Bill has been published. It is
likely that the outcome of this will be twofold. First, if solicitors
wish to give their own advice on pension sharing and undertake
the appropriate arrangements for their clients, they will need
to be authorised by the Financial Services Authority. Firms wishing
to be authorised by the Financial Services Authority will need
to satisfy the requirements of the Authority on training and competence.
The Financial Services Authority are likely to be given powers
to delegate specified functions, such as monitoring to the Society.
They may also disapply some of the rules where they are satisfied
that the Society's rules provide adequate investor protection,
for example, the client money rules are likely to be disapplied
as the solicitors' accounts rules provide more than adequate protection
for clients' money. Solicitors, unlike other financial advisers,
are required to account for any commission on financial services
or products used by their clients.
2.10 Secondly, solicitors could avoid the need
for authorisation by the Financial Services Authority by seeking
advice from an authorised person and passing the advice to clients.
The solicitors would then be able to utilise the expertise of
the authorised person and put the pensions advice in the context
of the overall advice which is being given to the client. The
Society believes that it is crucial that solicitors should be
able to pass advice from an authorised person on to their client
and, where they have reason to question the advice, to point this
out to the client and recommend a second opinion. This will allow
solicitors to ensure that the investment advice is not isolated
from the other matrimonial advice and ensure that financial advisers
are aware of all the circumstances which need to be taken into
account in any particular case.
CONSULTATION
2.11 The Committee has previously warmly welcomed
the Government's commitment to consultation in the process of
introducing pension sharing on divorce and is glad that the Government
has given a continued commitment to consultation during the implementation
process. The Committee hopes that this consultation will be as
broadranging as possible. The Committee also welcomes the Government's
commitment to review the operation of pension sharing and hopes
that this too will be an open and wideranging process.
3. The Social Security Committee's Report
3.1 The Committee warmly welcomes the proposals
contained in the Social Security Committee's Fifth Report "Pensions
and Divorce" (HC 869). In particular the Committee believes
the following recommendations will be helpful/should be pursued:
Recommendation 4
The operation of the powers conferred on the
courts by the [Bill] and their consequences for the incomes in
retirement of divorced people should be rigorously studied by
independent researchers, and the results of that research should
be published at regular intervals for the information of Parliament
and the public.
Recommendation 9
Attachment should be retained for use in cases
where it is clearly shown to benefit one of the parties.
Recommendation 10
The Government should require the Judicial Studies
Board to provide for the training of `ticketed' or specialist
judges at each level on the implications of pension sharing before
it comes into effect.
Recommendation 13
Ministers' intentions with regard to the legal
aid treatment of pension sharing should be announced to Parliament
before the beginning of detailed consideration of the Bill.
Recommendation 17
The courts should be given a limited discretion
to cater for circumstances where serious anomalies would arise
from the rigid use of a standard cash equivalent transfer valuation
(CETV) of pension rights (this is dealt with in greater detail
below, see paragraph 4.1)
Recommendation 19
The jurisdiction of the Pensions Ombudsman should
be extended to enable him to rule on the reasonableness of pension
sharing costs charged by pension providers.
Recommendation 25
The provisions of the draft legislation imposing
a reduced ceiling on contributions to an occupational pension
scheme following a pension debit should be dropped (this is dealt
with in greater detail below, see paragraph 4.1)
4. THE GOVERNMENT'S
RESPONSE TO
THE SOCIAL
SECURITY COMMITTEE'S
REPORT
4.1 The Committee welcomes the Government's
response[55]
to the Social Security Committee's Report, subject to two points:
(a) The Committee continues to believe that
it is right to allow for exceptional circumstances when a calculation
using the CETV is not appropriate (see para 12 of the Government's
response). The Committee believes that in the vast majority of
cases using the CETV will be appropriate. However, the Committee
is concerned that in some cases where, for instance, a husband
has got a high salary and a substantial pension, this method of
valuation may not be appropriate. The Committee would therefore
like the court to have the power, in appropriate circumstances,
to consider alternative valuations introduced by the parties.
(b) The Committee remains opposed to the
Government's approach to rebuilding pensions and hopes this provision
will not be included in the forthcoming Finance Bill (see paragraph
28 of the Government's Response). The Committee is concerned that
the provisions concerning rebuilding will be introduced to maximise
the Inland Revenue's recoupment of tax and to prevent any accusations
that divorced couples are receiving more favourable treatment
than married couples. The Committee believes that:
(i) These rules will lead to excessive
complexity, will be difficult to administer and should not be
introduced;
(ii) Individuals will not divorce in
order to take advantage of favourable tax or pensions law. Research
on divorce has demonstrated that the decision to divorce is not
motivated primarily by financial factors. Research shows that
divorce is often a product of long term problems in a relationship
such as domestic violence, alcoholism, lack of communication,
etc. The vast majority of individuals contemplating divorce have
gone through lengthy soul-searching before taking the first step
towards a divorce. (See "Grounds for Divorce" Davis
and Murch Oxford University Press 1998);
(iii) These rules will run counter to
the clean break. Former husbands will constantly need to check
their former wives' entitlement to pensions to ensure they do
not exceed the prescribed limits, thus causing difficulties to
all concerned;
(iv) Former husbands will have a restricted
ability to rebuild their pensions following divorce.
5. THE BILL
5.1 The Committee has the following detailed
comments on the Bill:
(a) The Committee welcomes the extension
of the Bill to cover earmarking and pension sharing in foreign
divorces (see Clauses 18 and 20 and paragraph 4 of Schedule
9);
(b) As mentioned above the Committee believes
the safeguards in Clause 20(2) (activation of pension sharing,
qualifying agreements) should be clear on the face of the Bill.
They should ensure that the court performs a judicial, as opposed
to an administrative, function in checking that pension sharing
orders and agreements are fair, effective and enforceable. This
will lead to adequate protection being available to divorcing
parties and will make the job of pension schemes implementing
pension sharing that much easier to do;
(c) As mentioned above, the Committee believes
that Clause 21 (creation of pension debits and credits)
should incorporate some flexibility to allow methods of valuation
alternative to the CETV to be used in exceptional cases;
(d) The Committee welcomes the provisions
in Clause 25(3) (pension credits, time for discharge of
liability) and elsewhere concerning penalties for scheme trustees
or managers who fail to perform their obligations;
(e) The Committee has concerns about the
proposals dealing with charges contained in Clause 33,
as the level of charges is not defined. It is the Committee's
experience that the costs incurred in achieving earmarking have
varied widely and have often been substantial. The Committee is
concerned that there will be inadequate control over the costs
levied in relation to pension sharing. The Committee believes
this area should be monitored to ensure that individuals are aware
of the totality of costs to be incurred at an early stage. Monitoring
also needs to assess whether the internal complaints procedures
provided by pension schemes and/or the Pensions Ombudsman can
deal quickly and adequately with complaints about the level of
costs. If this proves not to be the case, the Committee believes
consideration should be given to the courts being given a role
in controlling costs, or fixed costs should be introduced.
(f) Paragraph 2 of Schedule 3 to the
Bill will preclude making arrangements consistent with Brooks
v Brooks [1995] 3 WLR 141 in future. The Committee is unclear
why it has been thought necessary to do this;
(g) The Committee welcomes the provision
in Schedule 3, paragraph 3, Clause 24B(3) (pension
sharing on divorce) which states that "so far as is practicable"
all pension sharing orders will be made at one time. The Committee
had previously expressed concern that a provision stating that
all pension sharing orders must be made at one time could
lead to unnecessary hardship should a pension be inadvertently
or deliberately omitted when pension sharing is being considered.
6. CONCLUSION
In conclusion the Committee would like to summarise
its supplementary evidence to the Social Security Committee on
the Welfare Reform and Pensions Bill.
General Comments
1. The Committee warmly supports the Government's
approach to the scrutiny of the draft legislation in this area
and hopes the Government will continue to consult widely in the
run up to implementation.
2. The Committee believes that care must
be taken to ensure that the needs of couples (and any children)
on divorce are balanced against their welfare in retirement.
3. The Committee welcomes the flexible approach
adopted to the introduction of pension sharing.
4. The Committee would like consideration
to be given to ways in which the proposals could be extended to
those entering into a judicial separation and cohabitants.
5. The Committee is glad pension sharing
will not have retrospective effect.
6. The Committee believes a long lead in
time is necessary to enable public awareness to be raised and
professional training to take place.
7. The Committee believes it will be essential
under the new financial services regime for solicitors to be able
to place advice about pensions in the context of other advice
given on the financial consequences of divorce.
The Social Security Committee's Report
The Committee particularly welcomes the following
recommendations of the Social Security Committee's Report:
Recommendation 4
The operation of pension sharing should be researched.
Recommendation 9
Attachment should be retained for use in cases
where it is clearly shown to benefit one of the parties.
Recommendation 10
The Government should require the Judicial Studies
Board to provide for the training of `ticketed' or specialist
judges at each level on the implications of pension sharing before
it comes into effect.
Recommendation 13
Ministers' intentions with regard to the legal
aid treatment of pension sharing should be announced to Parliament
before the beginning of detailed consideration of the Bill.
Recommendation 17
There should be limited discretion to depart
from use of the CETV.
Recommendation 19
The jurisdiction of the Pensions Ombudsman should
be extended to enable him to rule on the reasonableness of pension
sharing costs charged by pension providers.
Recommendation 25
The provisions of the draft legislation imposing
a reduced ceiling on contributions to an occupational pension
scheme following a pension debit should be dropped.
THE BILL
The Committee has the following comments on
the Bill's provisions:
(a) The Committee welcomes the provisions
extending the Bill to cover earmarking and pension sharing in
foreign divorces.
(b) The Committee believes that it should
be clear on the face of the Bill that when the court examines
a consent order or agreement relating to pension sharing it performs
a judicial, rather than administrative function.
(c) The Committee welcomes the provisions
dealing with penalties for scheme trustees or managers who fail
to perform their obligations.
(d) The Committee has concerns about the
level of charges which will be incurred in implementing pension
sharing in individual cases.
4 March 1999
51 HC 869 Appendix 6 pages 161 to 169. Back
52
HC 869 Qs. 290-345. Back
53
HC 869 Summary of Conclusions and Recommendations pp. iv to vi. Back
54
EN-44. Back
55
HC 146. Back
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