APPENDIX 17
Memorandum submitted by William M Mercer
(PS 1)
PROPOSALS FOR
RECOUPING BENEFITS
LOST BY
A MEMBER
THROUGH DIVORCE
1. Rationale
There has been some public concern that a member
who loses a substantial part of his pension rights as a result
of the new pension sharing proposals may not be able to make good
part or all of his loss (known as "debit" in the regulations).
Under the current proposals, the only method available is the
Company's Additional Voluntary Contribution (AVC) Scheme or a
Free Standing AVC (FSAVC) Scheme. However, there are two problems
with using these arrangements:
— the maximum limit of 15 per cent
contributions may not be enough to make good the loss, especially
for older members who have large debits against their pension;
— the debit will be deducted from the
Revenue Maximum Pension in determining the maximum amount the
member may receive. Again, this may mean that a member with a
substantial debit cannot receive a good pension in retirement.
The Treasury have so far refused to allow higher
contributions or remove the debit from the Revenue Maximum Test,
because (a) they feel that there will be a loss of tax revenues
(even though it is really only a deferment of tax revenues) and
(b) they do not wish a divorced couple to be in a better position
than a married couple.
2. Proposal
Allow the divorced member to make contributions
to a special type of FSAVC, with no limit on the contributions.
Benefits from this arrangement will only be payable as pension.
The total benefits payable to the member from all sources will
be subject to the Revenue Maximum (i.e. no reduction for the debit).
3. Effect of Proposal
Since the benefits will be solely in pension
form, there will be no ultimate loss to the Revenue (the only
real loss comes where benefits can be taken as a tax-free cash
sum). Also, the deferral of any tax revenues would be minimal
because:
— the FSAVC will only apply to members
who have substantial debits and have to pay high contributions
(>15 per cent) to make these good;
— these members are likely to be old
(i.e. they were married for a long time and incurred a substantial
debit);
— the maximum benefits will only be
payable to a very small number of people, since the vast majority
of members do not receive Revenue Maximum benefits anyway.
4. Possible selection by a member
One possible downside is that a divorced couple
could be in a better situation than a married couple, in that
the maximum benefits payable to a divorced couple could be two
thirds to the member plus the spouse's credit, whereas only two
thirds would be payable to the member if the couple remain married.
There is, therefore a theoretical risk of selection by a member
to improve his benefits through divorce.
I feel that the possibility of selection in
this way is exceedingly small, if not nil. This is because for
it to happen, first of all his financial adviser would have to
advise him that, in order to achieve the higher benefits, the
member should divorce his/her spouse. This would obviously take
a number of years and would incur a large number of costs (not
to mention the hassle), including all the costs of the new proposals
for setting up credits and debits. Additionally, the member would
presumably have to provide proof to the Courts that the marriage
has broken down.
Even if the financial adviser convinces the
member to do this, the member would then have to explain to the
spouse that they were only divorcing so that ultimately they could
get a bit more pension. This would take a great of convincing!
Finally, even once the divorce has gone through,
and the extra contributions are paid (as stated above, this would
only affect older members who have substantial debits), the benefits
would only be paid as pension. This means that effectively the
Treasury would not lose tax revenue and any deferral of tax would
be for a minimal period. (A small reward to the couple for three
or four years divorce proceedings and associated costs!)
Conclusion
The risk to the Treasury is exceedingly small
in allowing this new contract. However, if they wish, they could
impose some restrictions, e.g. only allow the special FSAVCs to
over 55-year-olds and/or limit the contributions to, say, 25 per
cent of earnings.
R Andrew Scott
27 January 1999
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