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Lord Boyd-Carpenter: My Lords, I and perhaps most of your Lordships would be grateful if the Minister, at the beginning of his reply, clears up the procedural position in which your Lordships' House now finds itself. As I understand it, if it is moved we will debate Amendment No. 174. If it is carried there will be a case for saying that Amendment No. 225 does not arise. I do not know. I would be grateful to have my noble friend's answer to that. But I believe that we need to be clear as to what it is your Lordships have to decide in a few minutes after the Minister has spoken.

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This is a very important matter. As to the merits, I say only that I fully share the view expressed from all quarters of the House that where a pension is split the pension fund should pay the wife's portion direct to the wife so that the perpetual irritation of a husband having to make an instalment once a month or once a quarter is avoided. Quite obviously, that causes the greatest ill-will on both sides.

So I hope that my noble friend the Minister—I noticed that he listened to the debate with his usual care and attention—will guide us on the procedural position and will indicate also no doubt the views of the Government on the merits of the amendments.

Lord Mackay of Ardbrecknish: My Lords, the extent to which the House has debated this issue both today and in Committee is a measure of the strength of feeling which surrounds the question of how pensions should be treated on divorce. Let me say at once that the Government fully share the concerns voiced in the debates and echoed widely in the media and elsewhere.

I was asked by one noble Lord to give some legal advice. I do not know that I am entirely qualified to do so, given the other lawyers present in the House. I am now asked by my noble friend Lord Boyd-Carpenter to give some procedural advice. It seems to me that we are faced with Amendment No. 174, which is the amendment of the noble Baroness, Lady Hollis of Heigham. That is the one to which we are speaking at the moment. However, because the subject is the same, the amendment has been linked with the amendment of my noble friend Lady Young, Amendment No. 225. I do not feel that we could conceivably accept or have both of them and I hope to persuade your Lordships that the amendment of my noble friend Lady Young should be accepted. I hope that that clarifies that point. Of the other amendments, one is attached to Amendment No. 174 and one to Amendment No. 225. I believe that that is the position.

The three main points to be decided are whether we agree or disagree with Amendment No. 174 in the name of the noble Baroness, Lady Hollis of Heigham. Later we shall be asked to agree or disagree with the amendment of my noble friend Lady Young. There will be the further amendment of the noble Baroness, Lady Hollis of Heigham, about the method of payment and another amendment from my noble friend, which is almost consequential and which I hope that the House will accept. Perhaps, as I speak, the position will become clearer. It may not be absolutely clear at the moment as noble Lords are thumbing through their papers. However, I think that what we are asked is fairly clear.

In Committee, I promised that we would consider carefully all the arguments made for an immediate change in the law to see whether we could bring back at Report stage something which would meet the very real concerns expressed on all sides. Your Lordships will recall that I indicated a great deal of sympathy with those concerns. Discussions have gone on since the Committee stage and we have before us the amendments tabled by my noble friend Lady Young. I am happy to be able to say at the outset that the Government

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wholeheartedly endorse those amendments as drafted. I hope that the House will accept that that shows that the Government have listened, considered and responded in a positive and practical way.

In Amendments Nos. 174 and 175, the ones we shall deal with first, the noble Baroness, Lady Hollis, wishes to give the courts new powers to require pension schemes themselves to divide pensions between divorcing parties. I understand why some might be attracted to that approach. Indeed, the right reverend Prelate and the noble Lord, Lord Meston, have so indicated. While they were speaking, some noble Lords nodded and perhaps agreed. I can understand that some noble Lords might be attracted to that approach; however, it ignores all the complexities involved.

Your Lordships are invited to believe that such complexities are a figment of the Government's imagination. The noble Baroness, Lady Hollis, and I have spent some hours discussing these matters. Occasionally, I suspect she feels that all the complexities of the world and of the law can simply be removed with one wave of the hand. I am afraid that I do not believe that to be the case. Pension splitting of the kind envisaged by subsection (3) (b) of Amendment No. 174 would present the most formidable difficulties. Those difficulties were recognised by the PMI working group, by the Pension Law Review Committee and by many informed commentators. The noble Baroness argues that simple, cost free solutions are readily available. I can assure the House that there is simply no chance of finding simple solutions. Those of us who have spent many happy hours on the Bill—a small group will receive long service medals at the end of it—know, if nobody else does, that anything to do with pensions is far from simple. This is no exception.

Most of the problems arise from the intricate relationship between occupational pensions and other forms of pension provision, including personal pensions and the state earnings related pension scheme. It would be neither wise nor practicable to ignore that relationship.

Women are increasingly coming to enjoy the benefits of the growth in pension provision. By the year 2025, which we will be looking forward to later in our proceedings, virtually all women on reaching the age of 65 will receive a basic state pension, many at the full rate. Over one half of those women will also have an entitlement to their own occupational pension. That means that, as time goes on, more and more women, including those who divorce, will be able to look forward to a worthwhile pension when they retire. Of course, there will remain some women who, for one reason or another, will not have the opportunity to build up pension rights of their own, or who, because they are now in late middle age, will not substantially benefit from the improvements to which I referred. It is those women for whom it is particularly important to ensure that there is a means to derive some benefit from their former husband's pension rights.

But splitting pensions as envisaged is not the right solution. If it were to produce an equitable result, it would involve splitting all the different forms of pension provision. If we were to confine pension splitting to

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occupational pensions alone, for example, we should rightly be criticised for excluding those whose partners are not able, or who do not choose, to join an occupational scheme and who either remain in SERPS or opt for a personal pension. To quote from the report of the PMI working group:

    "It is outside our terms of reference to explore the full implications of all the difficulties in the context of the State scheme and to make recommendations on the changes needed but it would clearly lead to inequities if the courts were able to reallocate GMPs and protected rights but not SERPS pensions".

It is important to bear in mind that the PMI's deliberations, and indeed those of the Pension Law Review Committee, predated decisions on the reform in this Bill of the arrangements by which occupational pension schemes contract out of SERPS. Those reformed arrangements will simplify the future basis on which salary related schemes contract out by abolishing the requirement to provide a guaranteed minimum pension—the GMP—and requiring schemes instead to pass a test of overall scheme quality. That would almost certainly mean that such schemes would need one method for splitting pension rights accrued before 1997 which include a GMP and quite a different method for splitting pension rights accrued after 1997.

Splitting GMPs and the matching provisions which would be needed for splitting SERPS would introduce complexities of fairly nightmarish proportions. Much of that complexity arises from the fact that, until pension age is equalised in the next century, SERPS and GMP entitlements accrue at different rates for men and women. So splitting a man's GMP and SERPS entitlements, which have accrued on the basis of the number of years in his working life, and giving, say, half to the woman, whose working life is shorter, means that the value of the half acquired by the woman is in fact greater than one half of the man's original rights. Exactly the same considerations apply to the protected rights in a contracted out money purchase or personal pension scheme. In stark and simple terms, that means that SERPS would cost more; and that means that it costs the taxpayer more. But the matter becomes more complicated when other variables are added, such as how much SERPS and GMP entitlement the woman might have in her own right.

The problems do not end there. If a man has changed jobs, which he may have done several times in his working life, his GMP or protected rights may well have moved with him; and he may have had periods when he was not in a contracted out scheme at all.

The consequences of that kind of pension splitting would not only increase the costs of SERPS and add administrative costs to the state and private sector. There would be a further burden on the taxpayer through increased tax relief on the pension rights which have been split. That increase in tax relief arises partly from the fact that pension entitlements which are currently offset against one tax allowance would, under pension splitting, be offset against two tax allowances. And because both parties might seek to make additional contributions to enhance the value of their share of the pension rights, there would be a further cost to the taxpayer from the additional tax relief that these

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contributions would attract. A very rough estimate puts the total potential loss of revenue to the Exchequer at something in the order of £300 million a year.

It has been argued that these costs would be more than offset by savings to be gained from a reduction in income related benefits on the part of the divorced partner who acquires new pension rights by virtue of the split. But it is important to remember that for each partner who gains something there is a corresponding loss for the other—and that loss could result in the loser having to claim income related benefits when they would not otherwise have to do so. Preliminary estimates suggest that the net reduction in income related benefits may be as small as £20 million—only a fraction of the potential costs. Indeed, the PMI working group itself quoted from a paper presented to the Faculty of Actuaries which noted that pension splitting would reduce the tax take for the state by more than the reduction in income support payments.

I hope that what I have said will be enough to convince the House of the formidable and costly administrative burdens on pensions schemes and on the taxpayer that we would be introducing if we were to go down the route of the kind of pension splitting which is referred to in Amendment No. 174.

I now turn to Amendments Nos. 175 and 226 and to paragraph 3(c) of Amendment No. 174. They address a different kind of pension splitting. The amendments would allow the courts to direct pension schemes to pay shares of the pension income which came on stream at retirement to the two different parties to a divorce. I detect that that view has some support in your Lordships' House. This is a form of pension splitting which the PMI working group also considered and which is usually described as "earmarking".

Earmarking would certainly have a less drastic effect than the other form of pension splitting. But it is not by any means straightforward. As I have already explained, people may move jobs quite frequently and have pension entitlements in a number of different pension schemes. The partner—for convenience, let us say the woman—seeking a share of those pension rights would have no say in the decision taken by the man in respect of those pension rights. It would be open to him to take a transfer to another pension scheme or to a personal pension without her knowledge or agreement. That would place administrative burdens on pension schemes. They would also be required to note in their records the wife's interest in the eventual pension to be paid and keep track of both parties. Schemes would be faced with the additional costs of processing two lots of pension payment instead of one. Earmarking is a form of deferred maintenance which would be much more costly and cumbersome to administer than the kind of deferred maintenance orders which the courts would be able to make by virtue of Amendment No. 225 and which offer both fairness and flexibility.

I listened carefully to the noble Lord, Lord Mishcon, who has considerable professional experience in these matters. I really do not think that earmarking is any more of a clean break than deferred maintenance. I understand the argument that the second or third wife

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may feel aggrieved and nip her husband's ear when he has to send his contribution to his first wife. But I cannot believe that an indication of the contribution being paid to that first wife will not appear monthly in the pay slip which is sent to him from the pension company accompanying his pension. That is the only way in which he could possibly keep a track and make sure that the pension company was paying him the proper amount. So I do believe that neither of the ways we are looking at —the way I am suggesting it should be done or indeed the way the noble Baroness, Lady Hollis, is suggesting—is a clean break and both breach the principle that some people would like to attain of a clean break. But I think we are all agreed that if we are to deal amicably with this business of pensions, that is probably an inevitable conclusion.

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