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Baroness Hollis of Heigham: The amendment calls for the pension sharing legislation to override any conflicting provision in the rules of pension arrangements. Industry representatives have called for this in the past, and officials have discussed the issues with them and their legal advisers.

We understand why it would help speed up the implementation of pension sharing if pension schemes did not have to make lots of individual amendments to scheme rules before the start date for pension sharing, so we have framed the Bill in a way which makes the provisions overriding whenever it makes sense to do so. But there are some areas where that blanket approach would not make sense. These are where schemes have discretion to carry out their responsibilities in the way that suits them best.

Let me give a couple of examples. One option open to the Government was to make it an overriding requirement that a scheme responsible for discharging its liability for a pension credit should be required to offer the former spouse pension rights within the scheme. However, private schemes wanted the freedom to choose whether or not to have former spouse members. Similarly, the Government could have made it an overriding requirement for schemes to offer former spouse members a package of benefits that mirrors the benefits available to deferred members.

Again, the pension industry argued persuasively that schemes should have the flexibility to make up their own minds on these matters. Indeed, we shall be debating a later amendment designed to ensure that schemes which decide to offer internal transfers have the freedom to design a package of benefits for former spouses that suits them best.

If schemes want to have a choice on matters relating to pension sharing, such as the former spouse's package or charging for administrative costs, it follows that the legislation cannot be wholly overriding. It cannot be had both ways.

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We think the Bill as drafted strikes the right balance. As in the Pension Schemes Act 1993 and the Pensions Act 1995, some matters are overriding and others are not. Each provision has to be considered individually and decided on its own merits.

The noble Lord pressed me in particular on whether the whole of Part IV would be overriding, like the Pensions Act 1995, as he put it. Certain parts of that Act were overriding--Part I, for instance. However, others were not. In particular, none of the new contracting out provisions which came into force in 1997 was overriding. We intend that the safeguarded rights requirements in Clause 32 shall in general terms reflect those already in place for contracted out schemes which have accrued since 6th April 1997. The schemes will have to confirm that they satisfy the contracting out requirement in order to hold a contracting out certificate. Any scheme opting to hold safeguarded rights will be required to provide assurances to the Inland Revenue that the safeguarded rights requirements are met. The contracting out provisions are not overriding, since they permit schemes to make choices about how to satisfy the requirement, and it is for scheme rules to specify which of the available choices have been exercised by the scheme. Similar provisions will apply to safeguarded rights, and scheme rules will need to explain which of the options are available to those members entitled to safeguarded rights.

However, where provisions in Part IV are analogous with provisions in the Pensions Act 1995, or, indeed, the Pension Schemes Act 1993, which are overriding, for consistency with the existing legislation we have made those provisions in the Bill overriding as well. So, for example, Clause 33, which inserts a new Part IVA into the Pensions Scheme Act 1993, is overriding since it is broadly analogous with the existing Part IV of the 1993 Act, which is also overriding legislation. Similarly, part of Clause 34 imposes requirements on schemes winding up that are analogous with provisions in Part I of the Pensions Act 1995 which, as I mentioned earlier, are also overriding.

Therefore, I realise that these are complex matters. Essentially, we are mirroring existing practice. I hope that on the basis of what I have said in an attempt fully to answer the noble Lord's point about Part IV, he will feel able to withdraw his amendment.

Lord Astor of Hever: I thank the Minister for that very full answer. I am extremely grateful to her for pointing out that parts of the Pensions Act 1995 were not overriding. I am also grateful to her for pointing out that schemes will have to confirm that they satisfy the contracting-out requirements to hold the contracting-out certificate. That is an important point.

We shall need to study carefully what the Minister said and confer with our advisers. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Clause 23 agreed to.

Clause 24 [Activation of pension sharing]:

[Amendments Nos. 70B to 70D not moved.]

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Clause 24 agreed to.

Clause 25 [Creation of pension debits and credits]:

Lord Astor of Hever moved Amendment No. 70E:

Page 29, line 36, at end insert--
("( ) Subsections (2) and (3) above shall not prevent the court from assessing the percentage or amount to be transferred on the basis of the past service reserve, if in the circumstances of the case the court considers this to be appropriate.")

The noble Lord said: The purpose of this amendment is to give the courts some flexibility about the method of valuation used when looking at pension sharing. At the moment, the Bill provides that only the cash equivalent transfer value--CETV--can be used to calculate the value of a pension. The Law Society is concerned that that may not yield an accurate result. Therefore, the courts should have discretion to use other methods of valuation in certain cases. That is most likely to be needed when the person who has built up the pension is nearing retirement, has a high salary and the pension concerned is substantial.

CETV is a widely used and well understood means of valuing pensions. For example, it is used if an employee changes jobs and wishes to transfer his pension from his old to his new employer. In the vast majority of cases, using the CETV as a basis of pension sharing will produce a fair result.

However, in some cases, particularly where there is a large pension or a long marriage, using CETV may result in the pension being undervalued. For a personal pension, the CETV is the surrender value and not the fund value. Surrender values can sometimes be as low as one-fifth of the fund value and can sometimes be nothing at all. We wish the courts to have the power, where appropriate, to use an alternative method of valuing pensions, such as the past service reserve, where it appears that CETV may not generate a fair result. We do not believe that alternative methods of valuation would be used frequently. Therefore, will the Government consider giving the courts the power, wherever appropriate, and where serious anomalies could arise in the rigid use of the standard CETV, to use an alternative method of valuing pensions? I beg to move.

9.30 p.m.

Lord Goodhart: On the last occasion I was critical of the amendment moved by the noble Lord, Lord Astor of Hever. On this occasion, I express my support in principle for it. However, I can see certain problems with it. In particular, it could lead to an increase in the cost of matrimonial litigation if one has to retain experts to argue the question as to which method of calculation is appropriate in any particular situation. Nevertheless, it is well established that there are cases in which the cash equivalent valuation might work unfairly. In such cases it would be appropriate to use one of the other recognised methods of evaluation of pension rights as the basis for the order for pension-sharing. I shall be interested to hear the Minister's response.

Baroness Berners: I support this amendment moved by my noble friend Lord Astor of Hever. I repeat his

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question. Will the Government consider giving the courts the power, wherever appropriate, to use an alternate method of valuing pensions? What guarantee can the Minister offer that the courts will have sufficient expertise to know when it is appropriate?

Baroness Hollis of Heigham: I have some sympathy with this amendment. I am aware that the Social Security Select Committee was thinking along the same lines when it published its report on pensions on divorce in October 1998. The committee recommended at paragraph 47 of its report that the court 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, a CETV of pension rights.

The Government have, of course, made it clear in the Explanatory Notes to the Bill that they intend to use the regulation-making power in Clause 26 to require pension rights to be valued for pension-sharing purposes by the tried and trusted CETV methodology. In contrast, Amendment No. 70E and the Select Committee both argue for the courts to be given discretion to depart from the CETV method.

Despite that difference in approach, the Government have some sympathy with the amendment. I believe that we all readily accept that the CETV method is not perfect. But after very serious consideration we have concluded that it is the least worse method available to us. More than that, it is probably the only valuation method that is fair to employers, pension schemes and other scheme members.

It is worth perhaps saying a few words in defence of CETV which has had something of a dark press tonight. I hope that I shall be on safe ground if I quote from the evidence of Mr Martin Slack who appeared before the Social Security Select Committee, on behalf of the Institute of Actuaries and the Faculty of Actuaries on 22nd July last year. He said:

    "The CETV is a value of the benefits to which a member would have been entitled had he ceased to be in service at that point. So the fact that the CETV is valued as the leading service benefit means it is valuing a less valuable benefit than if the member stayed all the way through to retirement. I think that is the only way one can proceed because one does not know what the person's salary increases would have been had they stayed, nor whether or not they would have retired earlier, whereas the leaving service benefit is a factual benefit at the time and is the only one you can get hold of". That is why the Government believe that it is right to use the CETV for pension-sharing purposes. There is no way of knowing when the member may leave the scheme early because of a change of job or early retirement. So it would not be fair to schemes or employers that fund the balance of costs, to place a higher value on the pension rights to be shared than the value that has actually accrued. That would require schemes or employers to meet additional costs as a result of divorce. That would be unacceptable. It would also enable some former spouses to be treated more favourably than other scheme members who transfer pension rights out of the scheme. That too cannot be justified.

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The CETV must, therefore, remain the basis for any division of pension assets. However, we accept that there are some circumstances--for example, certain schemes with fast accrual where people typically retire early--where the simple application of the CETV could be inappropriate. As we said in response to the Select Committee, we believe that, in such cases, the courts will have an adequate remedy to hand in that they could increase the share of the member's CETV to be transferred to the former spouse. So, for example, the court, in considering all the circumstances of the case, including perhaps a past service reserve valuation of the rights of a member of a salary-related scheme, may decide to transfer, say, 80 per cent of the normal CETV to the former spouse rather than 60 per cent. To make the Government's policy intention absolutely clear, it would not in any circumstances be possible to require a pension scheme or arrangement to pay more than 100 per cent of the CETV.

I hope that I have said sufficient to persuade the noble Lord that there is, in practice, much common ground between us. Our intention is that legislation will permit the court to take account of additional evidence when determining the percentage of the CETV to be shared. The difference between us is that we do not think it would be right to allow more than 100 per cent of the normal CETV to be shared. For that reason, the Government cannot accept the amendment.

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