Select Committee on Liaison First Report

Committee Recommendations: Progress

Fifth Report: Pensions on Divorce (HC 869) Published: 28th October 1998

Committee Recommendations: Progress
Sessions 1997-98
Fifth Report: Pensions on Divorce (HC 869) Published: 28th October 1998

Government Reply: First Special Report, Session 1998-99 (HC 146) Published: 13th January 1999
RecommendationGovernment Response Committee Response/Follow upFurther Government Action Notes
We recommend that the operation of the powers conferred on the courts by the Pension Sharing Act and their consequences for the incomes in retirement of divorced people should be rigorously studied by independent researchers, and that the results of that research should be published at regular intervals for the information of Parliament and the public.

We recommend that the Government should monitor the operation of pension sharing in Scotland in respect of the changes in valuation of the pension share between the relevant date and the date of implementation of the pension share.

We recommend that the Government should monitor the operation of pension sharing in Scotland, with a view to introducing as necessary as requirement that the valuation of a pension share at the time off making the sharing order should be based on a percentage of the transfer value of the pension at the relevant date.
We recognise the need to evaluate and monitor the impact of the pension sharing legislation. The Department of Social Security commissioned a quantitative research study in 1988 to examine the "Treatment of Pension Rights on Divorce", and an in-depth study exploring the financial settlements surrounding pensions and divorce. Results are expected to be published later this year. This research should help to form a baseline for monitoring and evaluating the effects of pension sharing, and the amendments to the existing earmarking provisions. We intend that further research will be carried out once pension sharing has been implemented.   Two research reports, Pensions and Divorce: 1998 Survey and Pensions and Divorce: Exploring Financial Settlements (DSS Research Reports Nos 117 and 118), were published in April 2000.

Pension sharing will be implemented on 1 December 2000 however the effects of the policy will not be immediately evident. We intend to begin monitoring and evaluating the policy around 2002. These arrangements will apply to Scotland.
We recommend that the Department should monitor the pensions credit available to, and options chosen by, former spouses and the extent to which personal pensions purchased with pension credits are encashed before normal retirement age.
As above.       
We recommend that the monitoring of pension sharing arrangements should address any particular problems emerging from further marriages.
As above.       
In our view it would not be appropriate to use pension sharing legislation to introduce the more wide-arranging reforms of extending (or adapting) the Scottish treatment of matrimonial property to the other jurisdictions in the United Kingdom.
We agree with the Committee's view that pension sharing legislation is not an appropriate vehicle for any extension or adoption of the Scottish system of ancillary relief to other jurisdictions. In the early part of last year, the Lord Chancellor asked his Ancillary Relief Advisory Group to consider whether the Scottish treatment of matrimonial property should be extended to England & Wales. The Group reported in July 1998, recommending that the Government reject such an extension. Following careful consideration, the Lord Chancellor decided to accept its recommendation.
We recommend that attachment should be retained for use in cases where it is clearly shown to benefit one of the parties. We agree with the Committee that attachment or "earmarking" should be retained as an alternative to pension sharing. Provisions intended to improve earmarking will be included in the provisions brought before Parliament. We are committed to giving the divorcing couple maximum practicable flexibility, and earmarking may well be attractive in certain cases. Some respondents to the consultation raised the possibility that earmarking and pension sharing could be mixed in certain circumstances, and we are consulting pensions and family law practitioners on this issue, although we do not believe that earmarking and pension sharing should be permitted in respect of the same marriage and the same scheme.   Pension sharing, as provided for under the Welfare Reform and Pensions Act 1999 and related regulations, will be available alongside existing methods of dealing with pension rights on divorce: offsetting and earmarking. It will not be possible to pension share and earmark the same pension.   
We recommend that the Government should require the Judicial Studies Board to provide for the training of 'ticketed' or specialist judges at each level on the implementations of pension sharing before it comes into effect. We note the Committee's recommendations on professional lawyer's organisations and pension sharing training. Lawyers' training is a matter for the profession, rather than Government, but we understand that the profession is already taking active steps to increase lawyers' awareness and understanding of pensions; for example the Law Society and the Solicitors' Family Law Association are including pensions in the training which needs to be undertaken to achieve accreditation as a specialist family lawyer in their respective schemes. We will, of course, be willing to work in partnership with the profession to encourage effective training, for example, by producing guidance on the relevant legislation.   The Judicial Studies Board held a pilot pension sharing seminar for 50 judges on 6 September. Attendees included District Judges and those judges authorised to hear divorce appeals. The pilot will form the basis of a further 20+ courses which the Judicial Studies Board will run between November 2000 and January 2001. By the end of end of that programme, over 1,200 of the judges authorised to hear divorce appeals, some 98% of the total, are expected to have received the appropriate training.

Departmental officials have taken a proactive stance in disseminating information to conferences on pension sharing organised for the professions including pensions and family law lawyers.
We recommend that the new Financial Services Authority should review the provision of pensions advice in divorce cases, including the adequacy of investment advice made available by family lawyers, and if necessary provide further guidance for independent financial advisers and insurance companies before pension sharing comes into effect. We note the Committee's recommendations. We attach great importance to protecting investors from mis-selling of pensions and other investments. We also recognise the importance of taking into account the regulatory implications of our policy, and will be working closely with all interested parties, as we take forward the pensions reform agenda.

Firms authorised to give investment advice, including that on personal pension transfers, are required under the current regulatory rules to provide standardised projections of benefits and to disclose commissions and charges. The Financial Services Authority (FSA) is currently considering the implications of pension sharing, including the further guidance which may be needed.

The Law Society, the Law Society of Scotland, and the Law Society of Northern Ireland, recognised by the FSA under the Financial Services Act 1986, are responsible for supervising their members' conduct of investment business, and will set the relevant rules and guidance where investment advice is given by family lawyers.
     The FSA continue to keep a watching brief on developments to see if any further guidance is required
We recommend that 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 Pension Sharing Bill.

We note the Committee's recommendations that the proposed treatment of legal aid in relation to pension sharing should be clarified. We intend that the legal aid statutory charge should be recoverable from an assisted person who receives a pension share as part of a financial settlement on divorce. The mechanism for achieving this is currently under review.   
The Lord Chancellor's Department are considering the matter.
We recommend that the Bill should be amended to avoid any doubt whatsoever that pension sharing may only be used in cases where the application for divorce is made after the Pension Sharing Act is brought into force. We accept the Committee's recommendation that the Bill should be amended to put beyond doubt that pension sharing on divorce will be available only to those who begin divorce proceedings after the legislation has been brought into force. This was always our intention, and we will instruct the Parliamentary Counsel accordingly.   The Welfare Reform and Pensions Act 1999 makes it clear that pension sharing orders may only be made where the proceedings for divorce or nullity commence on or after the day on which the pension sharing provisions are brought into force.
Provisions incorporated in the Welfare Reform and Pensions Act 1999 section 85(3) and (4) for England and Wales and section 85(5) for Scotland.

The Welfare Reform and Pensions Act 1999 (Commencement No. 4) Order 2000 brings the pension sharing provisions into force on 1 December 2000.
We recommend that the long title of the Bill should be amended to make it clear that any amendments to require pension schemes to extend to unmarried survivors the same rights as widows and widowers would be within the scope of the Bill. We note the Committee's recommendation that the long title of the draft Bill should be changed to cover unmarried survivors. Pension sharing legislation will be introduced as part of the proposed welfare reform legislation and the long title will be drawn up accordingly. On the substantive issue, we intend to consult on the position of unmarried survivors in relation to pension schemes as part of the Pensions Review.   Pension sharing provisions are included in the Welfare Reform and Pensions Act 1999.   
We recommend that the Government should take the opportunity to clarify the law by bringing forward amendments to the Pension Sharing Bill, once the outcome of the Pensions Review has been decided, to provide the same degree of protection against bankruptcy for all kinds of pension provision. We note the Committee's concern that the law on pensions and bankruptcy should be clarified. We are considering this issue as part of our Pensions Review and we will announce our proposals in due course.   Bankruptcy provisions are included in Welfare Reform and Pensions Act 1999. See sections 11-16 of the Act. .
We recommend that 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. Many of those responding to the consultation recognised the importance of sticking to the tried and tested cash equivalent transfer value (CETV) method of valuation. The Committee acknowledged this view, but recommended some discretion for the courts to depart from rigid use of the CETV in a small number of cases. Whilst we understand the concern on potential anomalies arising from a standard CETV valuation, we believe that 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 in such cases.        
We recommend that the Government should simplify the pension credit by requiring that the inflation-proofing of all its elements should be provided only in the form of the limited price indexation which is applied in any case to any increases in pension rights after April 1997. We also agree with the Committee that a single indexation requirement attaching to the whole of the pension credit would, in some cases, simplify administration for schemes, although we believe that other factors should be taken into account, such as equity between the member whose pension is shared and the former spouse. So, we intend to give occupational schemes the discretion to impose a single indexation requirement on the whole of the pension credit. Similarly, for a pension credit held in a personal pension, the former spouse will be able to buy an indexed annuity with the whole of the pension credit. However there would be no statutory obligation to provide a pension or annuity protected against inflation where part of the pension credit has been derived from those not-contracted out rights not subject to indexation requirements.   Indexation provisions are included in section 40 of the Welfare Reform and Pensions Act 1999 and in the Pension Sharing (Pension Credit Benefit) Regulations 2000 (S.I. 2000/1054).

The provisions provide for the indexation of a pension credit derived from a public service pension. They also provide for occupational pensions and personal pensions derived from a pension share to be protected against inflation, subject to a cap of 5% per annum.
We recommend that 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. We agree with the Committee that charges made in respect of pension sharing should be reasonable. The draft legislation provides that charges should be limited to covering the reasonable actual costs incurred in carrying out pension sharing. The Pensions Ombudsman has powers to investigate maladministration, and we believe these ate sufficiently wide in relation to administrative charges imposed on the divorcing couple.        
We recommend that the Department should work with interested parties to develop standardised forms for the disclosure of information associated with the calculation of a CETV. We note the Committee's recommendation that standardised forms should be developed for the disclosure of information. We will discuss the issue with the pensions industry.   Following a two-month consultation period ending on 14 February 2000, regulations relating to the disclosure of information for pension sharing purposes were laid before Parliament on 19 April 2000. The Lord Chancellor's Department are considering whether to introduce prescribed forms in the future.
We recommend that the financial and administrative impact on occupational pension arrangements of occupational pensions legislation and family law be minimised. We note the Committee's recommendations that administrative costs should be minimised. This has always been one of the Government's key policy aims, and was a stated objective in the consultation paper. In response to representations made in public consultation about excess complexity, we have decided to dispense with the requirement for pension schemes contracted out of the state scheme to obtain separate certificates to hold "safeguarded rights" (contracted-out rights which arise from a pension share).   The Welfare Reform and Pensions Act 1999 does not incorporate a requirement to obtain a safe-guarded rights certificate in relevant cases.

We recommend that the provisions of the draft legislation imposing a reduced ceiling on contributions to an occupational pension scheme following a pension debt should be dropped.
We note the Committee's concern that tax limits should be relaxed to allow any scheme member whose pension has been shared to rebuild it fully. The issue was also raised in some responses to the consultation document. We estimate, however, that less than 10% of those who may be subject to a pension share will be able fully to rebuild within the existing Inland Revenue limits. Some of these people might not have the financial means to take advantage of rebuilding in excess of limits, even if they were permitted to do so. Others might prefer to save for their retirement in other tax efficient ways, which will still be possible. We shall nevertheless keep the matter under review.   The Government has introduced an administrative easement that allows most members of occupational pension schemes to fully rebuild within Inland Revenue contribution limits. For occupational pension scheme members on moderate incomes (ie with yearly earnings up to 25% of the earnings cap), the pension debit will be ignored in calculating the maximum benefit limit.   
We recommend that pension providers and insurers should have the right to request medical evidence in respect of the sharing of pensions in payment. The draft Bill contains a regulation making power which would allow pension providers to request medical evidence. We will take the Committee's views into account when we consult the pensions and insurance interests on drawing up the secondary legislation.   The pension sharing regulations do not refer to medical evidence. Providers will able to request it in those cases where they consider that it is right to do so.

We recommend that further consideration should be given to the time limits allowed fir each stage of the pension sharing process to ensure that the proposed statutory limits are reasonable, fair and achievable. The Committee recommends that further consideration be given to the statutory time limits for each stage of the pension share. In particular the reports quotes the view of the National Association of Pension Funds that some small occupational schemes may find it difficult to implement a pension share within the 4 month limit laid down in the draft Bill. We remain satisfied that the present 4 month period strikes the right balance between the need to give the scheme adequate time to discharge its liability for the pension credit, and the wishes of the couple for a speedy resolution of the pensions share. We consider that the Committee's concern may be adequately addressed by the provision that the Occupational Pensions Regulatory Authority may extend the implementation period in appropriate circumstances.   The Government carried out a consultation exercise on the draft regulations and reconsidered the time-limits for provision of information at the pre-divorce stage as a result of representations from the pensions industry. The regulations were laid on 19 April 2000. See "The Pensions on Divorce etc. (Provision of Information) Regulations 2000 (S.I. 2000/1048).
We recommend that the Bill should be amended to extend to former spouses of members of unfunded public service schemes the same rights of choosing how to take a pension transfer as will be available to former spouses of members of unfunded schemes. We note the Committee's view that former spouses of members of unfunded public service schemes should be allowed to choose to transfer out of such a scheme, a point that was also mentioned in some consultation responses. Public service schemes are high quality schemes which offer good value-for-money. Former spouses will enjoy the same levels of security and inflation proofing of pensions as other scheme members of a public service scheme. They are unlikely to lose out from not having the option of transferring out. Without the restriction in the draft Bill, public expenditure would be brought forward, and although we accept that not many members currently opt to transfer out of unfunded public service schemes on changing jobs, it is very difficult to be certain whether this pattern would provide a reliable guide to the number of former spouses who would choose to opt out.        
We recommend that the Government should consult interested parties on the possibility of delaying the implementation of the Pension Sharing Act, together with the Regulations to be made under its provisions, until April 2001. The working assumption for planning purposes has been that pension sharing legislation will be implemented from 2000, but, following concerns expressed both by the Committee and in responses to the consultation exercise, we are currently discussing this issue with the pensions industry, and contingency planning is continuing for other implementation dates. We will announce our conclusion in due course.   The main pension sharing provisions are included in the Welfare Reform and Pensions Act 1999. Two minor provisions were also included in the Child Support, Pensions and Social Security Act 2000.

Following a two month consultation period the pension sharing regulations were laid before Parliament on 19 April 2000.

Pension sharing comes into force on 1 December 2000.
Se "The Welfare Reform and Pensions Act 1999 (Commencement No. 4) Order 2000.
We recommend that any draft Bill published by the Government in future should be aid before Parliament as a command paper.

We recommend that Bills which are to be published in draft for pre-legislative scrutiny by a select committee in the Session before their formal introduction should be published no later than Easter, in order to allow potential witnesses plenty of time to prepare their evidence and for the select committee to complete its work before the end of the Session.
We welcome the Committee's support for the principle of pre-legislative scrutiny, and specifically its support of this particular scrutiny. The Committee's detailed recommendations about changes to the procedures will be considered as part of the Government's continuing work with the modernisation Committee to improve Parliamentary procedures.        

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