House of Commons - Social Security

Select Committee on Social Security Fifth Report

FIFTH REPORT

The Social Security Committee has agreed to the following Report:—

1. This Report marks a milestone in the modernisation of Parliament. For the first time a departmentally related Select Committee has been able to hold an inquiry into a draft Bill published in the session prior to its First Reading.[1] The Pension Sharing Bill was the first of the Bills which the Government hoped to publish in draft to see the light of the day.[2] The Ministers and officials of the Department of Social Security (the lead Department) and the several other Departments involved (notably the Lord Chancellor's Department, the Scottish Office and the Inland Revenue) deserve to be congratulated on taking this important step towards improving the quality of legislation. We compliment the previous Secretary of State for Social Security, Rt Hon Harriet Harman, and the former Leader of the House, Rt Hon Ann Taylor, for their close interest and support for our inquiry piloting the pre-legislative scrutiny of draft Bills.

2. In recent years pensions have become increasingly important in relation to matrimonial breakdown. Their importance stems from the fact that the pension provision between spouses is rarely equal, with women frequently having little or no pension provision compared to their husbands. The problem has been, however, that the courts have not been able to transfer pensions from one spouse to another and have thus had to try and compensate for that inability by adjusting other available assets. This is a perfectly reasonable solution when there are sufficient other assets to adjust but many families have just the house and the pension. Pension sharing will enable the court, in appropriate cases, to divide pension benefits, giving part of those benefits to a former spouse.

3. Pensions and divorce bring together two notoriously complex areas of law. The various interactions of the proposed changes with the existing tax regime, regulatory provisions and family law, in the separate jurisdictions of Northern Ireland, Scotland and England and Wales presented formidable challenges for those drafting these proposals. In our inquiry we have been most ably assisted by two distinguished experts in their respective fields: Ms Maggie Rae of Mishcon de Reya, solicitors and Mr Allan Martin of Hymans Robertson, consulting actuaries. We are grateful to those who gave us oral and written evidence.[3] We are also grateful to those members of the House of Lords who were able to attend an informal meeting with Members of this Committee to discuss the issues raised by the draft Bill.

Recent history[4]

4. In 1993 the Goode Committee[5] endorsed the general approach of the Pensions Management Institute[6] that pension splitting on divorce should be introduced.[7] The White Paper, Security, Equality, Choice: The Future for Pensions, accepted the need for further detailed work on this "extremely complex issue".[8] Sections 166 and 167 of the Pensions Act 1995 were inserted during the passage of the Pensions Bill [Lords] through Parliament to give courts a new powers to 'attach' benefits payable to a member of a pension scheme for direct payment to the former spouse.[9] The Family Law Act 1996 was also amended during its passage through Parliament to reflect concern about the pension issue in divorce cases. Sections 16 and 17 of the Act provide in principle for pension 'splitting', although it was recognised that further primary and secondary legislation would be needed to make the Act's provisions on this subject workable.

5. The subsequent Green Paper, The treatment of pension rights on divorce,[10] explained that there was no prospect of pension 'splitting' becoming fully operational before 2000, not least because any further changes to the National Insurance Recording System (NIRS) would have to await the completion of the NIRS 2 project.[11] In February 1997, following the generally favourable responses from family law practitioners and the pensions industry to the Green Paper, the then Government published a White Paper, Pension rights on divorce,[12] setting out proposals which would require primary legislation to be in place before the main Regulations could be laid by the Spring of 1999, in order to make pension splitting powers applicable to proceedings for divorce or nullity commenced after April 2000.[13] The incoming new Labour Government adopted the Conservative Government's proposals, which had met with a broad measure of bi-partisan approval, subject to a possibly significant semantic shift from pension 'splitting' to pension 'sharing'.[14]

6. After detailed consultation with interested parties,[15] the Government published a Consultation Document, Pension sharing on divorce: reforming pensions for a fairer future, in two volumes: Part 1 (consultation) and Part 2 (draft legislation). Part 1 of the Consultation Document explains that by introducing pension sharing the Government intends to:

provide greater flexibility and choice for divorcing couples and the courts;
- allow pension rights to be treated in a way which provides for the fairest overall settlement of assets in each divorce case; and
- increase the opportunity for divorcing couples to achieve complete financial independence through a 'clean break' settlement.

1. The Government's guiding principles for the development of the pension sharing policy are:

courts and divorcing couples should be able to deal with pension rights in the way that provides for the fairest overall financial settlement;
pension sharing should fit into existing arrangements where possible, whilst:

opportunities should be sought to minimise administrative complexity and cost; and

-arrangements should be capable of adapting to changes which emerge as a result of the Government's welfare and law reform agenda;

pension sharing arrangements should preserve the broad value of the pension rights in the divorcing couple's financial settlement, apart from reflecting the recovery of the costs of the pension share;
pension sharing arrangements should provide legal certainty and adequate safeguards for all parties;
arrangements should be based on full and effective consultation to ensure that they are workable.[16]

1. Three chapters in Part 1 of the Consultation Document set out how pension sharing is intended to operate in each of the separate jurisdictions: England and Wales, Scotland and Northern Ireland.[17] In this Report, we adopt the Government's gender-neutral terms of 'scheme member' for the person in whose name the pension rights have been accrued and 'former spouse' for the person who may acquire these rights under a pension share.[18] It should be noted, however, that the political impetus behind the legislation is a concern for the pension rights of divorced women.

2. Part 2 of the Consultation Document sets out a full draft Bill on Pension Sharing, and a draft Clause and Schedule to be included in a future Finance Bill. Each of these pieces of draft legislation is accompanied by a full set of (draft) Explanatory Notes, drawn up in accordance with the improvements endorsed by the Select Committee on the Modernisation of the House of Commons.[19] The Explanatory Notes are helpful[20] in explaining the draft Clauses and Schedules, which are not easy to follow since most of the effective changes are made by inserting new Sections into existing statutes, notably the Matrimonial Causes Act 1973, the Family Law (Scotland) Act 1985 and the Pension Schemes Act 1993. It was pointed out in evidence to us[21] that the pension sharing legislation had been drawn up on the assumption that the Family Law Act 1996 will be substantially brought into force. We note that any major revision, or postponement, of the Family Law Act 1996 could require consequential changes to the pension sharing legislation.

3. In addition to the draft primary legislation which the Department has published, much of the detailed provision will be set out as secondary legislation in Regulations.[22] Professional guidance to actuaries on the calculation of a pensions value will make a third tier of quasi-legislation which together with the primary Act of Parliament and the secondary statutory instruments will determine how pension sharing operates in practice.

Background

4. The DSS has published two Research Reports on women, pensions and divorce which showed that women in younger age groups were more likely to belong to occupational pension schemes,[23] indicating that the problem of dependent spouses with no pension entitlement of their own may be on the decline.[24] Nevertheless, for many couples the occupational or personal pension entitlement is modest even when only a single household is considered. Sharing this entitlement over two households may result in inadequate pension coverage for both ex-partners. Many individuals simply do not earn enough to support two families and to maintain the living standards they were accustomed to before establishing a new marriage or partnership. A survey carried out in 1997 found evidence of unfairness with regard to divorce settlements which failed to take proper — or indeed any — account of the value of pensions: "At the time of divorce, many women may be too traumatised to be able to assert their rights, which once again highlights the need to take steps to achieve independence early in adult life."[25] A study of the relatively low incomes of women warned that pension sharing "cannot be a panacea to make up for the small pensions of many women, particularly mothers, whose domestic responsibilities reduce their access to good jobs and good pension schemes."[26]

5. One projection of the marital status for the population over the age of 65 over the years up to 2025 suggested that a substantial increase in the proportion of women over 65 who are divorced (3 per cent in 1991; 9 per cent in 2010; and 13 per cent in 2025) is expected to be offset by a declining proportion of widows in the age-group (49 per cent in 1991; 46 per cent in 2010; and 43 per cent in 2025), with the proportion who are married staying fairly constant at about 40 per cent.[27] Projections carried out using the decrees absolute held by the Office of Population Censuses and Surveys (now part of the Office for National Statistics), taking into account life expectancy, have indicated the proportion of couples married in the mid-1990s who can expect to celebrate their silver wedding is just below one half; on average recent marriages will last 26 years; and only 9 per cent of those couples married in the mid-1990s will celebrate their golden wedding anniversary.[28]

6. One of the concerns of the Department of Social Security has been to ensure that the

developing proposals on pension sharing will not cut across whatever emerges from the continuing Pensions Review.[29] The additional requirements imposed by new legislation may themselves alter the underlying balance between different forms of pension provision; the burden of regulations has been cited as one of the reasons for the shift away from traditional occupational pension schemes (which pay benefits in retirement based on a proportion of a person's salary at retirement).[30]

Security in retirement

7. In her foreword to the Consultation Document which accompanied the draft Bill,[31] the former Secretary of State for Social Security linked the Pension Sharing Bill with the statement in the Labour manifesto that "we believe that all pensioners should share fairly in the increasing prosperity of the nation"[32] and stated that pension sharing would be an important step towards security in retirement for women which would both help to narrow the pensions gap between men and women in retirement and allow greater scope for a clean break between divorcing couples. These are substantial claims for the rather technical provisions in the draft Bill which extend the courts' powers to divide a couple's assets on dissolution of the marriage, without necessarily altering the basis on which that division is made.[33] We note that while many people may expect pension sharing to lead to a transformation of the income prospects of divorced women in old age, the new powers may in effect alter only the method of dividing assets at the time of divorce, without directly affecting the disparity in retirement incomes between men and women.

8. An Annex to the Consultation Paper provides a regulatory appraisal, which assesses the costs to individuals, businesses and the Government of the draft Bill's proposals.[34] The appraisal appears to be founded on little more than guesswork,[35] which may not necessarily predict the future accurately. Regulatory appraisals are helpful to Parliament and the public, especially those who expect to be affected by a Bill's proposals. In this case, the appraisal understandably focuses on the costs to the pensions industry and the taxpayer, but does not cover the wider economic and social consequences of the proposed legislation. For some years now, politicians and analysts have called for family impact statements to be attached to new parliamentary Bills and other policy statements which would spell out in some detail the intended consequences of the policy on different families and individuals.[36] In the absence of detailed social research, using projections based on a range of soundly-based assumptions, there is no way to tell whether the legislation as presented will or will not live up to the former Secretary of State's high hopes. The permissive rather than mandatory approach of the legislation, and the uncertainties of the legal process of divorce, perhaps make this uncertainty inevitable. Part of the effect of the public debate on the proposed pension sharing legislation will be to give higher profile to the importance of the pensions asset when married couples (and their legal representatives) are contemplating divorce.

9. Quite apart from the central issue of fairness between the divorcing couple, there is a legitimate public interest in ensuring so far as possible that individuals are encouraged to make reasonable provision for their retirement, in order to minimise the need for Income Support from the taxpayer. There are some parallels to be drawn between pension sharing and child support, in terms of public concern over the ability of the courts to deliver outcomes which look after the individuals concerned while protecting the interests of the taxpayer. Indeed it could be argued that pension sharing has greater long term financial consequences for the individuals stretching ahead for possibly decades of retirement, while child support comes to an end when the children are grown up. Pension sharing will merely augment the powers of the court. If over time the courts show themselves incapable of delivering an outcome which meets the public interest in terms of justice to individuals and proper regard to the consequences for public expenditure, Parliament may wish to re-visit this subject.

10. 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.

1 For a Select Committee examination of a draft Bill published in rather different circumstances see the Ninth Report of 1977-78 from the Select Committee on Nationalised Industries, Reorganising the Electricity Supply Industry: Pre-Legislative Hearings, HC 636. Back

2 The other Bills which the Government intended to publish in the 1997-98 Session are: Food Standards Agency, Freedom of Information, Tobacco Advertising, Financial Services, Limited Liability and Communicable Diseases. Cf. First Report of 1997-98 from the Select Committee on Modernisation of the House of Commons, The Legislative Process, HC 190, page viii fn 7. Back

3 Listed at pages xlviii, l and li. Back

4 This section follows closely paragraphs 50 to 56 of the draft Report on "Saving for Retirement: The Pensions Agenda for the New Parliament" prepared in the last session of the last Parliament, which was published in the Minutes of Proceedings of the Social Security Committee for 17 March 1997, HC 452 of 1996-97. Back

5 Pension Law Reform, Report of the Pension Law Reform Committee, Cm 2342 Vol.1 (September 1993), para 4.16.16, Recommendation 172. Back

6 Pensions and Divorce, Pensions Management Institute, 1993. Back

7 The Consultation Document Pension sharing on divorce: reforming pensions for a fairer future (DSS June 1998) traces pension sharing back to the 1969 Law Commission report on Financial Provision in Matrimonial Proceedings. Back

8 Cm 2594 (June 1994), Vol II, p 26. Back

9 The Pensions Act (Commencement) (No. 5) Order 1996 (S.I., 1996, No. 1675), the Family Proceedings (Amendment) (No.2) Rules 1996 (S.I.,1996, No. 1674) and the Divorce etc. (Pensions) Regulations 1996 (S.I., 1996, No. 1676) set out details of how these powers were to operate for divorce petitions lodged after 1 July 1996. Back

10 Cm 3345, July 1996. Back

11 ibid., para 3.17; Q.68-9. Back

12 Cm 3364. Back