25. In divorce cases, legal aid is often a kind of loan to be repaid if money or property (over £2,500) is recovered or preserved.[88] A statutory charge may be imposed on property (which will incur interest charges) or on an earmarked asset such as a pension lump sum (in which case interest does not arise before the lump sum itself is payable). Pension sharing raises the question of whether pension credits should be treated as a kind of property[89] or in the same way as earmarked sums up to now, with repayment of the statutory charge without interest deferred until the pension comes into payment. A change to legal aid rules could influence the kind of settlement reached between the scheme member and the former spouse; the interest of the taxpayer needs to be balanced against the wider public policy objectives which the Bill is designed to meet. In September 1998 we were told that the Lord Chancellor's Department and the Scottish Office Home Department were in discussion with the Legal Aid Board and the Scottish Legal Board respectively on the practical implications of pension sharing, including the treatment of interest and whether new powers should be sought from Parliament.[90] Clarity is important here, and 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.

Retrospection

26. It is a general principle of English law that retrospective legislation should be avoided wherever possible.[91] In our first formal evidence session, Mr John Denham explained that —

"The provisions will come into place when the Act comes into force. There is retrospection in the sense that it will apply to pension rights accrued up until that point, some of which will clearly already have been accrued today, so in a sense when the legislation comes into force, somebody entering into the divorce process will then look backwards over the working life or the period of the marriage, but there will be no retrospection provisions for revisiting previous cases."[92]

27. Lord Justice Thorpe told us that it was very important that the statute should be absolutely plain that it is not intended to have any retrospective effect:

"It would be nice if this statute could eliminate the possibility of somebody, say, who had a clean break order in 1995 coming to the court and saying "Despite the fact that I had a clean break order in 1995 that dismissed all my claims, now I want to apply for a pension share. I must be entitled to do so because the rights that were the subject of dismissal did not include the right to apply for pension share because it did not exist", that sort of thing. I would hope that as far as possible the statute itself would eliminate that sort of ingenuity."[93]

28. Mr Martin Pointer QC for the Family Law Bar Association told us that it was important that the issue of retrospection be "squarely addressed"[94] and that practitioners would prefer it to be made quite clear in the statute itself, rather than in a statutory instrument, that the new legislation related only to divorces which are considered after the implementation of the statute, or after a specified date.[95] The Law Society also said that they would find it "unattractive" for existing settlements to be subject to variation by the retrospective imposition of a pension sharing order because they "could fundamentally change the financial arrangements in such a way that would be normally thought to be beyond a variation. It would be much more a fundamental change rather than a variation of an existing order."[96] Concern was expressed that the wording of paragraph 6 (6) of Schedule 1 to the draft Bill might inadvertently reopen a very large range of existing divorce settlements by allowing pension sharing to be considered when a variation order was being made by the court.[97] The Solicitors' Family Law Association told us that this was one of their main concerns and they could see major implications arising from an apparently minor drafting point.[98] They advocated a "simple drafting amendment"[99] to forbid the courts making a pension sharing order in any case where the original court order was made before pension sharing came into effect, even in cases where hardship was claimed. [100]

29. On the other side of the argument, it has been suggested that it would be anomalous and unfair to deny the use of pension sharing orders in cases where divorces had been initiated but not yet finalised,[101] or that "ongoing friction and distress" would be suffered by couples whose marriages had irretrievably broken down but who chose to defer divorce proceedings until pension sharing became available.[102] OPAS recommended that those with existing attachment and earmarking arrangements should be allowed to review these arrangements with a view to their being set aside and relaced by a pension sharing arrangement.[103] In our final session of evidence the Minister's position remained unchanged —

"our view is that it is very difficult to see how this sort of provision could be made retrospective without creating far more problems than one was actually solving. For those settlements which have already been reached, and they may often have had lengthy and difficult negotiations to get there, trying to revisit those could have very significant impacts on the two people directly affected. Equally, I think there needs to be a commencement date to avoid all of the uncertainty that can otherwise arise and where arrangements of course have been made over a range of assets, it would be quite difficult, I think, to go back and deal with one issue in isolation ... the intention is that the pension sharing provisions would apply to actions that were initiated after the commencement date, so it would not apply to actions which were in course at the time of the commencement."[104]

30. 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.

Nomination and survivors' rights

31. One of the challenges which pensions are faced with arises from the increasing number of couples who are not married — either by choice or through legal inability, as in the case of lesbian and gay couples. Pension funds have traditionally provided for widows and widowers, and the best practice now developing in the private sector[105] provides for trustees to make equal or similar provision for unmarried partners. In less progressive schemes, including those in the public service, it is still the case that individuals may be forced into financial hardship despite their late partner having paid the same level of contributions as their married colleagues. Considerable support has been expressed for the view that the time is now right for a legal change to require all schemes to pay partner's pensions regardless of marital status or sexual orientation.[106] 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.

Cohabiting couples

  32. We have not considered fully the question of cohabitation.[107] We do recognise that the breakdown of a long-term cohabiting relationship raises questions about pension sharing. However, the treatment of cohabitation in law and public policy raises fundamental issues that need to be addressed elsewhere.

Bankruptcy

33. The development of occupational pensions has been greatly influenced by the law of trusts, but more recent forms of pension provision have been governed by contract law. The residual discretion of trustees has given a degree of protection for occupational pension rights, which cannot be freely bought and sold. Other assets of a marriage, including the matrimonial home, may in principle be readily turned into cash, but pension rights by contrast have always been relatively illiquid. Part of the purpose of pension sharing is to introduce a greater degree of liquidity into the pension asset, to allow divorcing couples to treat pension rights on a par with their other assets. The implications of this need to be considered carefully, so that the wider public interest in preserving the special status of pensions (in preventing, for example, spendthrift individuals selling their pension rights for cash and turning to the State for support in their impoverished old age) is not lightly discarded. If creditors are confident of making recoveries from an individual's pension rights, there could be a danger of those rights being used as ordinary security for loans with potentially long-term ill consequences for the individual's income in retirement.

34. The current state of the law has been place in doubt by the decision of the Bankruptcy Court in re Landau[108] which confirmed the long-held view of the Insolvency Service that 'Section 226' retirement annuity contracts can be realised by the trustee of a bankrupt's estate for the benefit of creditors.[109] The former Under-Secretary of State for Competition and Consumer Affairs at the Department of Trade and Industry (Mr Nigel Griffiths) wrote that "it is considered that the effect of the judgement would also apply to personal pensions [which are] a form of personal savings and should be treated in the same way."[110] Mr John Denham later told us that he was aware that legal opinion is divided.[111] Mr Griffiths recognised that the rules of occupational pension schemes usually contained forfeiture clauses designed to prevent the trustee in bankruptcy being able to access the pension benefits.[112] The whole issue of pensions and bankruptcy is being considered as part of the Pensions Review.[113] Mr John Denham pointed out that a pension credit transferred to a former spouse could be seized, to prevent abuse in cases where the scheme member was conniving with the former spouse to place assets beyond the creditors' reach.[114] The transfer of a pension credit out of an occupational scheme could theoretically bring assets within the creditors' scope which would otherwise have been protected. Sections 91(3) and 95 of the Pensions Act 1995, which were passed by Parliament in order to confirm the protected status of occupational pensions, have not been brought into force by the Government.[115]

35. The Landau problem had not been considered by Lord Justice Thorpe,[116] the National Association of Pension Funds[117] or Mr Pointer of the Family Law Bar Association.[118] Mr Robin Ellison for the Law Society told us, first, that the Landau decision was not settled law and that legal opinion was divided on whether the decision had general application and, secondly, the difference between the treatment of personal and occupational pensions was an anomaly and seemed to be unfair.[119] Mr Ellison sided with the view of the Goode Committee that occupational pension rights should not be the property of the trustee in bankruptcy, except where there had been a fraud on the creditors.[120]

36. Mr David Salter for the Solicitors' Family Law Association told us he could see no reason why the Pensions Act 1995 should not be amended in the Pension Sharing Bill to strengthen the protection of pension rights in relation to retirement annuity contracts.[121] The Association's written evidence amplified their recommendation that the opportunity be taken in the Pension Sharing Bill to clarify the position on bankruptcy both as to earmarking and pension sharing.[122] In Mr John Denham's view, it was "not obvious that this [Bill] would be the appropriate vehicle".[123] Mr Iain Talman of the Law Society of Scotland described the situation following Landau and Shand,[124] a comparable Scottish case, as "lawyers' law par excellence ... an absolutely impossible conundrum".[125] In his view it was "more than high time the matter was clarified as to what the effect of personal bankruptcy is on a pension, whether it is a personal or an occupational pension, and how that impacts on orders made in relation to the divorce".[126] Fairshares also drew attention to their concern over the abuse of the insolvency process by scheme members getting divorced, to the disadvantage of the former spouses.[127]

37. Written evidence from the Law Society of Scotland Pensions Working Party on Pensions and Bankruptcy set out the unsatisfactory position at present and recommended that there should be consistent treatment for all forms of pension, which should be protected from bankruptcy.[128] 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.

89   See paragraphs 40 to 44 below. Back

90   Ev.p.122-3. Back

91   According to the Law Society, Appendix 6 paragraph 2.11. Back

92   Q.75. Back

93   Q.132. The Staff Side of the Police Negotiating Board also opposed retrospective pension sharing DSS 6 paragraph 4. Back

94   Q.71; Ev.p.52 paragraph 12. Back

95   Q.272. In its written response to the Consultation Document, the Family Law Bar Association drew attention to the useful precedent of SI 1996/1675, which applied s. 166 of the Pensions Act 1995 to proceedings begun after 1 July 1996; but the Association supported the limited provision to make pension sharing orders available to the courts in discharging a former spouse's maintenance order - DSS 70 paragraph 10.1 and 10.2. Back

96   Q.322. See also Appendix 6 paragraphs 2.11 and 4.2 (d). Back

97   Q.323. The Society of Pension Consultants shared concerns expressed by others that if the beneficiary of an earmarking order knew that the scheme member was in ill health, they might be tempted to seek to substitute a sharing order. Schemes might have made assumptions about the termination of an earmarking order on death which would be undermined by the substitution of a sharing order - Appendix 11page 199. Back

98   Ev.p.73 paragraph 2.2, Q.351. The Association's concerns were spelled out more fully in its response to the Consultation Document, Appendix 9 paragraphs 3.1 to 3.5; see also Appendix 9 paragraph 8.1 on the Association's suggestion of at least transitional provision to allow for a Brooks type variation of settlement order to be made where proceedings were commenced prior to the implementation of pension sharing. Back

99   Q.352. Back

100   Q.352-3. The Association of Pension Lawyers agreed that retrospection would be damaging - Appendix 5 paragraph 2.1., and the Law Society of Scotland also proposed that the variation power would not apply to orders made before the Act comes into force - Appendix 7. Back

101   For example, the case of Mrs L of Garstang, Lancashire, which was raised with the Committee by Mr Hilton Dawson MP. Mrs L's own response to the Government's consultation exercise is at DSS 5. Back

102   Response to consultation by Mr John Dyson, Chairman of Thomson's, an independent financial adviser DSS 9. Back

103   Appendix 17 paragraph 1(b). Back

104   Q.614-5. Back

105   Q.392. Back

106   Early Day Motion 1582 of 1997-98, tabled on 21 July 1998 by Ms Gisela Stuart, had obtained 132 signatures at the time of going to press. See also the response to the Consultation Document from the Irish Congress of Trade Unions Northern Ireland Committee, DSS 80 section 2. Back

107  Q.18, Q.129-130, Q.285, Q.390-5, Q.487-8, Q.564, Appendix 6 paragraph 2.8. Back

108   [1997]2 FLR 660. Back

109   Appendix 3. Back

110   Appendix 3. Back

111   Q.635. See also Solicitors' Family Law Association Appendix 9 paragraph 18.2 and Law Society of Scotland Appendix 8 paragraph 2.1. Back

112   Appendix 3. Back

113   Q.635, Ev.p.135, Appendix 3, Appendix 4. Back

114   Appendix 4. Back

115   Q.396, Q.423, Q.636; Ev.p.135; Appendix 9 paragraph 18.3; Appendix 8 paragraph 2.3.2. Back

116   Q.120-1. Back

117   Q.141. Back

118   Q.278-80. Back

119   Q.341. Back

120   Q.341-2. Back

121   Q.396-7. Back

122   Appendix 9 paragraph 18.5 Back

123   Q.635. Back

124   [1994] SLT 387. Back

125   Q.423. Back

126   Q.423. Back

127   Q.545-8. Back

128   Appendix 8. Back