Are you a victim of the latest multi-billion pound pensions mis-selling scandal?
1. Two reports
There have been lurid headlines in the press recently about "a new pensions scandal", and articles such as in the Guardian: "Why contracting out is just another debacle". x Doing a Google search on "new billion-pound pensions scandal" brings up 188 references.
These headlines have resulted from a report of the Consumers' Association, x and a report written for the FSA by Oxford Actuaries and Consultants. x These reports show that most people contracted out of the State Earning Related Pensions Scheme (SERPS) now the State Second Pensions (S2P) will receive less than if they had stayed in. The report of the Consumers' Association is based on actual examples:
"Which? looked at the cases of 108 of its staff and readers who had contracted out of the second state pension into a personal pension."
This is better than the report of the FSA which says:
"We have not had access to individual company data i.e. access to specific case examples." (2.6)
This indicates that there has been no official monitoring of the investment performance of personal pensions. It may be a reason why the Pensions Commission did not study the investment performance of personal pensions in its First Report. The FSA does not like discussing investment performance in general, because it says: "Past performance is no guide to future performance." But this lack of interest in investment performance is awkward if the FSA needs to study topics for which investment performance is important - such as the effect of contracting out.
2. "Bewilderment"
There has been disagreement amongst experts whether to be in or out of SERPS/S2P. For example Ned Cazalet said in evidence to the Treasury Committee:
"We have had a ludicrous debate in the industry recently about opting in or out of SERPS: it has occupied many newspaper column and taken up a great amount of brain power trying to work this out." x
There is even disagreement amongst IFAs.
"IFAs argue that the decision on contracting back is not clear-cut and admit that they make no money from giving clients advice on this." x
An IFA, Barnes Independent Financial Advice, says:
"Millions of National Insurance payers do not even know if they are contracted 'in' or 'out'." x
The details of contracting-out, Guaranteed Minimum Pensions and Protected Rights, are too complicated for this website. There are recent and also forthcoming simplifications x and the DWP has a Pensions Education Working Group, but nevertheless:
"Time and again various surveys have highlighted the fact that few consumers really understand how this top-up scheme works, let alone what pension they can expect to receive from it. This bewilderment has been exacerbated by the change from Serps to S2P." x
It is therefore not surprising that so many people have made a mistake, even though "informed choice" is described by the government as "the key". x The government is requiring people to make impossible decisions whilst at the same time saying: "Informed choice is the key." Providers are encouraging customers to contract back into the S2P: x
"But a number of insurers, including Axa and Standard Life, have been writing to customers of all ages urging them to contract back in. Some insurers have taken this one step further. Earlier this year Norwich Union announced it would be automatically contract 40,000 personal pension customers back into S2P, regardless of age." x
3. millions affected
The Consumers' Association estimates that there is a 71 per cent likelihood of individuals getting less by contracting out, amounting to 4.5 million people: x
"Anyone who opted out of the state earnings related pension scheme could get less than if they stayed in the scheme. .. Malcolm Cole, editor of Which?, submitted his own financial details ... Of his pension provider he says: 'Its charges are high, but its skill at investing my money is low.' "
(New pension scandal hits, Guardian, 20th August 2005. x)
The money the provider makes for itself are the charges. What it makes for you are how it invests your money. So what do you expect? An article in the Telegraph says:
"It's official: people who have contracted out of the state top-up pension scheme will be worse off when they retire." x
4. Complaints
The CA is encouraging people who are contracted out to find out if they would have done better remaining in, and if so to make a complaint. x The Telegraph reports that asked whether or not people can complain, an FOS spokeswoman said:
"Much will depend on the advice that was given at the time, were people told and were they happy to accept the investment risk for example?" x
There may not be a record of what was said at the time. The adviser may have gone out of business. When there is so much bewilderment, "happy to accept the investment risk" does not seem very meaningful. If people do not understand the scheme in the first place, how can they be "happy to accept the investment risk"?
5. Rebates
The ABI is recommending that the level of rebates for contracting out should be increased. x This seems like throwing good money after bad. This is a common situation: the industry eating away at the capital by various charges, and then when as a result objectives are not going to be achieved, it recommends that contributions should be increased. The poor investment performance resulting from excessive charges is routinely hidden behind a variety of excuses such as: fall in stock markets, or interest rates. The government has provided the industry with such an excuse:
"The present situation has come about because the Government has reduced the level of contracted-out rebate that is paid into private pension schemes." x
The Consumers Association estimates:
"Since 1988, the government has handed over £35 billion of taxpayers' money to the pensions industry ... Of that £35 billion, around £3 billion has been paid to pension providers and financial advisers in charges." x
In addition to the £3 billion there are dealing costs - mainly stockbrokers' commissions.
The ABI proposes: "Abolish contracting-out for those earning under £15,000." It would arguably be best to abolish contracting-out entirely.
6. The need for a new approach
This latest scandal has resulted from government policy to create a nation of pension punters, x where everyone is responsible for their own pensions planning and financial decisions, with an emphasis on choice, supported by many "informed choice initiatives" x "to help individuals to understand financial choices". For example:
"simple, low-cost, risk-controlled savings products"
"national strategy for financial capability"
"improved integrated marketing". x
This is arguably the wrong general approach to the subject. There needs to be a U-turn away from people doing things to not doing things. Such as the proposal to require new employees to opt out rather than to opt in to occupational pension schemes:
"Under the plan, new employees would be automatically enrolled into their company pension scheme unless they opt out from joining." x
I hope that "their company pension scheme" is only self-administered occupational pension schemes and does not include group personal and stakeholder schemes. "Default option to a stakeholder pension for new employees" is one of the listed Informed Choice Initiatives. x It is "policy under consideration", and is in my opinion completely unacceptable.
In this area the government should require people to do as little as possible. It is instead requiring and encouraging people to do things, such to choose between a bewildering number of pension "products", and indeed whether or not to contract back in to the State Second Pension. It is requiring new parents to choose a Child Trust Fund. Choice puts an onus on individuals to choose. Flexibility puts an onus on schemes to be flexible, which should not mean providing numerous unnecessary investment options. It can result in mistakes, such as:
"Pension experts are warning that many employees are being short-changed by £6 billion a year when they take a tax-free lump sum from their pension on retirement." x
The new approach needs to be extended to the entire industry, reducing unnecesssary activity, in particular the excessive portfolio turnover discussed on this website. x
September 2005
Stephen Wynn,
E-mail: centre@boltblue.com