Pension problems under scrutiny

Christopher Fitton and Andrew Long on the latest pensions mis-selling review. Christopher Fitton is a solicitor and Andrew Long a partner at Pinsent Curtis.

On 13 August the financial services regulators launched Phase II of the Review of Past Pension Business. This low-key, eight-line press release attracted little coverage, but its implications will be massive.

The review came about in 1994-1995, when a study of sales of personal pensions during the period 29 April 1988 to 30 June 1994 was ordered by the Securities and Investment Board (SIB) and the Personal Investment Authority (PIA).

The purpose was to compensate those who had been mis-sold personal pensions when they would have been better off staying with or joining their occupational pension scheme. Companies were made to carry out the review even if no complaint had been made.

Phase I concentrated on cases where a loss might have been suffered either already or in the near future – the dead, retired or older investors.

Phase II proposals are for a similar review to apply to other personal pensions sold during the aforementioned period which did not fall within those groups. Phase II will relate mainly to younger investors, and will mainly follow the same format as Phase I.

The startling new figures were produced after taking advice from Price Waterhouse and Bacon & Woodrow. The regulators uncovered:

1.821 million cases within the Phase II categories;

600,000-790,000 cases to be individually considered;

330,000-600,000 cases where redress payments will have to be made;

a cost of £3.35bn-£5.8bn for redress; and

a further cost of £520m-£750m for administration.

With Phase II the system of direct invitation is to be used – firms must write to all relevant investors, inform them of the review process and invite them to put their case forward.

The review will include a publicity campaign featuring an 8ft tall Ostrich burying its head in the sand, signifying potential claimants ignoring attempts to give them a review of their arrangements.

In Phase I, professional indemnity insurers had been unhappy with the communication method with investors and complained that it would require firms to breach the terms of their professional indemnity cover.

An accord was reached between the regulators and the insurers, which allowed Phase I to proceed. The direct invitation system is similar to the accord method.

The regulators have pulled back on whether to include advice given to investors to contract out of the State Earnings Related Pension Scheme (SERPS) between 1988 and 1994. Following protests, the regulators are commissioning more research on this issue.

The inclusion of SERPS (or “rebate only”) advice in Phase II of the review would be a shift from the original focus of the review. By including all investors who were advised to contract out of SERPS, the review would extend to some investors who never had an occupational pension scheme available to them, thus changing its nature significantly.

It is now 10 years since the Financial Services Act 1986 came into force on 29 April 1988. The irony is that the commencement of the legislation coincided with what is now seen as mis-selling on a large scale.

Two prime causes of mis-selling can be identified. First, the political climate shown by the encouragement by the Government of the sale of personal pensions.

Second, the newness and immaturity of the regulatory organisations. The regulators did not raise the alarm when, as they now see things, widespread mis-selling was taking place.

With hindsight it was foolish to introduce a new method of pension provision at the same time as a new system of regulation. The cost has been enormous and, as the review has again proved, prevention is far less painful than cure.