The lay person's guide to the great pensions scam is simple. If the punter chose a personal scheme and ignored an employer's scheme or transferred from it while still in their employment, they probably received bad advice. As every good litigator knows, the trick is to assess, at reasonable cost, the extent of 'probably'.
The unexpected feature of this scam is that the perpetrators may initiate redress. The Securities and Investments Board (SIB) announced on 25 October that investment firms will be required to review priority groups in three stages, the most urgent being reviewed by 31 December 1995.
The key to this scandal is that individuals have been tempted to move from pension schemes which, on the whole, are heavily subsidised by employers, to personal schemes (primarily with insurance companies) which employers have shunned.
In the sample period, 1991-92, the majority of transfers were missold. For most individuals the transfer option (while service continued with the employer) became possible only from April 1988.
During the heyday of the Thatcher years, the Centre for Policy Studies proposed personal portable pensions. The leading exponents were Nigel (now Lord) Vinson and the late Philip Chappell. They advocated a raw entrepreneurial incentive for the little person to invest their pension fund in their own business. There was huge pressure to break up the monolithic pension schemes.
Norman Fowler gave in to this pressure but, with one eye on security, insisted that the personal pensions be placed with insurance companies, banks or other institutions. Section 15 of the Social Security Act 1986 (now s 160 of the consolidating Pension Schemes Act 1993), in force from 6 April 1988, rendered void any rule for compulsory membership of the employer's scheme. This single change is the direct cause of the scandal.
Ministers disagree. They say that they simply created level playing fields and that the cause was misselling, but the Financial Services Act did not create a level playing field. It favoured the big battalions with their impressive titles: Lautro-approved, Fimbra member and so on, while employers worried that the new law rendered it illegal for them to comment (not so, but it was often the perception).
More importantly, the scam was predicted. The Government claimed that personal pensions were open to employers' contributions too, but all the evidence showed that employers would have nothing to do with them.
Apart from the later development of the mildly popular group personal schemes, no employer wanted to contribute to numerous individual arrangements.
So a member who gave up their company's scheme was on their own. If they wanted life cover or any other common feature, they had to pay for it. Except in rare cases, there was no opt out .
Evidence accumulated from the outset that some personal pension sales people were not even calling for the employer's scheme booklet. Their patter was helped by the State contribution to personal schemes that reduced the State pension liability (Serps).
These 'free' State contributions were the main plank in a serious Government programme to reduce State liabilities in the next century, but where there was already an alternative from the employer that benefited from reduced national insurance contributions the opportunity for confusion was ripe.
The sales regulations all contain a know your client provision. The SIB now says this goes further even than an inquiry into the available employer's scheme. It entails questions regarding the individual's priorities, their dependents and so on. There was no way, in 1988, that a sales force able generally to judge the opt-out from Serps by the simple question of age was going to believe that the opt out from the employer was to be treated more seriously.
So where does that leave today's ambulance chasers? Not very far. To assess a potential claim is a skilled business, and the investment firm (or, if alerted, the compensation scheme) will get round to it for free eventually; they will not take kindly to a claim for costs when they can point to a well-publicised timetable for redress.
This will not help the lawyer with an anxious client in the office. The cost-effective litany must be:
* Your personal scheme has not suddenly lost its value.
* The question is whether you should have been advised of likely greater value in the employer's scheme.
* The investment firm has to review your position, and we can probably help you jump the queue.
* If you are planning early retirement you can certainly jump the queue.
Most clients will want to jump the queue. Either way, they will certainly need advice regarding the investment firm's review.
Most practitioners, before the client arrives at the office, will have armed themselves with SIB's full factsheet.
The client needs to know that there is no claim unless the investment adviser failed to assess his needs and the transfer or opt out resulted in lesser value than the employer's scheme.
It is unlikely a client who has made the transfer will have systematic records that will enable the lawyer to assess the claim, so they are thrown back to the investment adviser. Often the best answer will be re-instatement in the employer's scheme, but typically this will require more money than is in the personal fund, as few employers will contribute retrospectively.
The SIB factsheet covers these matters in some detail and gives further telephone numbers for information.
The tabloid press has concentrated on the big insurance companies, but often the investment adviser will have been an independent broker. The SIB has published a two part review which makes chilling reading. The resources needed to assess past business are considerable.
Part one of the SIB review is required reading, at u5. Paragraphs 39-42 are a reminder to liaise at the outset with professional indemnity insurers. Part two, at u25, is a full specification for review procedures.
Part two says the review also covers the lesser pensions scam that may arise from the ordinary transfer of the former employee; while in the past it has often been advantageous to bring to a personal scheme the cash equivalent of a preserved pension, the SIB has found that some salesmen omitted to ask the important questions, the crucial one being whether the cash equivalent includes value for discretionary increases where the former employer's scheme customarily awarded these.
For the 'at risk' categories, few personal pensions will ever have been sold to the exacting requirements of the specification. This is a scandal that will not lie down. The Government will need nifty footwork to avoid the blame.
Jonathan Seres is senior partner of Sacker & Partners, practising in pensions law.