The financial services industry is not ready to deliver on pension reforms

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BACK IN the late 1980s, when the Conservatives were intent on "breaking the shackles" binding employees to their occupational pension schemes, Labour politicians warned that the move into personal pensions could turn into a disaster.

And so it proved. Up to two million of the seven or eight million people enticed into taking out a personal pension were wrongly advised to do so.

The cost of paying them redress has gradually mounted and the final bill could top pounds 15bn. Moreover more and more offshoots of the same scandal are coming to light.

Weeding them out is vital. Unless the financial services industry can sort the mess it created, it won't have the credibility to provide so- called "stakeholder pensions", second-tier retirement plans proposed by Labour and which ministers are ready to see provided privately. Yet if events this week are an indication, pension providers are still unfit to be active in this area.

One of these mis-selling "offshoots" mentioned earlier concerns "rebate- only" personal pensions. This is where premiums paid into a policy consist only of National Insurance rebates given as a bribe by the Government as an incentive for people to opt out of the state's own earnings-related pension (Serps). This is calculated as a percentage of the individual's National Insurance contribution, itself related to how much he or she earned.

The problem with rebate-only personal pensions was that the charges levied on them by insurance companies meant that unless the rebate itself was linked to reasonably high earnings - it could take a huge chunk of the amount paid in. So huge, in fact, that many risked being worse off than if they had stayed in Serps. The disadvantaged are people with low incomes (of pounds 8,000 or less), many of them women.

Now that insurers have been forced to sort out the most urgent pension compensation cases attention has switched to reviewing the "less urgent" ones. Among them are up to 1.5 million rebate-only pension holders.

Unfortunately, this week, the Financial Services Authority, a new watchdog created by Labour, backtracked over plans to include rebate-only policies in the review of potentially mis-sold pensions. A final decision on what is to be done will now be taken in the autumn. This U-turn only came about after massive lobbying by the financial services industry.

For hundreds of thousands of people, then, their cases are left in limbo for another six months at least - almost five years after the potential for mis-selling on a mass scale was first admitted by government and regulators.

As if that were not enough, insurance companies admitted this week that admin problems mean they are unable to pay the annuities bought with a personal pension when a policyholder retires. In many cases, the delays have stretched to months. Even if you weren't mis-sold a pension at the time, it may still take months before you finally receive your retirement income.

If there is a lesson to be learnt from this debacle it is that the financial services industry is not yet ready - either morally or administratively - to deliver on the new stakeholder pension reforms.

To pretend otherwise is to risk another scandal in 10 years' time. Whether a Labour government as committed to slashing state pension costs as the Conservatives once were actually listens is another matter ...

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