Pensions - the clawback

How effective will the new compensation regulations be? Nic Cicutti provides a few answers

It seems to happen with such monotonous regularity that it has almost acquired ritual status, like the first cuckoos in spring.

First, a confession by the City's top financial watchdog that the process of reviewing the pensions mis-selling scandal has been massively delayed. Then, a pledge that things will get better, plus an announcement of a new "initiative" to breach the logjam.

For victims of the scandal, the promises made last week by the Securities and Investment Board, have an eerie sense of deja vu.

What is the problem?

Personal pensions, introduced in 1988, suit many people, but they are not always a good idea. This is because benefits from company schemes are often guaranteed and better than those from personal plans, because the employer pays a sizeable contribution into them.

But this did not stop armies of salespeople scouring the country and promoting the value of the new pensions.

Few, if any, controls were placed on how it was done. The result is that thousands are at risk of substantially smaller pensions.

Did no one try to stop it?

At first most warnings were ignored. By 1993 it was obvious that a massive scandal was brewing. The Securities and Investments Board (SIB) launched an inquiry that reported two years ago. It found that up to 1.5 million people may have been mis-sold a personal pension.

The most vulnerable categories were so-called "opt-outs", those still in work who were conned into leaving the occupational scheme and shifting into a private pension. Teachers, nurses and other public-sector employees were in this group.

Then there were "transfers", those who had already left a job. They were persuaded to move the money they had accumulated in their old pension scheme into a personal pension.

The SIB said companies involved in the mis-selling should compensate their victims and asked its junior watchdogs to ensure it happened. Initial estimates of the cost of compen-sating people was pounds 4bn. The most urgent cases were to be dealt with 12 months ago.

So, two years down the line, have people been compensated?

No. Last week, a report by one of the junior watchdogs, the Personal Investment Authority, showed that out of almost 450,000 priority cases, barely 6,700 people have been offered redress, totalling pounds 50m.

What has gone wrong?

If you listen to the regulators, almost everything. There have been legal challenges to the review, software problems, plus a poor response to letters sent by companies to their clients.

Finally, both pension companies and company schemes complained that the forms used to supply policyholders' details are too complicated. The latest SIB initiative aims, however, to break this logjam.

How will it work?

Instead of a form asking 200 questions, only eight are on the new questionnaire. Personal pension companies will be allowed to make a rough assessment of a policyholder's loss by using his or her old pension scheme booklet and standardised details rather than more specific information.

So, all systems go then?

Not quite. While this initiative speeds up the process of assessing whether and roughly how much loss has been suffered, it still does not solve the trickier question of compensation.

There are two options available to the company that sold the personal pension once loss is assessed: reinstatement into the old scheme or topping up the existing personal pension. The SIB says reinstatement is best, because it returns victims to where they were before the mis-selling occurred. But reinstatement might take lots of time as company scheme trustees haggle. Despite the regulator's promises, not many people will be reinstated for at least another year. Plus, insurers are already starting to complain that the cost of doing so may be disproportionately large compared to top-ups.

So what can I do?

You may have received a letter from an insurer asking you to take part in the pensions review. It is probably at the bottom of the pile of papers you promised to deal with one day. Dig it out and send it back. Failing to do so may cost you a chunk of your retirement income.

The insurer may ask for details of your old company scheme. Unless you are certain that the scheme has not changed since you left it, don't send in the old booklet: just write back and tell the insurer to get it directly from the scheme trustees.

You may eventually be given an estimate of the losses you have suffered. This is not an exact amount. If you believe you are being short-changed, insist on a detailed assessment.

The insurer should try to reinstate you into your old scheme. You may be told this is impossible because of the high cost. Refuse to accept this and complain to the PIA Ombudsman.

A topped-up personal pension may be inevitable. Insist on an explanation. But even then, you may not be happy with the absence of guarantees. If so, ask for one - called a deferred annuity.

If you have a personal pension but are not sure whether it was mis- sold and haven't received any communication about the review, contact your pension company.

And finally ...

The SIB is placing the onus for compensation at the door of the punters who were conned in the first place. The fewer people who reply to insurers' queries, the smaller the bill they will have to pay for their bad advice.