The great pensions scandal: When you get to their age, you may not have enough to live on. Nick Cicutti investigates. . .

SARAH HANKINS is a lucky woman. A Northampton primary school teacher, she knows that if she stays in her job long enough she will receive a pension equal to two-thirds of her final salary.

Her pension will always go up in line with the cost of living, and if she dies before her husband he will receive a small income from her scheme for the rest of his life.

This is no more than she is entitled to under her contract of employment, so what makes her lucky? The answer is that she came very close to losing it. Six years ago Mrs Hankins, then 22, was wrongly advised by a life insurance salesman to stop paying into her employers' pension scheme and to start a personal scheme instead.

'It was only when the union sent an adviser round the school and told me I was in danger of losing a large slice of my retirement benefits that I realised what I had been conned into,' Mrs Hankins recalls.

'I felt cheated. You expect someone to give you proper advice and to tell you if something is not suitable. All this man did was bamboozle me with figures, going on about how much money I would get without also telling me what I stood to lose.'

Her union has since extricated her from the insurance company, Teachers' Assurance, and got her back into her old scheme. The insurer paid pounds 13,500 in compensation.

Mrs Hankins's case is one of many, but so far only a minority have been sorted out. Up to 500,000 other people who were advised to switch from workplace pension schemes to personal ones are still waiting. In the next few weeks, the Securities and Investment Board, the senior City regulator, will announce its guidelines on how people wrongly sold personal pensions should be repaid. The compensation will run into hundreds of millions of pounds - one of the biggest financial calamities to hit the City.

But the great pensions scandal does not end there. Equally worrying is the fate of millions more people who were induced to leave the state earnings-related pension scheme - Serps - and take out personal pension plans. The Government offered them a sweetener to do this: a slice of their regular National Insurance contributions - 2 per cent - would be diverted into their personal pension once it was set up.

For many low-paid people this has backfired disastrously. They themselves can pay at best small amounts into their scheme on top of the National Insurance money, while high charges by insurance companies cut into whatever funds they manage to build up. As a result, they are only likely to receive what one expert calls 'piddling little pensions'.

According to a recent report by the accountants Coopers & Lybrand, as many as 2.4 million people earning less than pounds 10,000 a year may have been caught out in this way. They will only discover how badly they have lost out when they retire.

PENSIONS are notoriously complex and dull. In the past most of us have either neglected them or, baffled by the expert explanations, taken them on trust. We signed up, paid money in each month and assumed that when we retired we would have enough to live on.

Increasingly, such comfortable arrangements are impossible. Companies which are fighting their way out of recession are unable to provide generous pension deals for their staff. At the same time, people are moving jobs more often, whether willingly or not. Many of us have reason to worry about whether our pension plans are in good shape.

And worry we must, for as the experience of Sarah Hankins or of the millions of low- paid personal pension victims shows, this is no longer something we can take on trust. Like so much else in our financial lives, pensions are now risky things. What has happened?

The foundation of the British pension edifice is the state pension dating back to 1908, when people over 70 were granted an income of 15 shillings a week. In the 1940s Beveridge ushered in a more comprehensive system. Payments were originally set at subsistence level, but grew steadily in real value so that by 1979 the state pension stood at about 19 per cent of the average wage. Since then government changes have pushed it down to about 15 per cent and by 2025, some estimates suggest, it will be 10 per cent.

Today's basic state pension is pounds 57.60 a week for a single person, rising to pounds 115.20 for couples if both have paid full National Insurance contributions through their working lives.

Besides this basic state pension there is Serps. Introduced in 1978, this was designed to top up the basic pension by paying retired people up to 25 per cent of the earnings they achieved in the best 20 years of their working life, up to a maximum earning limit of pounds 21,000. Again, over the years this amount has been cut, but, in any case, since the scheme only started in 1978 the sums being paid out now are small. The average additional pension paid out per retired person in 1993 under Serps rules was just pounds 7.60 a week.

Outside the state arrangements there are workplace, or occupational pension schemes, to which some 19 million people in both the public and the private sector belong. These schemes can take various forms. At best, they will pay an income linked to a person's salary before retirement, often two-thirds of final income.

In the private sector, however, many employers find it too expensive to offer such a guarantee. Instead, staff pay an earnings-linked contribution into the pension fund, which is invested. On retirement, the member receives a pension based on the fund's performance and how much has been paid in. These are known as money-purchase pensions.

The seeds of today's crisis were sown after the 1983 general election, when Norman Fowler, then Secretary of State for Social Services, set up a committee on pensions. It included influential figures such as Mark Weinberg, a founder of three top insurance companies. Also in the team was Professor Alan Peacock, vice-chancellor of the privately funded Buckingham University. Their remit was to reform the system.

This was partly a response to mounting concerns that in the long term the state pensions bill would be unpayable.

Treasury forecasts showed the number of retired people, currently about 10 million, rising steadily from the year 2000 until it reached 15 million. At the same time the number of people of working age was expected to fall from a peak of 37 million to about 33 million.

This was worrying because in the state system people in work pay the pensions of those who have retired and, in return, expect the same to happen when they stop working. If, by 2030, a much smaller number of working people were carrying the burden of a much larger number of retired people, it was difficult to see how the sums would add up.

But the committee also had wider issues on its mind. In April 1983 the Centre for Policy Studies, a think-tank committed to free-market ideas, published a pamphlet by Nigel Vinson, then a deputy chairman of Barclays Bank. Entitled Personal and Portable Pensions for All, it challenged the role of workplace pensions.

For Vinson, occupational pensions were wrong in several respects. They penalised those who changed their jobs often. They were unfair, in that early leavers effectively subsidised 'plodders' who stayed in one job all their lives. And they were undemocratic because they denied people the right to control the level of their contributions and to carry a personal pot with them from job to job.

'At present,' Vinson wrote, 'the law actually results in a continuing shift of capital from the personal to the corporate sector. And for most people today, ownership is ownership at second hand, and as such, is not ownership in the motivational sense.'

He argued instead that people should have personal pensions, which would be their responsibility and which they would keep wherever they worked. This, he wrote, 'would give a new opportunity for . . . people to have a real sense of involvement in the industrial success of this country. This would allow those in employment to have the option to supervise their pensions, as the self-employed do.'

Such views were music to the ears of the pensions review group. Personal pensions, it seemed, might answer the looming problem of an ageing population since people would provide for themselves. Better still, they would make the workforce more mobile and flexible and could be presented as giving people more control over their lives. It all had the makings of a Tory reforming initiative on a par with privatisation and council house sales.

In 1985, pushed by Fowler, the government threw its weight behind personal pensions. Its plans were bitterly opposed, with warnings that there would be over-selling, that many would end up worse off and that the government was panicking in the face of dubious demographic predictions.

Michael Meacher, Labour's spokesman on social security matters at the time, remembers the arguments. 'It was clear to us at the time that Norman Fowler wanted to succeed with Margaret Thatcher. As far as he was concerned, this was the new spirit of the age. The influence of people like Vinson and the CPS was considerable.

'Despite the fact that we were raising a whole series of valid points, ones on which we have subsequently been vindicated, it was impossible to budge him. There was a blind refusal even to acknowledge the merit of any facts that conflicted with his own.'

Joel Joffe, a former deputy chairman of the insurance company Allied Dunbar, who is now retired, was one of a minority of industry figures who disliked the change. 'What was happening,' he recalls, 'was that you had a government which was ideologically blind to any objections. This meant that the only people it was prepared to listen to were its own supporters.'

Three ministers were responsible for piloting the Social Security Bill through the Commons: Fowler, his minister of state, Tony Newton, and his young, ambitious under-secretary of state, John Major. The Bill became law in mid-1986.

THE INSURANCE industry which was presented with this opportunity to push personal pensions comprised a multitude of companies, from big-name firms such as Prudential, Pearl and Scottish Amicable to scores of small outfits, many of them badly run. Between them they employed about 250,000 people, most of them salesmen. They were in for a bonanza.

The government, by offering the 2 per cent 'bribe' (as the industry called it) to those who opted out of Serps at the same time as starting a personal pension, was effectively doing the salesmanship itself. And it even did the advertising, with a high-profile television campaign showing men breaking free from the shackles of their occupational pensions. Government experts had predicted that 500,000 people would opt for a personal pension, but that figure was reached in weeks. In two years, almost 4 million personal pensions were sold, many of them consisting solely of the Serps rebate. The total is now more than 5 million.

Sales were boosted when Robert Maxwell plundered the Mirror Group pension fund. Many people who were members of other workplace schemes began to fear their money was not safe there, so they switched to personal pensions.

Soon salesmen were everywhere, and their methods were often ruthless. (See the thoughts of Kevin, below.) One small Essex company, InterLife, sent its salesmen to tout for business around nurses' residences, telling members of the respectable NHS scheme they would be better off out of it.

Companies were scrambling for the pensions business because it was highly profitable. New customers paid large up- front fees, while the commissions for salesmen and advisers were usually harvested from the client's first two years' premiums.

'The assumption was that competition would itself lead to lower charges for the consumer,' says Joffe. 'This did not happen. Pensions were often designed to be highly opaque, with charges that are not understood by the consumer. In practice, many companies get away with charging what they like.'

The additional charges can reduce drastically the value of a pension at maturity. For example, without charges a person paying pounds 100 a month into a scheme for 20 years would expect a pot of more than pounds 60,000 if the fund's value grows by 8.5 per cent each year.

Scottish Life has relatively low charges, yet its final payout is cut to pounds 51,500 pounds, a drop of 15 per cent in the fund's value. With Royal Life charges strip 25 per cent out of the fund, leaving pounds 44,500.

That may still sound a lot, but because it is used to buy an annual income for the rest of the retired person's life, the actual pension that results is small. Based on current rates, a pounds 50,000 lump sum - a generous estimate of how much a person might receive - would buy a pension of about pounds 60 a week. Not much, after 20 years of saving.

And the problem does not end there. As Sally West of Age Concern points out: 'As soon as a person is paid a pension, they may lose a whole range of state benefits they are entitled to. In just the same way as we talk about a 'poverty trap' for those who are in work but lose benefits, the elderly also find themselves in a 'pension trap'.'

By late 1990 it was clear both to the government and to various City watchdogs that the situation was out of hand.

In many cases, salesmen had run amok, sparking a rising number of complaints. Lautro, the insurance companies' watchdog, instructed them to change their advertising to include a warning that not everyone could benefit from buying a personal pension. For millions of people this came too late.

By June two years later, both Lautro and Fimbra, the parallel watchdog for independent financial advisers, were warning their members that only under exceptional circumstances should they advise clients to transfer out of occupational schemes. Half a million people had already made the transfer.

Equally alarming, it now emerged that paying people to leave Serps had actually cost far more than anticipated. The National Audit Office says the Government has handed insurance companies more than pounds 10bn of National Insurance contributions towards personal pensions in the past seven years. And because people are allowed to switch back into Serps at any time and claim at least part of their earnings-

related pension (a wise move for many) this vast sum has been handed out with very little to show for it.

A SCANDAL of such proportions might be expected to provoke resignations, but the opposite has happened. Mark Weinberg and Professor Peacock were knighted, while Nigel Vinson received a peerage.

Now running an investment company in the City, Lord Vinson is unrepentant. 'Of course I regret the way that mis-selling has taken place in the past few years,' he says, but adds: 'The demographics of the next few decades point to the fact that millions of people will need to take out pensions to provide a decent income.'

Norman Fowler received his knighthood in 1990 and is now Tory party chairman. He was unavailable for comment last week. Tony Newton is Leader of the House. John Major is Prime Minister.

Taxpayers, meanwhile, have paid billions of pounds to swell the profits of insurance companies and provide pensions for a minority of people, many of whom may face hardship in their old age as a result.

'WE'VE ALL GOT TO MAKE A LIVING'

KEVIN, who declined to give his real name, has been a pensions salesman with various companies for six years. 'I fell into it by accident, really. There was a guy in our local pub who used to go on about how much money you could earn in financial services, selling to people. I went for an interview and they seemed to fall all over me.

'We had to do a week's training. It was a joke. They crammed us for eight hours a day, mixing a lot of gibberish no one understood about products with serious stuff about how to sell them. Then we were assigned to various offices and told to get going.'

Kevin spent the first nine months knocking on doors five evenings a week and phoning potential customers during the day. It was dispiriting: 'For every 40 or 50 calls you made you might be able to swing one face-to-face interview. For every seven or eight interviews you might sell something.

'At first, I rang just about all my friends and relatives and went on and on at them. I managed to sell something but probably lost a lot of mates as well. If I walked into the pub people tried to avoid me. Then it got a bit easier. Now I make a decent living at it, about pounds 30,000 a year. But nearly everyone who started with me has gone. They just couldn't hack it.

'To be honest, the way the system works you are bound to get dodgy stuff going on. If you've gone without a whiff of a sale for a few weeks and you get some old guy who tells you he's not sure, you have to turn the pressure on.

'In my second office, whenever you got a decent sale, it was jump up and down, fist-punching stuff, real adrenalin. Your name went on a board and the manager would take you out or you got a bottle of booze. For hitting your quarterly targets you got weekends away. I even went to Paris once.

'I've taken a few short cuts, but nowhere near as bad as some. I know people who would try to sell 95-year-old grandmothers a 10-year investment plan. Nowadays the training is a lot better and there are a lot of things you are not allowed to do. Obviously, I feel sorry for some of the punters. But then, we've all got to make a living.'

(Photographs omitted)