Leading Article: Paying the price for bad advice

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The Independent Online
Something has gone very wrong indeed in Britain's pensions industry. A year ago, the number of people who had been persuaded by unscrupulous salesmen to switch into personal pensions against their interests seemed shocking enough. Today, with the publication of the Securities and Investments Board's report, it is clear that malpractice has been more widespread than even pessimists believed, and that the industry is in crisis. Figures as high as pounds 4bn are being canvassed as the final cost of putting right the mess.

Compensating individuals who have lost out from bad advice will cost the life industry dearly. Some believe that the resulting liquidations, mergers and takeovers will reduce the number of pension firms by half over the coming five years. To make matters worse, one-third of the victims were guided by independent financial advisers. Since few of these will be able to put matters right, the entire industry will have to contribute to a compensation fund covering their losses.

The SIB now acknowledges the need for regulatory changes. But the reforms already planned, most prominently the disclosure of commissions, due to come into effect at the start of 1995, are the very least that will be needed.

The promise of far higher standards of training and policing inside companies will have to be delivered. And consumers, too, will have to change their attitudes. Despite the huge sums they can lose from making the wrong decisions, most people still balk at paying a few hundred pounds for expert independent advice. Those who expect salesmen to tell them all they need for free in so complex an area as pensions must accept some of the blame for the outcome.

The irony is that the problems of private pensions have come into a harsher light at the same time as the deficiencies of state provision. State pensions, which have long since abandoned the pretence of being linked to national insurance contributions, are now far short of what is necessary to finance a comfortable retirement. Today's workers know that they will need more than their statutory pensions contributions to avoid a penurious old age.

Given the history of public-sector pensions in Britain, it is no wonder that both companies and individuals should dislike the idea of a compulsory second pension scheme run by the state. Compulsion sits uneasily with the idea that well-informed individuals should be able to choose for themselves.

But unless the pensions industry can speedily put its house in order, a compulsory system run by the government, as suggested by the Borrie Commission, may yet recommend itself.