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warning on potential work place pensions mis-selling
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PostPosted: Thu Jan 20, 2011 3:22 pm 
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Retirement Angels warns on potential work place pensions mis-selling
scandal. Up to one million employees face £10,000 income loss

Calls for Code of Practice to be introduced applicable to ALL
work-based pension schemes.
Set to launch Red Should be Read campaign to identify crucial
pensions communications - Red = critical - Amber = requires
action/potential problems in future warning - Green = no action needed.

retirement schemes because employers are making radical changes to workplace
schemes transferring significant pension risks to employees and it’s the
ordinary workers who will be hit hardest, warns Retirement Angels (RA).

The company estimates that as many as 1 million members are making key
decisions on their pension rights where they may stand to lose typically
around £5,000- 10,000 for a wrong decision.

A significant and growing area is the number of people retiring from defined
contribution pension schemes and having to secure an income for themselves.

Now the pension advice specialist is calling on the Government’s Department
for Work and Pensions (DWP) through The Pensions Regulator (TPR) to
introduce a Code of Practice to help avoid the problem (CoP see note 1
below), applicable to ALL work-based pension schemes whether they are
defined contribution or defined benefit in nature, and whether they are run
under trust or contract arrangements.

And at the core of the CoP, Higham (see note 2) is advocating a traffic
light colour coding system where ALL crucial pensions communications are
prioritised by colour according to their degree of urgency.

Basically, it is simple, with the key message being Red should be Read -
all communications branded Red are those that need action and carry a
non-trivial risk of material financial loss.

Amber communications will require action but with a low likelihood of
material financial loss or containing information warning of potential
problems for information only, while Green indicates no action needed, with
general updates for information only.

In our view, a universal adoption of this approach coupled with Government
and Regulatory support to explain the colour coding to members will leave
people in no doubt that they should Read when it’s Red, said Higham.

RA research on decisions needed at retirement shows that 70% of companies do
not make advice available to help members to arrive at the correct decision
with only a small minority carrying out some checks to test that members
understand the material presented to them.

It is well understood by the schemes that members stand to lose on average
20% from making a wrong decision - and in extreme cases losses can be more
than 50%. Schemes also accept that most members need help to make the right
decisions, so it is something of a puzzle why more schemes don’t make advice
more accessible, said RA’s Alan Higham.

There is increasing evidence from data collected by the Government &
Pensions Regulator and surveys done by leading consulting firms that
increasing numbers of employers are changing the pension schemes to reduce
the financial risk to the company and put this risk on the employee.

Consequently, vulnerable employees are placed in an invidious position as
they are required to make decisions on complex issues with a material risk
of significant financial loss, he said.

Often the employee doesn’t even understand the significance of risk they
are taking on and therefore don’t seek help in making the right decision.

In many cases they find the communications so impenetrable that they just
put it in the dustbin unread with the result that they are defaulted into a
solution which may well not be right for them.(see case study examples at
end of document)

RA fears that this situation could ultimately result in losses similar to
those found in the pensions mis-selling crisis of the 80s and 90s which
exposed millions of vulnerable workers to a severely compromised retirement
because of poor financial advice.

There are already ambulance chasing firms encouraging complaints in this
area and just one successful court case could open a floodgate. said Higham

Employers, and specifically pensions trustees, advisers & regulators who
collectively determine industry policy need to take this concern seriously
and act now to avoid this being another mis-selling scandal similar to the
one which we experienced in the Eighties - when millions of people were
persuaded to opt out of secure schemes and into inferior personal plans,
said Higham.

Over 2011 we will be campaigning for a new, robust Code of Practice (see
note 2 below) to be introduced to help minimise the likelihood of another
pensions mis-selling scandal such as we have witnessed in the past.

It is good for business as it helps reduce the risk that they could be
successfully sued for losses caused by the changes to workplace pensions
instigated by the employer,he added.

A company is changing its defined contribution scheme from being run
by trustees to a contract based DC scheme.

The key issue is the member is responsible for all future decision
making and no-one is going to neither help them nor alert them to any risks.

A person with average savings in the scheme of £100,000 is exposed
to the risk that they could easily lose 50% of their value by not making the
right decisions at the right time. Yet they are not told that this change is
exposing them to this type of risk.

The result is usually that large numbers do not engage and are put
into the default option.

Defaults whilst well thought out are unlikely to remain appropriate
indefinitely. Yet surveys done by DWP and TPR show that members do not
differentiate between a scheme set up by the employer and run by trustees
versus one run by an insurer with no trustee. They think that the employer
knows what is best and so place too much trust in the defaults.
Members should be given quantification pertinent to them of the
issues involved so that they can then decide whether it is worth their while
seeking help or not.

The Code of Practice applies to all work based pension schemes
whether they are defined contribution or defined benefit in nature, and
whether they are run under trust or contract arrangements.
The Code does not replace any existing legislation but is a
statement of the standard of service that the Pensions Regulator considers
necessary for employers, trustees and their relevant service provides to
adopt. The Pension Regulator considers that a failure to adopt the
standard in a material area would lead to a prima facie case for
maladministration should a complaint be brought to the Pensions Ombudsman.

The main concern arises when members of work based schemes have to make
complex choices where they may lack the financial capability to safely do so
and where is a significant risk of material financial loss exists.
Members must ultimately take personal responsibility for their own
actions or failure to act and decisions. However, the code requires that
employers, trustees and relevant providers take steps to satisfy themselves
that it is reasonable for members to be expected to understand the
significance of the decisions required of them and to put in place a process
to support those who don’t understand.
Employers/schemes that follow the Code should make themselves
significantly less vulnerable to claims for losses incurred by poor member

Note (2) Alan Higham

Alan has worked in the pensions industry since 1988. He holds a 1st class
degree in Mathematics and is a qualified actuary. He has advised a wide
range of companies and public bodies on pension matters. Prior to setting up
Retirement Angels, Alan was a partner at PriceWaterhouse Coopers in London.

He has a long record of helping the consumer in his professional work. He is
a member of the actuarial profession’s Consumers Support group. He sits on
the Association of Independent Financial Adviser’s steering group working on
how to improve service to people at retirement age.

During 2007-2008, he advised the Government on its Financial Assistance
Scheme which gave £3bn of support to people who had lost their pension

Alan was the founder of Higham Dunnett Shaw PLC and highlights of the work
his firm carried out include:

Improving the speed and reducing the costs of winding-up company pension
schemes. The work allowed people to access their pension sooner and with
more money left in their pot.

Resolving complaints about mortgage endowment policies on behalf of large
insurers, banks and financial advisers. Between 2003 and 2007, there were
millions of complaints that resulted in many people receiving significant
compensation to help them pay off their mortgage.

Helping insurance companies repair the damage caused by pension mis-selling.
Between 1988 and 1994, many people were wrongly advised to leave their
company pension scheme. qualified actuary with over 20 years experience in
pensions and insurance, Alan has been an adviser to the Government on
pension policy.

He resigned as a partner at leading accountancy firm PriceWaterhouse Coopers
to set up Retirement Angels


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