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ombudsman news

issue 52

April 2006

ombudsman focus - Tony King on pensions

Pensions are rarely out of the news at the moment and 6 April saw the introduction of pension ‘simplification’. We asked Tony King– our lead ombudsman for pensions – to outline some of the more common concerns brought to the ombudsman service, and tell us how he thinks some of the most recent pension legislation changes might affect the complaints we see.

pension problems seem to be headline news almost every day. Is the Financial Ombudsman Service inundated with pension complaints-

It’s important to remember that most of the pension disputes we deal with here relate to personal pensions and are mainly about sales advice. There are other arrangements for complaints about occupational pensions.

But no – we’re not inundated at all. In fact the overall number of pension complaints coming to us is falling a bit, although the complaints themselves are becoming more complicated.

why is that-

Well, for example, we still get a regular supply of complaints about ‘pension fund withdrawal’. This is an arrangement which allows investors to withdraw cash from their personal pension. They can then use the cash as income and defer buying their annuity until they are 75 – although these arrangements are changing as a result of pension ‘simplification’. In the cases we see, the consumer generally claims they were wrongly advised to enter this type of arrangement because they weren’t made aware of the risks involved. These are fairly difficult complaints to deal with because pension fund withdrawal is itself quite sophisticated.

In the pension fund withdrawal complaints we see, consumers may say they were told that annuities were poor value for money – and they may not have understood the risks of pension fund withdrawal. In particular, not only are the underlying investments subject to risk, but the consumer is also sacrificing one of the advantages of an annuity – which is that people who die younger than average subsidise those who live longer. And they are taking the further risk that annuity rates might get worse before they buy one.

Some of these cases are upheld and others aren’t. But for those that are, working out the redress for pension fund withdrawals is also complicated – because payments will have been made to the consumer that must be compared with the alternative annuity payments, as well as taking into account investment performance. And both sides will feel strongly, partly because so much is at stake. Not only might the value of the pension fund be considerable, but the fund often represents all the consumer’s future income.

The new arrangements after simplification are likely to have many of the same difficulties associated with them.

will much of our work be affected by the simplification changes-

Generally, the changes are about the tax position rather than the range of pension schemes and products available (although the tax changes will make some schemes more popular and others less so).

But some of the complaints we are already dealing with will be affected by simplification – for example, where the complaint relates to what the consumer was told about the old tax regime, or because redress is now possible in a different form because of the changes.

And I’m sure that in future we’ll get complaints about whether people were advised to take appropriate steps to make the best of the tax advantages – either before or after the changes. Where complaints relate to a regulated investment we’ll be able to look at them, but if they are just about tax advice, we won’t.

Of course, in the run-up to simplification, advisers will have been working on the information available at the time. If the detail has changed, then just as with any other advice-related complaint we wouldn’t apply hindsight.

what about self-invested personal pensions (SIPPs)- There has been a lot of discussion on the effect that the simplification changes will have on them.

Yes, there has – partly because of the greater investment freedom (although it’s more limited than was first thought). It’s currently intended that SIPPs will be completely regulated from 2007. In the meantime we have no jurisdiction over the SIPP ‘wrapper’. We do, however, have jurisdiction over any regulated investments contained within the wrapper.

At the moment we see just a small number of SIPPs complaints (excluding the ones about pension fund withdrawal). They are sometimes about the management of the portfolio itself and we treat those pretty much as we would any other complaint about portfolio management.

Others are about advice to make particular investments – and again they are treated in a very similar way to any other complaints about investment advice, taking into account the investment objectives and risk when looking at overall suitability.

is there anything else that is particularly relevant at the moment-

We are continuing to see Pensions Review cases, although there are not many new ones coming in. This can generally be put down to the time limits involved. However, in applying our time limits we do not assume that the clock starts from the moment the consumer received an invitation to have the sale reviewed. Instead we look at when the review would have been completed if the consumer had asked for a review when first invited to do so. In deciding when that would have been, we will usually ask the firm for their normal timescales for reviews of similar cases, and we take into account any specific features of the individual case.

Some consumers may say they did not get the firm’s review invitation letters. We then have to decide, on the balance of probabilities, whether they did or did not receive the letters.

We might decide the consumer probably did not receive a letter where, for example, there was an error in the address, or the consumer had moved, or been abroad for a lengthy period. Normally, if a letter was sent to the correct and current address we will decide it was probably delivered. We then treat those cases the same as we would any others.

is the redress for these cases difficult to work out-

Not especially – we expect firms to follow the regulatory guidance for redress of Pensions Review cases. This provides for the possibility of reinstatement in the employer’s scheme, or calculation and redress of actual or prospective loss. The regulator has published assumptions for use in those calculations. For cases not strictly within the Pensions Review period, we would usually use different assumptions, which are published on our website. But trying to calculate the redress for a pension mortgage is much more complicated!

why is that-

First let me say that this is an area where we get relatively few complaints – and we are not expecting huge numbers in the future. A pension mortgage is a mortgage linked to a pension plan. At the end of the interest-only mortgage term, all or part of the tax-free lump sum from the pension fund is intended to repay the capital.

The complaints we encounter with these are similar to those we see with endowment mortgages. Perhaps the firm has failed to explain the underlying risk that the investment might not produce enough, when it matures, to pay the amount needed. Or the firm may have mis-judged the consumer’s attitude to risk.

A problem specific to pension mortgages is that it can be difficult to work out which part of the premium is intended for the mortgage and which for the pension.

In addition, when the pension was sold, the consumer would not have been able to access tax-free cash until the pension was to be drawn on, perhaps at age 60 or 65. This could often mean that the interest-only part of the mortgage was intended to run for much longer than 25 years – the usual mortgage term – forcing the consumer to pay excessive interest. But this is one of the things potentially affected by simplification, since the restrictions on when cash can be drawn upon have been changed.

Deciding redress is particularly difficult as, unlike an endowment policy, a pension cannot be surrendered for a cash amount. We have devised a method which is loosely based on endowment redress – but takes account of the differences between the two. We discussed it with industry representatives to ensure the calculations worked and that the results were fair. But the whole area of pension mortgages is one that we’ll be looking at more closely in a future edition of ombudsman news.

Walter Merricks, chief ombudsman

ombudsman news issue 52 [PDF format]

ombudsman news gives general information on the position at the date of publication. It is not a definitive statement of the law, our approach or our procedure.

The illustrative case studies are based broadly on real-life cases, but are not precedents. Individual cases are decided on their own facts.