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ombudsman news

issue 70

June / July 2008

case studies illustrating some recent pension-related complaints

issue 70 index of case studies

  • 70/6 - consumer complains of being wrongly advised to contract out of SERPS
  • 70/7 - whether firm calculated appropriate level of redress for pension mis-selling
  • 70/8 - consumer complains about loss of guaranteed annuity rates when he was advised to transfer into an income withdrawal arrangement
  • 70/9 - consumer complains of being unsuitably advised to take a variable investment-linked annuity

consumer complains of being wrongly advised to contract out of SERPS

In 1990 Mr B contacted the firm for advice about saving for his retirement. He was aged 35 at the time and earning £18,000 a year. The firm told him he should contract-out of the State Earnings Related Pension Scheme (SERPS) and make regular contributions to a personal pension policy.

As the years went by, Mr B became increasingly concerned about his pension arrangements. Towards the end of 2007 he asked a claims management company to complain to the firm on his behalf. The complaint centred on the firm's advice to contract-out of SERPS, which Mr B considered to have been unsuitable. He said the firm had not considered his attitude to risk, or warned him that the value of the pension he would get from the policy was not guaranteed.

In its response, the firm said that Mr B had been below the "pivotal age" at the time of the advice, and had been earning enough for it to be reasonably confident that contracting-out was suitable for him.

The firm also said that when Mr B took out the policy he would have been sent various policy documents, including an explanation that the pension benefits were not guaranteed. Unhappy with this response, Mr B asked the claims management company to bring the complaint to us.

complaint not upheld
When considering whether it was suitable for a consumer to contract-out of SERPS, firms typically applied a "pivotal age". The idea was that consumers below that age could find it beneficial to contract-out. There was a reasonable explanation that the value of any National Insurance rebates, tax-relief and government incentive obtained by contracting-out would be greater than the value of the SERPS benefits given up.

For consumers above the pivotal age, there was less time for investment growth and therefore a greater risk that the consumer would be worse off than if they had stayed in SERPS.

When considering the suitability of contracting-out, firms also needed to consider the consumer's earned income, as the rebates and other amounts received when contracting-out were based on that income. People on lower incomes received lower rebates, if any, and the charges they would have to pay on a personal pension policy would have a greater impact.

In this instance, we agreed with the firm that Mr B had been below the pivotal age when he was advised to contract-out, and his earnings had been high enough to make contracting-out worthwhile. There was clear evidence that the firm had properly considered Mr B's attitude to risk. We were satisfied that the firm's advice had not been unsuitable and had not exposed Mr B to a degree of risk that he would have found unacceptable at the time the advice was given.

We did not uphold the complaint.

whether firm calculated appropriate level of redress for pension mis-selling

In 1988, Mr J was working for C Ltd and was entitled to join its final salary pension scheme. However, after consulting a firm of financial advisers he took out a personal pension instead.

Later on, the firm started to assess the advice it had given Mr J - as it was required to do as part of the industry-wide pension review. When it contacted Mr J in connection with the review, he asked it to postpone work on his case. He was aware that the review could result in his receiving redress - and he was anxious to avoid any increase in his assets while he was going through divorce proceedings.

In 2006 Mr J took up a job with the Civil Service and joined its pension scheme. By then he was divorced and he asked his financial adviser to complete its work on his case.

The firm's review showed that Mr J had been wrongly advised, so it arranged to put things right for him. Unfortunately, it was unable to do this by buying-back pension benefits for him in his former employer's personal pension scheme. This scheme had closed in 1998 when C Ltd had gone into liquidation. The firm therefore offered to provide Mr J with redress in the form of a "top-up" to his personal pension.

Mr J wanted to transfer the fund value of his personal pension into the Civil Service scheme and he started making enquiries about this. He thought the transfer would result in his being credited with 10 years' pensionable service in the Civil Service scheme. This assumption was based on the fact that - if he had joined C Ltd's pension scheme in 1988 rather than taking the personal pension - he would have built up 10 years of pension benefits in that scheme before it closed.

He discovered, however, that the transfer would provide him with only 6 years' pensionable service in the Civil Service scheme. Concluding that the firm had failed to calculate his redress correctly, Mr J asked it to increase its offer. When the firm refused to do this, Mr J brought his complaint to us.

complaint not upheld
We understood Mr J's disappointment on finding that his pension fund would buy him fewer years in the Civil Service scheme than he had expected. However, as we explained to him, this was entirely unrelated to the amount of redress he had received because of the pension review.

The aim of the review had been to put right the loss he had suffered during the period when he could have been in C Ltd's scheme, but had taken the firm's advice to pay into a personal pension instead. The firm had calculated this loss correctly and had paid the correct amount of redress into his personal pension.

Mr J's subsequent decision to transfer the fund value of his personal pension into the Civil Service scheme was not related to the firm's earlier advice - or to the redress calculation carried out under the pension review.

Transfers into employers' schemes are rarely as simple and straightforward as employees generally expect them to be. Such schemes have their own rules governing whether they will accept transfers from other schemes - and the terms they are prepared to offer.

It was entirely a matter for the Civil Service scheme to determine how many years' service Mr J would be credited with, in return for the transfer of his existing benefits. Had he been transferring from a broadly comparable public sector scheme, then he might reasonably have expected to obtain a broadly equivalent amount of pensionable service.

However, that was not the case here, as C Ltd had been a small private company and the terms of its pension scheme were not as generous as those of the Civil Service scheme. Even if Mr J had been in C Ltd's scheme for 10 years and had transferred direct from that scheme - rather than from a personal pension - the value of the benefits he was transferring in would not have "bought" 10 years' service credit in the Civil Service scheme.

We were satisfied that the firm had carried out its review in accordance with the regulatory guidelines, and that its offer had been fair and reasonable. Indeed, we were surprised that it had agreed to Mr J's request that it should postpone its review in order to suit his personal circumstances.

We did not uphold Mr J's complaint and we recommended that he should accept the offer of redress that the firm had already made.

consumer complains about loss of guaranteed annuity rates when he was advised to transfer into an income withdrawal arrangement

In 1995, a self-employed accountant, Mr D, sought financial advice. He was planning to reduce the number of hours he worked and wanted to benefit from unused tax relief by making additional pension contributions.

Mr D had four pension policies. Each of them included a guaranteed annuity rate option, entitling him to a guaranteed rate when he eventually converted his pension fund into an annuity.

The firm advised him to transfer the fund values from his pension policies into an income withdrawal arrangement, taking the maximum tax-free cash lump sum and recycling it back as a pension contribution in a new pension policy (as was permitted at the time). That contribution received higher-rate tax relief, enhancing the value in the new policy.

Mr D later transferred from the new policy into another income withdrawal arrangement, and again recycled the tax-free cash lump sum into yet another pension policy.

When Mr D eventually retired he was disappointed with the annuities he bought with him. He complained about the firm's advice, saying he would have been better off if he had been able to take the guaranteed annuity rate option offered with his four original policies.

complaint not upheld
Mr D was financially aware. He took a keen interest in the stock market and had a number of investments, including a portfolio of shares.

He was not reliant solely on his pension funds to provide for his retirement, and it was clear that he had been willing to take a risk with his investments – not only in 1995, when he first consulted the firm for advice – but also when he later purchased with-profits annuities.

We noted that, at the time of the advice, none of Mr D's original policies offered annuity rates that were at all competitive. We concluded from Mr D's circumstances and attitude to risk at the time of the advice that, even if the firm had stressed the advantages of a rate that was guaranteed, he would have preferred to transfer out. Doing so gave him the opportunity of obtaining a potentially higher rate.

We also noted that Mr D had gained because of the tax-relief added to his funds when he twice recycled the tax-free cash lump sum. We did not uphold the complaint.

consumer complains of being unsuitably advised to take a variable investment-linked annuity

In 2001 the firm advised Mr T to use his pension fund of £100,000 to purchase a variable investment-linked pension annuity. The level of income he would get from the annuity, which was initially £7,800 a year, was to be recalculated every five years, based on the value remaining.

Mr T was aged 67 at the time and still working part-time as a self-employed sales and marketing consultant. He had savings of approximately £120,000, predominately in bank and building society accounts but with about £5,000 in privatisation issues.

By the time of the first recalculation of his annuity income in 2006, Mr T was alarmed to find that the value of his pension fund had fallen to £60,000. He decided to use that remaining fund to purchase a normal pension annuity. He then complained to the firm about its advice. He said the type of pension annuity the firm had recommended was unsuitable for him, as an inexperienced investor. He had not needed the income it produced and he had not received the service he had expected from the firm, in the form of regular reviews of his financial situation and on-going advice.

complaint upheld
Mr T had said in his complaint that he had no need for additional income. However, he had approached the firm for advice about buying an annuity. We considered this to indicate a wish to enhance his income - something that was not unreasonable given his age.

While it is usually appropriate for a firm to review a client's situation after a certain interval, particularly where benefits are subject to recalculation, we could find no evidence that the firm had undertaken to provide Mr T with the on-going advice that he said he had been expecting.

The firm justified its advice that Mr T should take the variable investment-linked annuity, rather than a less risky type of annuity, on the grounds that he was an "adventurous investor".

Initially, it could give no reason for this view, other than the fact that Mr T had agreed to its recommendation. However, it later cited the fact that Mr T had invested in the privatisation issues.

We did not agree that Mr T was an "adventurous investor", or that he should be rated as such simply because he followed the advice he was given. And we noted that the amount he had invested in the privatisation issues had been modest, compared with the amount he had on deposit in bank and building society accounts.

We concluded that the variable pension annuity exposed Mr T to a greater degree of risk than was suitable in his circumstances. We directed the firm to pay Mr T redress for any past loss he had suffered because of its advice. We said it should calculate this by comparing the value of the pension he would have received from a normal annuity - taken out in 2001 - with the value of the payments he actually received.

We also said that the firm should arrange an additional annuity to cover the loss of future pension income that Mr T would otherwise suffer because of the firm's inappropriate advice.

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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.