Since the so-called “Pension Freedom” reforms introduced in 2015, there has been a sharp increase in the number of people transferring their pensions. In 2014 we saw around £5.4 billion worth of pension transfers in the UK. As a consequence of the pension reforms, by 2018 this figure had increased to a staggering £37 billion.
The idea behind the reforms, introduced by the then Chancellor George Osborne, was simple. Give people more control over their pension funds and allow them to plan for the future. Unfortunately, we have seen a considerable increase in instances of pension mis-selling. Many believe that the problem may get worse in the short to medium-term.
Why are defined benefits to defined contribution pension transfers so controversial?
For many people, this is the crux of the historic and ongoing pension mis-selling scandal. If we look at these two different types of pension arrangement, the problem will become apparent.
A defined benefits scheme, often referred to as a final salary scheme, guarantees your pension payments based upon your final salary. It matters not to the individual how their workplace pension scheme contributions are invested, their pension income is fixed. It is up to the company, and the pension fund trustees, to ensure there are sufficient funds to cover member’s pension payments.
A defined contributions pension scheme, often referred to as a money purchase scheme, has no guaranteed pension value. Upon retirement, the individual will be able to enter into a drawdown, purchase an annuity or defer pension payments until a later date. The value of their pension fund will depend upon the investment returns over the years when investing pension contributions. One of the more popular types of defined contribution pension is a Self-Invested Personal Pension (SIPP).
Investigations by the Financial Conduct Authority (FCA) found that many pension transfers, from defined benefit to defined contribution schemes, were not in the individual’s best interests. Many people were unwittingly giving up the guaranteed element of a defined benefit scheme, often leaving themselves exposed to stock market volatility. As a consequence, the FCA was forced to bring in an array of new regulations.
Defined benefit to defined contribution pension scheme transfers, valued at more than £30,000, now require mandatory independent financial advice. The accepted starting position for this type of transfer is that it is “not in the individual’s best interests”. As a consequence, it is up to the adviser to prove otherwise.
Can I claim for a mis-sold pension?
If you believe you were mis-sold a pension, or wrongly advised about a pension transfer, you can seek financial redress. Some of the more common reasons for pursuing pension compensation claims include:-
- Terms and conditions were not explained
- Inappropriate transfer out of workplace defined benefit pension scheme
- Lack of transparency regarding fees
- Transfer to an Unregulated Collective Investment Scheme (UCIS)
- Incomplete “Know Your Client” review
- Adviser lacked experience in pension transfers/investments
Information recently released by the FCA cast more light on the problem of pension transfers and inappropriate advice. A survey of 3,015 financial firms found that between April 2015 and September 2018:-
- More than 234,000 scheme members received advice on transferring their pensions
- 162,047 were recommended to transfer out with just 72,904 advised not to move from a defined benefit scheme
- 2,426 firms provided client advice on moving from a defined benefit scheme
- The total value of defined benefit transfers over the period was a staggering £82.8 billion
The FCA uses surveys such as this as an indicator of the need to tighten regulations and improve consumer protection.
How do I complain about pension mis-selling?
In theory, pension mis-selling claims are time-sensitive. There is a limit of six years from when the product was sold to you or three years from when you suspected there were issues. So, if you believe you have been the victim of pension mis-selling, you must act quickly. However, there are exceptions to this rule, such as with defined benefit schemes where sometimes the time bar can be lifted.
There are two main routes when making a complaint about a pension mis-selling issue.
Manage your own complaint
Your first port of call should be the company which gave you the pension advice in question – and the pension trustees. Explain the issues, what you believe has happened and how this should be rectified. In many circumstances, the company will look to instigate financial redress if inappropriate advice had been given. If you are not satisfied with their reply or offer, you should contact the Financial Ombudsman Service (FOS).
The FOS will contact the adviser in question, clarify the details and make a ruling to which the third party must adhere.
Where the financial adviser in question is no longer in business, there is a different route for compensation. The Financial Services Compensation Scheme (FSCS) was created for this scenario; funding successful claims of mis-selling from fees charged by members of the financial services industry.
Use a specialist adviser
In theory, the process for complaining about pension mis-selling is relatively simple. In practice, it will require significant paperwork, financial details and other information you may not have to hand. As a consequence, many people prefer to use specialist advisers when seeking compensation. There are many companies with significant experience in this field. They know the questions to ask and comparisons to make, which can often lead to enhanced levels of compensation.
When claiming compensation for a mis-sold pension, or pension transfer, you will be seeking what is known as financial redress. If a party is found guilty of giving inappropriate advice, or a lack of transparency, the authorities will strive to make up any financial loss. In effect, the compensation will reflect the cost of returning the individual to their previous financial position, before the advice.
The above FCA survey found that the average defined benefit pension transfer was just over £352,000. Due to the long-term nature of pension plans, there is potential for significant mis-selling losses which need to be addressed. The FOS can award up to £350,000 against your adviser. Alternatively, the FSCS can award up to £85,000 if your adviser is no longer in business.
Can you transfer pension funds?
When reading about pension mis-selling, you may get the impression that all pension transfers could be deemed inappropriate, but this is not the case. Central to the argument is the need for the individual to know and understand any additional risks. Comparisons need to be made between, for example, defined benefit payments, and possible payments under defined contribution schemes. They are very different.
As we touched on above, the starting position for all defined benefit pension transfers is that they are probably not in the client’s best interest. There is also the mandatory requirement to obtain independent financial advice, for defined benefit pension transfers of more than £30,000. Very often, you will find employers looking to restructure/closedown their defined benefit pension schemes, which can be expensive to fund. They may offer you an enhanced transfer value to “encourage” you to leave the scheme. However, they are not allowed to advise you one way or the other.
Protecting your pension income
By definition, many people only find that they have been mis-sold pensions, or received inappropriate transfer advice, years down the line. While pension claims are time-sensitive, there are exceptions to the rule, such as defined benefit transfers. It is therefore vital to take independent financial advice regarding all aspects of your pension arrangements. Contributions to transfers, drawdowns to beneficiaries, and many more issues need to be reviewed regularly.
Thankfully, there is a clear path towards financial redress for anyone who has been a victim of pension mis-selling or received inappropriate transfer advice.