FOOL'S EYE VIEW
£11.5b For Pension Scandal Victims

By Jane Mack (TMFJane)
June 28, 2002

There is a very interesting chapter in The Motley Fool's UK Investment Guide entitled: "The Dangerous World of Pensions". Now you might not think the subject of pensions could possibly be 'dangerous' let alone 'interesting' but think again.

Let's take the latest news from the financial watchdogs, for example.

Yesterday the Financial Services Authority announced that more than 1.5m people who suffered under the so-called pensions mis-selling scandal are to be compensated to the tune of £11.5b. Around 90% of people affected have already received notification of their payout with the remainder receiving theirs by the end of the year. It follows an investigation that has taken four years to complete and which has cost £2b.

If you're too young to remember what this particular scandal was all about, it originated in the late 80's and early 90's. Over a period of six years financial advisers and pension companies went on a selling spree advising people that they should opt out of or not join their perfectly decent company pension schemes. They should buy their own super-duper (very expensive) personal pension plans instead. Those wishing to top up their pensions were also advised to opt out of their occupational schemes.

The companies and financial advisers involved made a killing from selling these policies - until the consequences began to come to light. People lost money. Suffice to say some of the biggest names in the financial services industry were implicated and they're now having to pay billions of pounds in compensation to those who suffered a financial loss because of their spurious advice.

The aim of the Pensions Review, which began in 1998, was to work out who had been mis-sold a policy, who should receive compensation and how much. The idea was to restore the individual's pension provision to the level it would have reached had the mis-selling not taken place. In practice, for many people, it means they'll be able to re-join their company pension schemes with the compensation providing the necessary top up contributions.

As you might imagine the scandal has been the topic of much debate over the years on our Pensions Board. In fact, in the early days of The Motley Fool we ran a poll asking who had been affected by it. Now admittedly we were a very young company then and 112 responses is hardly a lot to go on - but 17% of those who responded had been affected by it. And if you remove those who didn't have a pension at the time anyway, the percentage increases to nearly 20%.

Now I don't know about you but I think one in five is rather high. And we're only talking about a particular pensions scandal that occurred between 1988 and 1994. Remember we've also had the Maxwell fiasco where members of the Mirror Group Newspapers pension fund discovered their money had been siphoned off to support the newspaper proprietor's ailing businesses. And dare I mention those two disturbing words 'Equitable' and 'Life'?

You might like to note that over the last four years, the FSA has had to take disciplinary action against no less than 346 firms who were, shall we say, less than forthcoming during the review process. It's cost them more than £9.5m in fines and hitting them where it hurts ie: their company wallets, seems to have worked. Only 2% of cases still need to be completed.

So, it seems to me that the world of pensions is certain very interesting indeed. Whether it's dangerous is a matter of opinion I suppose – it depends on how you feel about other people playing around with your money and your retirement plans.

At any rate, I was just wondering - if you've got a pension, do you feel secure in the knowledge that your money is in safe hands? And that you are armed with all the essential and unbiased information you need to ensure that on retirement you'll actually get what you've paid for over the years? If you've made a truly informed decision and you know exactly where your money is invested and what it's costing you in charges, then good for you. I'm rather fond of the idea of cheap index-tracking Stakeholders in this regard.

But, more to the point, now that these companies are going to have to stump up £11.5b to pay for their mistakes, where do you think they're going to find the money?

Why, from people like you and me investing our money with them, of course. No wonder they think we're mugs!

Related Links: Pensions Centre | Pensions Board | Financial Services Authority