Contracting out of SERPS/S2P: FSA finds no widespread mis-selling
9 May 2007 03:21 PM
The Financial Services Authority (FSA) has concluded its investigation into the sales of policies used to contract out of the State Second Pension (S2P), previously known as the State Earnings Related Pension Scheme (SERPS), and found no evidence of widespread mis-selling.
The FSA launched its investigation in early 2005 after concerns were raised about sales standards in relation to Appropriate Personal Pensions (APPs) sold since 1988 - the policies used to contract out.
The investigation involved careful analysis of firms' sales practices and quality controls in the context of the regulatory standards that existed at the time of those sales. As a result of that work, the FSA has concluded that there is no evidence of widespread mis-selling.
The FSA's investigation identified around 1.5% of sales (around 120,000 policies) out of the eight million APPs sold where the consumers were above the industry-set 'pivotal ages'. As many such sales were not typical practice at the time, it is possible that these consumers may have been wrongly advised to contract out.
However, there are reasons why it may have been appropriate for them to do so even if they were above the pivotal age. For example, some consumers may have wanted the option to leave their pension savings to their dependants if they died before retirement, or they may have preferred control over their investments rather than relying on government pension policy.
To assist those who may have been above the pivotal age at the time they contracted out, the FSA will be publishing a step-by-step guide later this month explaining where grounds for complaint may exist and, if so, what steps consumers should take next. The FSA is also updating its existing information which helps consumers decide whether or not to contract out of S2P, going forward, and explains what consumers should do if they believe that they were wrongly advised.
In addition, the FSA will continue to monitor the number of complaints received by the Financial Ombudsman Service (FOS) in case these indicate issues in past sales at particular firms. The FSA will also continue to follow up this issue on a firm-by-firm basis as part of its continuing supervision.
Vernon Everitt, Director of Retail Themes at the FSA, said:
"We have conducted an extremely thorough investigation and analysis of this issue and found no evidence of widespread mis-selling of policies used to contract out of SERPS/S2P.
"For the 1.5% of sales to consumers who were above the pivotal age, our step-by-step guide will help them to understand if they are affected and, if so, what to do next. We will also continue to follow up issues with individual firms as part of our continuing supervision of them."
The consumer guide will be available towards the end of May on www.moneymadeclear.fsa.gov.uk or from the Consumer Helpline on 0845 606 1234.
NOTES FOR EDITORS
1. A report about the investigation of sales of Appropriate Personal Pensions will be published at the end of May. An update will also be published to the August 2005 report by Oxford Actuaries and Consultants (OAC), 'Contracting out of SERPS/S2P to an Appropriate Personal Pension: a quantification of relative impact'.
OAC's work estimates the financial position of consumers who contracted out compared with the position if they had remained in the state scheme. It does not consider whether such individuals were mis-sold. OAC's latest report shows that improved investment performance since 2005, together with actual and proposed changes in government pension policy, have substantially reduced the median underperformance for all contracted out individuals. The average underperformance for individuals over the pivotal age when they contracted out is estimated to be £7 per week.
2. Pension providers generally published the male and female ages above which it was not deemed financially advantageous for a consumer to contract out – these were known as pivotal ages.
3. The reasons why it may have been appropriate for consumers above pivotal age to have been advised to contract out included:
a. for those who were single and expected to remain so, contracting out would enable them to:
i. take a higher starting pension at retirement, because they do not need to buy a widow(er)'s pension (which they must have under the additional state pension); and
ii. have the value of their personal pension fund paid to their estate if they die before taking their benefits (under the additional state pension there are no death benefits for single people);
b. for unmarried partners who wanted to buy a "spouse's" pension for their partner, contracting out would enable them to do this (they would not be able to do this under the additional state pension);
c. for those who preferred control over their own investments rather than leaving it to the Government;
d. for those comfortable with taking a higher degree of investment risk; and
e. from May 1990, those who wished to take their personal pension before State Pension age, contracting out would enable them to do this.
4. The FOS has considered a number of complaints concerning sales of APPs. The FSA and the FOS agreed that the issue of contracting out of SERPS/S2P should be dealt with under the wider implications process. As part of the FSA's overall work on this issue, the FSA considered under the wider implications process whether there were regulatory issues arising from the cases which have been considered by the FOS. In the light of the results of the FSA's work, the FSA has decided not to give regulatory guidance on the handling of complaints concerning such cases. Further information on the wider implications process can be found at www.ombudsmanandfsa.com
5. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; and fighting financial crime.
6. The FSA aims to promote efficient, orderly and fair markets, help retail consumers achieve a fair deal and improve its business capability and effectiveness.
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