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Critical mass

Pension providers mass-transferring people back into S2P are playing Russian roulette, says Informed Choice managing director Nick Bamford.

The criticism comes with the industry trying to fend of an FSA review into contracting out which could bring a £3bn bill.

The urgency of providers to put customers back into S2P has been heightened by impending cuts in Government payments into APPs instead of state benefits from next April. Some argue that this makes contracting back in a fairly straightforward decision.

Some insurers have again been writing to customers outlining the pros and cons but some companies, including Norwich Union and HSBC, have automatically contracted some people back in. In NU’s case, these were customers that failed to respond to a letter which told them they would be automatically contracted back in unless they asked to remain contracted out.

It wrote to 40,000 people and only 2,800 chose to remain contracted out so 37,200 were automatically contracted in.

Scottish Widows has only mass-contracted-in direct people over 50 who have requested a retirement age below 60 for non-protected rights and have not responded to correspondence. It has automatically contracted in 2,414 people so far out of 3,139 people who met its criteria for contracting back in.

Bamford says the decision on contracting back in is complex and should be based on a variety of often subjective factors which will be overlooked if people are contracted back in automatically. He says too much emphasis has been put on pivotal age parameters and there are many benefits to contracting out, such tax-free cash access.

Many people contracted out prefer to maintain some control, says Bamford. He says the Government’s proposal to abolish contracting out creates an opportunity for some people to use national insurance rebates for as long as they can. He adds that changes to protected rights benefits are also highly favourable.

Scottish Life head of pension strategy Steve Bee says: “Some people will argue that a bird in the hand is better than a kick in the teeth. The Government has already made retrospective changes to S2P and if the Government introduces a flat rate to make it more redist-ributive, who is to say it will not do this retrospectively?”

Bamford says: “Recommending mass contracting in is like playing Russian roulette with people’s retirement incomes. It is an individual case-by-case decision and I hope any individual who goes back in and ultimately finds himself worse off is compensated by product providers that cajole them to do this.”

Bamford’s criticisms are supported by L&G pensions strategy director Adrian Boulding who argues mass contracting in is indicative of a failure of communication.

He says contracting in or out is a fairly simple decision. People who want to maximise their pensions by state retirement are more likely to achieve this by contracting back in. But for those that want 25 per cent tax free cash and the flexibility to retire early, remaining contracted out is often the better option.

He says: “Mass contracting in is just a failure of customer communication and a case of companies trying to wash their hands of their basic responsibility to consumers. I am dead against this. It is down to companies to redouble their efforts to communicate.”

Boulding warns that firms which mass-contract in could be hit by misselling complaints. He says: “If a customer is automatically contracted in without him knowing, he might say he wants his tax-free cash and pension when he hits 50. He will want compensation.”

NU head of pensions strategy Graham Vidler says many issues raised by Bamford make staying contracted out look more attractive. He says NU is reviewing its policy and consulting with advisers to make them aware of the changes.

But Scottish Widows says it is “entirely comfortable” with its policy. Head of pensions market development Ian Naismith says: “These people will not be affected by the increase in state retirement age and would almost certainly lose out by not contracting back in. They have not responded to letters about contracting out.”

An FSA spokesman says firms must ensure any advice must take into account an individual’s circumstances.

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