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Full Marx for tragedy

Back in my youth, I used to read the odd bit of Karl Marx. It was Marx who remarked that historical events have a way of repeating themselves, “the first time as tragedy, the second as farce.”

Over the years, I have come to see things the other way round – when history repeats itself, the first time it is as a farce, the second time as tragedy.

Nowhere is this more apparent than in the case of Serps opt-outs, the new “scandal” which – if some reports are to be believed – may be about to engulf financial services.

The pension industry, faces a potential investigation by the FSA into contracting out. The fear is that if a review on the scale of the pension misselling inquiry were to be launched, it could lead to a bill for up to 3bn being faced by IFAs and life offices.

Actually, that figure is likely to be an under-estimate, as it does not include the costs of any investigation itself. This could turn out to be a 4bn bill, perhaps more.

Everyone is busy pointing the finger of blame at someone else. Numerically at least, the evidence appears to show that Serps opt-outs were carried through 50 per cent by IFAs, with the remaining half transacted by life offices’ direct salesforces and their tied agents.

But that is not the entire story. Back in the late 1980s, we had a Government ideologically driven to remove the shackles of the state from the individual, nowhere more than in the arena of pensions.

It moved to cut its long-term bill for Serps by not only offering rebates to those prepared to opt out but to pay them an additional amount of money to do so.

This additional sum was widely described as a “bribe” even then but it clearly had a material impact on the financial calculations that any IFA worth his or her salt needed to make when recommending for or against a transfer. A major element of responsibility must rest with the Government, which rammed through its policy without working through the consequences of its actions.

But what are we to say about advisers themselves, be they IFAs or salespeople? The brutal truth is that those recommending opt-outs were precisely the same ones who were also busy advising nurses, former miners and teachers to transfer out of their occupational pension schemes and into private ones.

For them, a Serps opt-out was not a carefully considered component of financial advice to be provided to an individual, but another money-making opportunity – which is why, for so many advisers, the issue of whether there are adequate “records” to show the reason for any advice given in the early 1990s is a red herring. Even if there had been decent records, they would have revealed the adviser or salesman had no real idea why he was making such a recommendation.

And what about the life offices? As usual, they created products which offered generous commission levels, to be paid for by charges imposed on clients’ contracted-out APP schemes.

It was not unusual for many of the schemes to levy fees of at least 1 a month, often more, in addition to whatever annual management and any other charges might be applied.

Bear in mind that in many cases, these funds would be made paid-up after a few years and you can see how such charges might have a disproportionate impact on many of them.

The other key issue is that of the pivotal age. Even as far back as 1996, when the Securities and Investments Board issued its own report on contracting out into APPs, the assumption was that it might make sense to contract back into Serps at age 50 for men and 45 for women. Very little has changed in respect of those ages that since then.

Yet it is almost certainly the case that many IFAs did little to make sure that their clients reaching or over those pivotal ages did anything to ensure they contracted back into Serps. In simple language, having grabbed the initial commission and while still receiving renewal income from these APPs, they failed in their key duty – that of ensuring clients did not lose out further.

The final bearer of responsibility must be the then regulator. I remember being astonished back in 1996 when SIB published its report, rejecting calls by journalists and consumer groups for a review of all APP sales.

The reason for this was that, notwithstanding the question of whether wholesale bad advice had been given in the period under investigation, the scale of consumer detriment – a “mere” 43,000 to 240,000 cases – was not sufficiently large to justify a full-scale review.

SIB’s failure to bite the bullet back then, possibly at the industry’s urging, and insist on a full review, with compensation paid out and hundreds of thousands of people being moved back into Serps immediately, has come back to haunt all IFAs and life offices.

Ten years ago, it might have cost a few hundred million pounds to sort out the issue. Today, the final bill may be 10 times higher, as the impact of this bad advice has come to infect not just 240,000 cases but far more besides. Truly, this is a case of a farce turning into a tragedy.

nic@inspiredmoney.co.uk

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