Nobody should have been surprised when Sackers, the specialist pension law firm, recently said that some annuitants could have claims against providers, trustees and IFAs if they have not been properly made aware of their options.
It would have been more surprising if they had said they did not have a chance of such claims. But with the Government now shining the spotlight on the annuitisation process with the age 75 review, Sackers’ comments should add weight to those calling for a fundamental change to the entire annuitisation process.
That process has for years been described as the next misselling scandal waiting to happen. For a considerable minority of the millions of retirees who have not exercised the open market option over the 30 years this framework has been in place, misselling is likely – you only have to look at the statistics of malpractice by trustees and providers to see how.
There are strict rules governing how trustees notify scheme members of their rights to exercise the open market option. Failure to comply with these would lead to a potential claim for maladministration, say lawyers, and that is even before you take to account the trustee’s overarching obligation to act in the best interests of the member.
The Pensions Regulator published a report last October saying that 6 per cent of occupational schemes had seriously breached rules by not telling scheme members that they could get more by shopping around. It also found one in three schemes had breached some rules.
It is likely that it is the smaller schemes that have been breaching rules but trustees have been on a steep learning curve as to the full nature of their burdensome responsibilities for some years now. I would be surprised if the problem was not even greater several years ago.
When it comes to the culpability of insurers, we only need to look at the FSA’s 2008 report into the pre-retirement correspondence sent to personal pension customers by pension providers. The investigation found that almost 40 per cent of providers had breached some regulations. In those cases, where providers failed to communicate adequately the right to the open market option, surely there are grounds for a claim if loss has ensued as a result.
But surely the providers’ responsibility extends beyond the letters the regulations require them to send, and into all forms of communications.
Where there is less clarity is the extent to which IFAs will find themselves in the firing line if an annuity misselling bandwagon does start to rumble. I have come across sick retirees who were not asked about their medical condition before being put into a conventional annuity. Again, surely they would succeed in a claim to the ombuds-man. How widespread such sloppy processes have been is unknown but those IFAs who have been taking commission on the annuitisation of personal pensions they sold years ago, where they have not even seen the client for years but still hold an agency with the provider, will surely be exposed to legal comeback if their client realises what has happened.
The bigger question is how many annuitants will bother to revisit the transaction. That will depend on whether claimants succeed, how much they win and how widely their success is publicised.
Either way, the threat of legal action should act as a wake-up call to make sure processes explain the options to customers. As to whether the fact many punters will still not bother to shop around means more fundamental changes are required, that is a different question altogether.
John Greenwood is editor of Corporate Adviser