Individuals with decent work histories who have remained contracted-in to the state second pension are among those who may well feel aggrieved by last week’s Government reforms.
Those persuaded to contract back in, or who were automatically contracted back in by their provider following guidance from the regulator, are likely to be particularly annoyed.
Although last week’s state pension reforms should be broadly welcomed, they prove that the instinct of many advisers to keep client money as far away from Government control as possible was the correct one.
Dealing with contracting out was always going to be the messiest part of the Government’s reforms. People who have contracted out, either through public or private sector DB or DC schemes, will be able to keep the sums they have accrued through the NI rebate, which could equate to tens of thousands of pounds. From 2017, they will also be able to build up annual state contributions up to the new flat-rate limit of £144. In contrast, those who have stayed contracted in will have their future state benefits capped at the £144 level although they can keep benefits already accrued over this level.
Pension experts calculate the decision to contract back in may have cost savers £20bn in the context of last week’s reforms as many of the 2.5 million direct customers contracted out at the time the FSA raised its concerns were subsequently contracted back in by their provider.
The FSA began to take a close look at advice around contracting out in 2005 due to misselling concerns identified by the regulator and Which?.
In 2007, the FSA said it did not believe widespread misselling took place but suggested 120,000 people were at risk of having been missold through being contracted out between 1988 and 1997, with the FOS receiving over 700 complaints. Most were above the “pivotal age”, usually 40-45, considered to be the level at which people should be contracted in. Many will have now retired or are close to retirement, mitigating the effect of the reforms.
However, millions of others will have lost out through the pressure applied on insurers from the regulator to contract back in.
Regulators may say they cannot second-guess Government policy. But clients who remained contracted out based on the advice of their IFA, and despite the prevailing regulatory winds, look set to reap the rewards.