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Pivotal points

Sources say a pension-style review of contracting out could cost the industry almost £3bn. To put this into perspective, and to demonstrate why the industry is so anxious to put its own house in order quietly, the combined profits of UK-listed insurers in 2005 was £6.376bn.

The FSA, which is reviewing contracting out, calmed industry fears earlier this year when it said it had found no evidence of widespread misselling in its preliminary investigations.

But it did warn that it would be concerned where sales were made outside the broadly accepted age parameters or where advisers failed to describe the product properly.

Money Marketing understands the FSA now believes that between 1987/88 and 1996/97, 200,000 to 250,000 people contracted out of Serps despite being above the pivotal age. The pivotal age is the age over which it is considered too risky to contract out and was typically 40 for women and 45 for men.

This has set alarm bells ringing, particularly in light of research commissioned by the FSA and conducted by Oxford Actuaries and Consultants last year. This found that losses for a 50-year-old man who contracted out between 1987 and 1997 could be £17,695 and £9,952 for a 45-year-old man.

If the average compensation is £14,000 and 200,000 people are compensated, the cost could reach at least £2.8bn.

A source says: “This could be a big financial cost to the industry as well as a PR disaster. Yet another review to go with misselling and endowments.”

Many in the industry, like Scottish Widows head of pensions market development director Ian Naismith, are adamant the majority of sales were fair.

Informed Choice managing director Nick Bamford points out there were a variety of valid reasons why IFAs and providers advised clients, even those above the pivotal age to contract out.

But the real problem may be in proving this.

The poor quality of sale documentation during this period, particularly between 1988 to 1992, means that IFAs and providers who sold direct could well be unable to specify in enough detail why the decision was made to contract out. The industry may then be unable to defend complaints which are likely to be whipped up by claim chasers, media reports and consumer groups.

Naismith says: “The vast bulk of sales were fair but the quality of the documentation during this period may make it difficult for firms to prove advice they gave at the time was warranted.”

The prospect of an FSA investigation into sales of policies almost 20 years ago raises the spectre of retrospective action, which the regulator has repeatedly promised to avoid.

Some sources say the FSA itself is anxious to avoid a full section 404 review, partially for this very reason, but it is coming under growing pressure from consumer lobbyists such as Which? to take an aggressive approach.

Which? is clearly not going to give up and says a voluntary internal review would be unacceptable. Policy researcher Teresa Fritz supports a section 404 review but says, failing that, the industry and the regulator needs to take the initiative.

She says: “The industry needs to learn from the endowment misselling fiasco. It needs to provide more guidance to people who have contracted out rather than relying on factsheets. In cases of misselling, we need to establish whether people will be time-barred from making complaints. We also need to sort out how people will be compensated as the compensation paid out during the pension review was inadequate. This all needs to be decided before we start a review.”

Bamford claims that the consumer group has conveniently overlooked the fact that it actively recommended contracting out to the public in the late 1980s – something Which? strenuously denies.

But Bamford points to an information pack issued by Which? in 1989 which definitively states that certain age groups should consider contracting out.

He also points to the fact that the FSA’s predecessor, the Securities and Investments Board, reviewed contracting out between 1987/88 to 1992/93 and found that out of 5.6 million cases of contracting out, the total number of cases where people lost out ranged between 43,000 and 238,000 – or 0.8 per cent to 4.3 per cent.

Bamford says: “SIB concluded in 1996 that the vast majority of people who contracted out of Serps were massively advantaged. A decade later, and after a tumble in equities and a fall in interest rates, we find that some of the same people have lost out and the FSA wants another review.”

But Fritz says the performance of equities and the effect on those have contracted out has no bearing on whether people were wrongly advised. She says: “The issue of what happened with equities is academic and does not alter whether a policy was missold. The only real relevance is that losses can trigger the customer’s awareness that the policy was missold.”

The FSA is understood to be holding a board meeting on contracting out shortly but the industry will have to wait until next year at the earliest for the results of the regulator’s deliberations.

Naismith (left): ‘The vast bulk of sales were fair’; Bamford (right): Challenge to Which?Fund name S&P fund 1 yr 3 yr stars % % Fund name S&P fund 1 yr 3 yr stars % % Fund name S&P fund 1 yr 3 yr stars % % Fund name S&P fund 1 yr 3 yr stars % %


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