Personal Pension Sales (Hansard, 25 October 1994)

§ Mr. Nelson

The Securities and Investments Board, the chief investment regulator, has today issued a statement determining how compensation is to be delivered for people who have personal pensions instead of being in an occupational pension scheme and who now face financial loss as a result of bad investment advice. I have today placed copies of the statement in the Libraries of both Houses.

Today's statement follows the initiative announced by SIB last December, when it published evidence that many sales of personal pensions appeared not to have been made in full compliance with the regulation under the Financial Services Act. Since then, with the help of experts for the life and pensions industry, the SIB has mounted an exercise to assess the problem and to prevent it recurring.

The Government are also taking action to make sure that the arrangements for redress are brought into effect as efficiently as possible. The public service pension schemes are setting other occupational schemes a good example. There is also clarification of the tax treatment of compensation payments.

It is now clear that some sales of personal pensions in the past took place on the basis of bad advice, not given in accordance with the regulatory rules then in force. SIB's statement today implements the assurance I gave in the House to the hon. Member for Southampton, Itchen (Mr. Denham and my hon. Friend the Member for Beaconsfield (Mr. T. Smith) on 8 December 1993, Official Report column 233–34. Anyone with a personal pension who is found to face financial damage as a result of mis-selling will be entitled to redress. The aim will be to provide this compensation by putting people in a financial position equivalent to that in which they would have been had the mis-selling not taken place.

There is at present no way of knowing the eventual total cost but there will inevitably be a substantial call on the financial services industry. Investors can be reassured that the industry as a whole can and will pay. In cases where the firm responsible has ceased trading, this will entail calling on the industry's compensation schemes.

The SIB statement sets out in detail how firms responsible for sales of personal pensions should review their cases; how they can identify mis-selling and damage to investors caused by it; and, where mis-selling leading to financial damage has occurred, how appropriate redress should be provided. The details of the review process and the formula for redress have been drawn up with the assistance of experts in the life and pensions industry and in the legal and actuarial professions. The regulators will now ensure that firms responsible for past pensions business take the necessary steps to review their casebooks. The Personal Investment Authority is setting 511W up a pensions unit to examine cases sold by firms which are no longer in business.

The review process will be supervised by the regulators. Many people will be contacted by the firm which sold their pension, or the pensions unit, and asked for information to help decide whether further investigation is required. SIB is distributing widely an explanatory leaflet, the Investor's Guide. It will also be generally available from libraries and citizens advice bureaux.

It will take at least two years to carry out the reviews in an appropriately thorough and systematic way as the interests of both personal pension holders and other policyholders require. The cases to be reviewed first will be those where financial damage caused by mis-selling is judged most likely to have occurred and where the effect of mis-selling could have the most immediate impact. These priority groups include the cases of investors who have died or retired. In addition, any personal pension investor who seeks it will have his or her case reviewed.

These reviews will no doubt show that many people who transferred to or opted for a personal pension were given good advice. Where redress is required, its form will depend on the circumstances of the investor. In many cases, and where it is possible, it will be desirable to reinstate people in their occupational schemes. if this cannot be done, the personal pension will usually be topped up. Sometimes additional benefits may need to be provided, for example through insurance policies. Those already retired may get top-up annuities.

With these forms of redress in mind, I very much hope that occupational schemes in the private sector will follow the example of public service schemes such as those for the teachers and nurses. These schemes are allowing current employees not only to rejoin for future service but also to buy back pension rights for previous service at reasonable cost.

All these remedies are designed to put the investor in a financial position equivalent to what would have been the case if the mis-selling had not occurred. The Chancellor intends to introduce legislation in due course to ensure that an investor in that position will have the same tax bill as would have been the case had there been no payment of compensation for mis-selling of the personal pension or buyout contract.

The action announced by SIB today relates to people who bought personal pensions in preference to an occupational scheme.

There are many others who would otherwise have been contributing to the state earnings related pension scheme. The SIB is also investigating, with the help of DSS, whether there has been mis-selling to people in this position. SIB intends to publish its findings in this further review next year. If a problem is revealed, SIB will prescribe appropriate redress.

Personal pensions remain a flexible and entirely suitable way of saving to provide a secure income in retirement for a great many people. They can make it possible to combine a mobile and varied career with a good pension. These advantages will no doubt ensure that personal pensions continue to appeal to many people. I also have no doubt that they will have a significant role to play in future pension provision.

But for people to choose personal pensions with confidence, they must be able to rely on high standards 512W of professionalism from those responsible for selling them. They must be able to trust advisers and sales staff to recommend suitable products. That is why in March the SIB defined new tougher standards for future sales of personal pensions.

As a result, investors choosing between occupational and personal pensions now get a "reason why" letter to explain each personal pension sale, backed by sophisticated analysis of their own personal circumstances. The regulators are following this up with more intensive supervision of sales. The Department of Social Security has also issued guidance to employers about the advice they may give to any of their employees considering a personal pension. These new standards are backed up by more demanding training and competence requirements. Financial services firms are already implementing the new standards. So people making decisions about whether to buy a personal pension instead of belonging to an occupational scheme can have confidence in the quality of the advice they get.

The problems addressed in SIB's statement today demonstrate how important it is that authorised firms operating in the financial services sector take these responsibilities to their customers seriously. Investors must be able to reply on their investment advisers to comply with the regulatory standards.

There can be no doubt that SIB's action to compensate investors is a success for the regulatory system. SIB has acted with commendable thoroughness and independence. I have no hesitation in concluding that the system of regulation, in which SIB takes the prime role, and which benefits from major practitioner input, is sound and working effectively to protect investors. The reforms instituted by the SIB review last year are beginning to bear fruit.

The financial services industry plays an important and growing role in a sophisticated modern economy such as ours. Increasing affluence means that people will more often have resources available for investment. They must be able to invest with confidence. A clean, well regulated market is in the interest of consumers and financial services firms alike.