The next big mis-selling scandal?

by Ed Bowsher on 24 June 2009  |  0 comments
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George Osborne thinks the government's personal account pension scheme could trigger a new mis-selling scandal. I disagree.

I'm a 41-year-old bachelor and I lead a dull life. I pretend to my lovemoney.com colleagues that my evenings are a non-stop whirl of glitzy parties, glamorous women and top-drawer cultural events. But the reality is rather different.

Last night, for instance, I sat at home and read a speech by shadow chancellor, George Osborne. And you know what? I enjoyed it.

Really.

One particular passage caught my eye. It was on Personal Accounts, the government's new plan to boost pension saving in the UK.

Basically, the idea behind Personal Accounts is that everyone aged between 22 and 65 should be contributing towards a pension. That's unless a person isn't working or has decided to opt out from the scheme.

The scheme is supposed to start in 2012 but it seems that Osborne isn't a fan. Here's what he said in his speech:

"It would be a disaster if Personal Accounts were to end up undermining saving even further instead of encouraging it.

"We have made it very clear that we have grave concerns about the potential for mis-selling to people who risk losing means-tested benefits by saving, the operating costs of the new system - which the Government now admits will be much higher than originally claimed - and the risk of employers 'levelling down' the generosity of their pension provision."

Now I can understand what Osborne is getting at. There is a risk that some employers will "level down." Under the scheme, employers will be obliged to pay in at least 3% of your salary - if your employer currently pays in more than that, you could be hit by an unpleasant cut in 2012.

That said, far too many people don't have any pensions provision apart from the state's offering, so I think it's worth taking the risk on "levelling down" given the size of the problem we face.

I can also understand the point about means testing. It's best explained by my favourite pensions guru, Steve Bee:

"The trouble is anyone who ends up in receipt of means-tested handouts in retirement stands to lose 40% of the value of their private pension savings and some may even lose up to 100% of the value.  For such people the fact that the pension charges were on the cheap side of things won't seem particularly relevant I guess.  They'll have been plonked into an unsuitable investment. Something that's cheap and unsuitable is still unsuitable."

I'd be pretty hacked off if I saved conscientiously for 30 years only to find when I'm 65 that I'm not much better off than the guy next door who had opted out of personal accounts and not saved a penny.

The worry is that people on low salaries will be persuaded by financial advisers to start a personal account when that's not in their best interest. So, in theory, this could be the beginning of another huge mis-selling scandal.

But I'm not convinced.

I think Messrs Osborne and Bee have missed one crucial issue: we don't know how generous state provision will be in 20 or 30 years time. A mean-tested benefit that is available might not be available in 2039. If that happened, I'd be really, really hacked off that I hadn't saved when I could.

So, for me, if the Personal Account scheme is introduced in 2012 as planned, I reckon the vast majority of people should stay in and not opt out.*

Of course, there's a strong chance that George Osborne will be Chancellor in 2012, so the rules may have been changed by then.....

Check out more of my blog posts.

* If there’s already a pension scheme at your company and the minimum level of contributions are already being paid, then there should be no real change to your pension provision. The scheme can simply continue in the same way as it did before 2012. If that's the case for you, it makes sense to stay in that scheme. Opting out would still be a mistake in my view.