Mis Sold SERPS

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State Earnings Related Pension Scheme.

SERPS Opted Out History

SERPS: Contracting Out – For Better or Worse?

Introduction

SERPS is the state Earnings related Pension Scheme (Now known as the State Second Pension) and is essentially a second pension available on top of the standard basic state pension. SERPS is comprised of National Insurance contributions paid by employers and employees to the Government which in turn pays an enhanced second pension. Since National Insurance contributions increase with earnings, higher earners receive a larger second pension (up To a point).

From 1988 onwards it became possible to "contract out" of SERPS – this meant that some of the National Insurance contributions were redirected from the state pension into personal pensions. Where people contracted out of SERPS the Government was no longer responsible for paying the second pension and this responsibility passed to the personal pension provider.

The idea was that the personal pension provider would invest the national Insurance contributions in such a way that the investor would be left with a larger pension at retirement than would have been the case under SERPS. Contracting out was very popular throughout the late 1980’s and early 1990’s.It is estimated that some 7.5 million people have contracted out of SERPS at some point and half of these remain contracted out.

The problem

It is now apparent that millions of people who contracted out in the 1980’s and1990’s are set to be worse off in retirement than they would have been with their second state pension. Put simply, the national insurance contributions invested by personal pension providers have not grown anything like the degree that was anticipated in the 1980’s and 1990’s. Accordingly the pension that people who contracted out will receive will often be significantly less than they would have received under SERPS.

Mis selling

People who have contracted out of SERPS will want to know whether they have any remedy to recoup the losses they may suffer in later life. In order to recover losses a person will need to show that the advice he or she received in relation to contracting out amounted to a "mis-sale". There is evidence that in the 1980’s and early 1990’s financial advisors were recommending almost as a matter of course that people would benefit from contracting out of SERPS. In part this was, no doubt, because the advisors received a commission for each person who agreed to contract out. In addition, however, there was a general perception, encouraged by the Government and media that contracting out was a "good thing". One newspaper even went as far as stating that for many people contracting out could be "the best financial planning decision of their lives". It is perhaps not surprising, therefore, that financial advisors were caught up in the contracting out furore.

Notwithstanding the above, any financial advisor recommending contracting out was obliged to investigate fully whether or not contracting out was appropriate to the individual investor. This means that in each case an advisor should have investigated the investor’s age, sex, employment status, earnings, details of any employer’s pension scheme and attitude to risk. Where this was not done, the investment will have been miss-sold.

Compensation Claims

It is estimated that millions of people will lose out as a result of contracting out of SERPS. If the contracting out is as a result of a "mis-sale" then the investor may well be entitled to compensation. Calculating compensation losses is complex where the investor in question has not yet retired. It involves a comparison of the projected return the contracted out contributions will give at retirement with what the second state pension would have given. Even at projected future growth rates of 7% per year (which may be optimistic) many people who have contracted out will suffer significant losses.

The Policy Performance on its own does not give rise to a mis selling complaint.

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Claim Mis sold SERPS