Grim downside of pension top-ups

Susannah Kirkman reports on dismaying mis-selling

Council officers in South Wales have been trying to draw attention to the mis-selling of pension top-ups to teachers and local government officers for almost two years.

Pension administrators in Gwent first suspected extensive mis-selling of free-standing additional voluntary contributions (FSAVCs) in 1999. They noticed that many local government employees who had received compensation after being mis-sold a personal pension had been advised to buy FSAVCs.

Analysis of the top-up contributions revealed that charges were enormous, because of the hefty commission paid to insurance companies and financial advisers.

Torfaen Council, which administers the Gwent scheme, discovered that employees who had signed up for the worst two schemes were due to receive two-thirds less than if they had invested in the local government in-house additional voluntary contributions (AVCs) scheme. It has charges of only 1 per cent, similar to the teachers' AVC scheme. But the council officers were then dismayed to learn that public-sector workers, the largest group of FSAVC investors, had been left out of the mis-selling review by the Financial Services Authority (FSA).

As it costs pound;750 for pension providers to do a review, the government's financial services watchdog argued that it would only tell companies to contact the investors who stood to lose most from the mis-selling. These people, like post office workers, had in-house AVC schemes which were subsidised by employers. However, Torfaen officials say that, with compensation averaging pound;3,000 for teachers and pound;2,600 for local government staff, the City regulator should guarantee that pension providers investigate the FSAVC schemes of all public-sector workers.

"I don't think the difference between the two top-up schemes is made plain enough," said Paul Skillicorn, Gwent's pensions review officer. "Pensions information tends to be tucked away in newspaper supplements, not in bold headlines on the front page."

Mr Skillicorn said that many people did not understand that an FSAVC is an individual policy offered and managed by an external provider, while an in-house AVC is a group arrangement offered by an employer and linked to an occupational pension scheme.

Investors were initially attracted to FSAVCs because they were confidential and offered access to a greater choice of investment funds. However, the actuaries Bacon and Woodrow have calculated that the worst-performing in-house AVC will produce better results than the average FSAVC. Teachers can also boost their pensions by buying additional years of service (past added years). Another option for those earning less than pound;30,000 is a stakeholder pension.

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