Return before it's too late

28th October 1994 at 00:00
Thousands could be in line for compensation after wrongly being told to quit the Teachers' Superannuation Scheme. The vast majority of the 20,000-plus teachers who opted out of their occupational superannuation scheme after receiving bad advice from personal pension-sellers have still not lodged claims for compensation.

No one knows the precise number of teachers who hold personal pensions but 30,000 have opted out of the Teachers' Superannuation Scheme - 3,000 more than has been generally reported - and most have probably taken out personal pensions. To date, however, the teacher unions and Teachers' Pensions Agency are aware of fewer than 1,500 compensation claims.

It may be that many teachers have approached their pensions-providers directly and that the companies have declined to act pending this week's report from the Securities and Investment Board into the whole matter of pension mis-selling and compensaton.

But most personal pension-holders still do not appear to have realised what an error they have made. They should seek expert advice from their union as soon as possible because any delay could cost them dearly.

Most at risk are teachers who opted for personal pensions in the 1980s, as legal entitlement to compensation is normally limited to claims made within six years of the bad advice.

Personal pensions became big business from 1988 onwards. Teachers, nurses and miners were among the groups in good occupational schemes that became the targets of pension-sellers eager to make a fast buck.

The obligation to give "best advice", which in all but the most exceptional circumstances (for example, foreign-national teachers who intend to work in Britain for under two years) would be to stay in the occupational scheme, was very largely ignored.

Hundreds of thousands of people have consequently been wrongly advised to take out personal pensions. The precise cost of putting it right is unknown but it has been estimated at more than Pounds 400 million.

Fortunately, it should be possible in most cases to demonstrate "bad advice" by the personal pension-providers and to require that they meet the costs of restoring the much better pension entitlements the teachers would have had if they had they never left the TSS. Some cases have already been resolved (see " Sarah's story") In contrast to a personal pension, the TSS pension benefits are guaranteed, based on your salary rather than the level of contributions, index-linked on retirement to the cost of living and involve a contribution from the teacher of less than one-third of the total costs.

In addition, pensions benefits from other schemes can be transferred in, or the benefits transferred out if the teacher moves to new employment, and a range of options are available to meet individual circumstances.

Personal pensions are fundamentally different. First, their basis is "money purchase". That means that the benefits are not guaranteed and are not linked to "final salary" as in the TSS. It is, in effect, a savings account and the benefits provided by a personal pension are dependent upon: * The level of contributions paid * The level of charges or commission deducted from your contributions (which can be as much as 20p of every Pounds 1 invested) * The investment conditions over the period up to which the pension becomes payable * The skill with which the particular institution has invested your contributions and * The cost of buying a pension annuity at the date of retirement.

The cost of the TSS benefits is just over 19 per cent of salary, of which only 6 per cent is paid by the teacher. In contrast, employers are not required to make any contribution to a personal pension.

Where, however, a teacher opts out of the TSS and then opts out of the state earnings related pensions scheme (SERPS) which heshe would otherwise have to enter in favour of a personal pension, the employer is required to pay less than 3 per cent to the personal pension.

This payment is effectively a redirection of the contribution which would otherwise have been payable by the employer had the employee remained in SERPS. That payment of less than 3 per cent and a 6 per cent contribution from the teacher would produce a total gross contribution less than half of that of the TSS.

When it comes to teachers' pensions there is invariably no contest between the much superior benefits of the TSS and a personal pension. What a pity it is that so many personal pension-holders have not yet recognised that fact.

Barry Fawcett is assistant secretary (salaries, conditions of service and superannuation) of the National Union of Teachers.

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