Too little, too late
Suggested compensation for victims of the latest pensions mis-selling scandal is derisory, says one of the teaching unions fighting for redress.
With the Association of British Insurers proposing a maximum of Pounds 1,000 for teachers wrongly advised to buy top-up pensions, known as free-standing additional voluntary contributions (FSAVCs), the National Association of Head Teachers is considering issuing writs against insurance companies that mis-sold the policies to its members.
Mike Beard, head of pensions at the NAHT, says Pounds 1,000 is nowhere near enough to make up for the losses suffered by some teachers. The NAHT has recently won almost Pounds 2,000 in compensation for one teacher.
"We have always advised our members to get the FSAVC provider to arrange a comparison with the teachers' AVC scheme before they commit themselves, " says Mike Beard.
The insurance industry estimates that 50,000-70,000 people may have been sold unsuitable FSAVCs. The options for teachers who wish to improve their pensions are the in-house AVC scheme run by Prudential, or the purchase of additional years of past service (past added years).
The disadvantage of FSAVCs is that administration charges and commission are often higher than for occupational AVC schemes; there can be heavy penalties for interrupting or discontinuing payments if the bulk of the financial adviser's commission is deducted at the start of the scheme.
According to a recent report by Bacon and Woodrow, actuaries who advise the teachers' panel of the Teachers' Superannuation Scheme, even the worst-performing in-house AVCs produce better returns than the average FSAVC.
The Financial Services Authority says people most at risk of losing out with an FSAVC are those whose employers contribute to a company scheme, or where the company pension has such a high accrual rate that additional contributions could lead to over-funding under Inland Revenue rules. Neither of these factors applies to teachers.
Brian Clegg, assistant secretary of the National Association of Schoolmasters Union of Women Teachers, is urging teachers not to panic. He says high-performing FSAVCs may still be a better option than the teachers' AVC scheme.
Mr Clegg suggests teachers look at the performance rates of AVC funds over the previous 10 years. They must also compare the charges by asking for the "reduction in yield" figure, which has to include accurate predictions of the costs throughout the term of the investment.
Teachers should also consider buying past-added years, according to Richard Wright of Godfrey Pearson and Partners, an independent financial adviser with many teacher-clients. "The costs may seem high," he says, "but the benefits are index-linked and include an increase to a spouse's pension, and you will get an extra tax-free lump sum, which isn't available with an AVC."