I have a question regarding a pension guarantee that I received when I was wrongly sold a pension policy many years ago. I was told I had to join the company defined benefit scheme. The co-operative insurances services then gave me a guarantee that they would make up some of the pension that I had lost by joining them instead of my company scheme.
The problem is now my company has changed their pension scheme to a defined contribution scheme. I was wondering what difference this will make to my pension guarantee, is the guarantee likely to end now that my company has changed to a defined contribution scheme.
This is a question of personal interest to me as my first job in finance 13 years ago was as a trainee actuary in the Pensions Review for a major bank.
For the benefit of other reader here is a link to a full explanation of the pension mis-selling scandal and the subsequent review, courtesy of the Pensions Advisory Service.
To quote ''Between 29 April 1988 and 30 June 1994 many members of the public were advised to take out personal pension plans when they were already members of, or had access to, an occupational defined benefit pension scheme. Also, many employees who had preserved pensions with the scheme of a former employer were advised to effect a transfer into a personal pension scheme.
The regulator responsible for overseeing the sale of personal pension plans realised that those advised to take out a personal pension plan in these situations may have lost out financially. They therefore ruled that firms must review the sale of personal pension plans during that period. Those policyholders that were found to have been mis-sold, had to be compensated for any financial loss suffered.''
Now the compensation could take a number of forms. The ideal scenario was that the mis-advising firm to pay to have their client reinstated back into the occupational scheme as if the advice had never occurred. Unfortunately this wasn't possible in a lot of cases for various reasons, one being the occupational scheme being unwilling to allow ex-members to be reinstated or to re-join the scheme.
Consequently alternative forms of redress were available such as making a one-off contribution into the client's personal pension plan. This lump sum was calculated by using complex actuarial calculations and a series of assumptions, agreed with the FSA, on what the value of the future missed benefits would be worth today. But to put this into perspective the list of assumptions were lengthy and included factors such as mortality rates and future rates of inflation and interest etc. We struggle now to predict what inflation will be doing next year let alone in 30 years time!
Another alternative form of redress was a 'guarantee'. Under most guarantee offers the advising firm agreed to hold off issuing compensation but rather look at the situation again when the client retires, assuming reinstatement into the occupational scheme wasn't possible. At that point the advising firm will try and calculate the value of the benefits missed by being ill-advised. Judging by what you've told me it looks like you were advised not to join your company scheme and instead take out a Co -Op personal pension plan. In accepting their offer of a guarantee you were obliged to re-join your occupational scheme in order to stop a bad situation for the Co-Op getting any worse. However, the offer of a guarantee may not necessarily be an absolute guarantee that you won't be worse off but rather a guarantee to review the situation at the point of retirement. Any redress may still involve calculations and assumptions in order to work out the value of your missing benefits. As ever, the problem with assumptions is that they can either work in your favour or against you but there is no way of telling which outcome is likely at the time of making them. But check the terms of your guarantee offer for more details.
So in answer to your question, 'what will happen to your guarantee now that your company pension has changed?' - the answer is that it depends on the terms of your guarantee offer. But in all likelihood the advisory firm will of course take account of the scheme change in their final calculations. This may mean that the final redress could be smaller than had your occupational scheme continued to be a final salary scheme – but that was never an option. As the scheme has become a defined contribution scheme the advisory firm's potential liability will likely be capped now as the final salary scheme they advised you to not join is closed. However, you should still be compensated, for the loss of pension benefits as a result of their poor advice, so in that respect your guarantee offer has not disappeared.
But as I said, your guarantee offer letter should explain this in detail – and if not contact the Co-Op for a full explanation.
I hope that helps
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