Business & Work

Significant pension risks will be transferred to employees – and it’s the ordinary workers’ who will be hit hardest, warns Retirement Angels (RA).

The company estimates that as many as 1 million members are making key decisions on their pension rights where they may stand to lose typically around £5,000 - 10,000 for a wrong decision.

A significant and growing area is the number of people retiring from defined contribution pension schemes and having to secure an income for themselves.

Now the pension advice specialist is calling on the Government’s Department for Work and Pensions (DWP) through The Pensions Regulator (TPR) to introduce a Code of Practice to help avoid the problem, applicable to ALL work-based pension schemes whether they are defined contribution or defined benefit in nature, and whether they are run under trust or contract arrangements.

And at the core of the CoP, Higham is advocating a ‘traffic light’ colour coding system where ALL crucial pensions communications are prioritised by colour according to their degree of urgency.

“Basically, it is simple, with the key message being Red should be Read - all communications branded Red are those that need action and carry a non-trivial risk of material financial loss.

“Amber communications will require action but with a low likelihood of material financial loss or containing information warning of potential problems for information only, while Green indicates no action needed, with general updates for information only.

“In our view, a universal adoption of this approach coupled with Government and Regulatory support to explain the colour coding to members will leave people in no doubt that they should Read when it’s Red,” said Higham.

RA research on decisions needed at retirement shows that 70% of companies do not make advice available to help members to arrive at the correct decision with only a small minority carrying out some checks to test that members understand the material presented to them.

“It is well understood by the schemes that members stand to lose on average 20% from making a wrong decision - and in extreme cases losses can be more than 50%. Schemes also accept that most members need help to make the right decisions, so it is something of a puzzle why more schemes don’t make advice more accessible,” said RA’s Alan Higham.

“There is increasing evidence – from data collected by the Government & Pensions’ Regulator and surveys done by leading consulting firms – that increasing numbers of employers are changing the pension schemes to reduce the financial risk to the company and put this risk on the employee.

“Consequently, vulnerable employees are placed in an invidious position as they are required to make decisions on complex issues with a material risk of significant financial loss,” he said.

“Often the employee doesn’t even understand the significance of risk they are taking on and therefore don’t seek help in making the right decision.

“In many cases they find the communications so impenetrable that they just put it in the dustbin unread with the result that they are defaulted into a solution which may well not be right for them.”

RA fears that this situation could ultimately result in losses similar to those found in the pensions’ mis-selling crisis of the 80s and 90s which exposed millions of vulnerable workers to a severely compromised retirement because of poor financial advice.

“There are already ambulance chasing firms encouraging complaints in this area and just one successful court case could open a floodgate.” said Higham

“Employers, and specifically pensions’ trustees, advisers & regulators who collectively determine industry policy need to take this concern seriously and act now to avoid this being another mis-selling scandal similar to the one which we experienced in the Eighties - when millions of people were persuaded to opt out of secure schemes and into inferior personal plans,” said Higham.

“Over 2011 we will be campaigning for a new, robust Code of Practice to be introduced to help minimise the likelihood of another pensions’ mis-selling scandal such as we have witnessed in the past.

“It is good for business as it helps reduce the risk that they could be successfully sued for losses caused by the changes to workplace pensions instigated by the employer,” he added.

Action from Retirement Angels

• Retirement Angels are calling for Code of Practice to be introduced – applicable to ALL work-based pension schemes 
• They are set to launch Red Should be Read campaign to identify crucial pensions’ communications - Red = critical - Amber = requires action/potential problems in future warning - Green = no action needed

www.retirementangels.com