Proposed overhaul of pension schemes creates potential for mis-selling, writes Laura Slattery

Could pensions mis-selling be the next scandal to hit the financial services industry?

In its bid to increase the numbers of people with retirement savings, the Pensions Board has proposed a major overhaul to the €62 billion pensions industry, suggesting attractive plans such as a State contribution of €1 for every €1 invested in a Personal Retirement Savings Account (PRSA) and the extension of tax relief on contributions to other pensions for lower-paid workers.

But some industry experts believe the new proposals, which would lead to differing tax treatments for different types of pensions, could create even more confusion among consumers about the already deeply complex world of pensions.

The removal of a requirement for sellers of standard PRSAs to prepare a fact-finding questionnaire about the consumers' financial circumstances before making a sale, while largely welcomed by the insurance industry, has been criticised by one financial adviser as the removal of the basic building block of consumer protection.

Perhaps even more ominous for pensions savers, the day after the contents of the National Pensions Review were announced, an Oireachtas committee heard how some 23,000 endowment mortgage holders who face an unexpected €89 million shortfall in their policies will not be able to complain to the financial services ombudsman that they were the victims of mis-selling because of a six-year statutory time limit on complaints.

This six-year time limit could affect someone who is wrongly advised to take out a new-style €1-for-€1 PRSA instead of contributing to their employer's pension scheme. If they do not discover the problem within six years, it will be too late to make a complaint on the grounds of mis-selling.

Endowment mortgages have long been bywords for unscrupulous, dishonest sales practices in the financial services industry. In the UK the consumers' association Which? magazine estimates that five million people were mis-sold an endowment.

But a UK pensions scandal in which people were advised to opt out of company schemes and into personal pensions, usually resulting in substantially lower pensions, was arguably an even larger scandal, says Ian Mitchell, director of Deloitte Pensions and Investments.

It is one that is now at risk of being repeated here.

"We need to be aware of the potential for abuse of what is a potentially excellent new pensions regime in Ireland," he says.

If pensions are sold to employees on the basis of a 50 per cent bonus in a PRSA versus 42 per cent tax relief in their employer's scheme, the person who chooses the seemingly more enticing PRSA could be losing out on significant pension benefits, according to Mitchell.

In a typical occupational pension scheme, employers are the ones who match employees' contributions. Put simply, before PRSI issues are considered, the employer contributes €10 per month and the employee contributes €10, of which €4.20 is in the form of a tax credit or tax relief. For a net personal cost of €5.80, the employee receives a total contribution of €20.

Under a new-style PRSA, if the employee contributes €5.80, they will get a Government top-up of €5.80. The total pension contribution for the same money is just €11.60.

The risk of a flight to poorer-value PRSAs has also been highlighted by the Irish Association of Pension Funds (IAPF), which has called for equal treatment for all types of pensions.

Another area for potential mis-selling is where someone is persuaded to ditch a low-charge personal pension scheme in favour of a new PRSA, says Mitchell.

They could, in theory, be sacrificing a policy in which 100 per cent of their contributions are invested in a fund with an annual management charge of 0.75 per cent to a PRSA where just 95 per cent of the contributions are invested in a fund with an annual management fund of 1 per cent.

"The absence of a fact-finding process eliminates the opportunity for the adequate research to be carried out before making the recommendation," says Mitchell.

There are pragmatic reasons for the relaxing of the rules, he admits. Piba, which represents more than 800 brokers, believes regulations that require a person buying a PRSA to sign as many as 10 forms have strangled PRSA sales, making it unnecessarily convoluted for consumers and financially unviable for brokers to offer them to clients. But removing the need for a fact-find takes away the requirement to explore the affordability of the pension being sold and the relative merits of the alternatives on offer, Mitchell adds.

"Consumers are best protected in a financial world where full research is carried out before a product of any kind is recommended, and I fail to see how the removal of a fact-finding requirement could do anything other than create mis-selling potential," he says.

According to broker Michael Kiernan, who runs MyAdviser.ie, pensions investors are already embroiled in a scandal waiting to happen.

Anyone who bought a personal pension prior to the introduction of disclosure rules in 2001 could be unwittingly paying huge charges and commissions on their pension plans. In many cases, 50 per cent of the money they invested in the first year was siphoned off to pay commissions.

Ongoing fees and commissions, including "sting-in-the-tail" charges of 50 per cent on any top-ups for the first year of that top-up, further eat into the value of the fund.

Executive and company pensions are still sold without disclosure of charges and commissions. "You are relying fully on the person selling it to you not to rip you off," says Kiernan.

It is not easy for pensions holders to find out what is going on. "If you are disappointed with your pension plan, which may not have broken even after 10 years, all you will probably get as an excuse is the various wars and poor market performance," he says.

"You will never hear that your plan is also high-cost and there are better ones available. No one will be writing to you to explain that there will be a shortfall in your original quote and that your pension will not deliver as expected."

In contrast, endowment mortgage holders have a fixed target - the capital sum they owe on their loan - and the shortfall is clear, Kiernan points out.

There is another problem. Today, pension fund projections are based on expected annual fund growth of 6 per cent per annum. But this rate of growth is not guaranteed and older policies were sold with even higher growth assumptions of 8-12 per cent.

Pensions savers often don't realise that the old growth-rate projections have not been met and they typically have no clear way of comparing new projections with the original ones, Kiernan adds. It may not be until the final years of their working lives that they discover the pension they are in line to receive is much lower than they were hoping for.

And with employers increasingly reluctant to run schemes that guarantee a certain level of pension, more and more workers must shoulder the investment risk on their pension themselves.

The wrong advice at the point of sale could lead to a very nasty surprise decades later - one which pension holders may find it impossible to do anything about.