For the last 20 years, mis-sold pensions have plagued the financial services sector. Abundant scandals have hit numerous countries internationally, as a result of commission-hungry sales staff that have persuaded people into investing in schemes before transferring the money into an unregulated alternative.
With the promise of a comfortable retirement, millions of people internationally have been tricked into investing their hard-earned money. An issue that’s been on the rise since the British Steel Pension Scheme scandal in 2017, there are fears that it will continue to grow as financial businesses realize the potential for profits.
In the 2017 scandal, big firms preyed on steelworkers, persuading them to transfer their pensions over to them – resulting in £15bn being taken from them and hefty commissions of over £6,000 for the sales staff.
That’s not the only big scandal that shook the country, however. In 2015, the annuity scheme was introduced by past prime minister David Cameron.
Although this looked promising initially, it turned out to be very profitable for pension companies – and not for the people investing in it.
With this scheme, it gave people the freedom to choose how they use their pension fund. Intended to turn their pension savings into retirement income, this independence and flexibility was very appealing to many.
Marketed as ‘an income for life’, people didn’t realize that once the contract was taken out, there’s no way to opt-out of it. The pension companies also misjudged life expectancy, meaning that they wouldn’t have to pay out as much as they charged for. Keeping the money for themselves, it perfectly showcased how they could profit from mis-selling pensions.
Two big players in the industry, Phoenix and Legal & General were prevalent within this scandal, releasing £205m and £433m respectively that they had set aside for annuities.
Although they, as well as other pension companies might have argued that they took on the risk of guaranteeing a payout in the first place, this scandal still uncovered just how risky these investments can be – leading to many trying to seek accurate and reliable claims advice for future transactions.
Another issue that unfolded was the doubling of payouts in 2018 from the Financial Services Compensation Scheme (FSCS). Almost £40m was paid out to those who had been wrongly advised. This, along with the other scandals heightened fears amongst other international residents that they also would be mis-sold pensions and that their savings would be pocketed by large pension firms.
This concern was intensified with the rise in Defined Benefit pension schemes. In the past year, the Financial Conduct Authority (FCA) have made their concerns about the financial market heard, stating that there isn’t accurate information about the scheme currently available.
To overcome this, they wrote to nearly 2,000 financial advisers stating the potential harm of their advice when it comes to Defined Benefit schemes. As this was a large portion of the firms that advised customers between 2015 and 2018, it was clearly a step in the right direction.
This step was supported by the much-respected FCA’s Mr Percival, who claimed that to prevent this issue in the future, firms would have to look at the cases involving the scandal, determine what future claims might be made against it and ensure that the right amount of capital is put aside for it.
Aligning with this, when speaking to the UK’s FT Adviser, Nick Bayley, who is the managing director of compliance and regulatory consulting at the financial firm Duff & Phelps discussed the potential for a Defined Benefit scandal in the future if incorrect advice was still being given.
Stating that as the market changes and interest rates are low in the next year, Defined Benefits will continue to be at the forefront of the FCA’s regulatory focus.
Predicting that the FCA will ban contingent charging and that those who were poorly advised will realize their mistake, a mis-selling scandal is more than likely unless dramatic changes are made.
The Future of Mis-Sold Pensions
It’s unclear as to what the future of the pension industry looks like. However, with the predictions that have been made about a mis selling scandal if the markets turn this year, it’s fair to argue that big financial firms will continue to profit off of the poor advice that people receive.
In Autumn of this year, the FCA is said to publish its findings of the Financial Advice Market Review and Retail Distribution Review; and have claimed that some of its new rules that are related to pension schemes may harm the market.
Following on from their re-evaluation in August 2019 that surveyed 400 firms, it’s designed to assess how they are meeting consumer needs and ensuring that their actions are in the best interest of them.