LONDON - U.K. employers will have to decide whether to allow employees who transferred their pension benefits to personal plans under poor advice to re-enter their company plans.
But employers will not be on the hook for any loss in the value of the benefits.
A scandal on pension transfers has rocked the U.K. pension industry during the past year. A report released last month by the Securities and Investment Board suggests more than 1 million cases might have to be reviewed because individuals made transfers based on poor advice.
But it is the insurers and financial planners who will be liable for making up any losses in the value of benefits, which some estimates peg at 1 billion ($1.63 billion). The cost of reviewing the cases alone could cost about 1,000 each, doubling the potential cost to the industry.
About 7.8 million personal pensions have been sold to employees since 1988 under a Thatcher-era policy that encouraged individuals to take care of their own retirement provision.
The problem is that many individuals received poor advice to transfer out; many would have been better off remaining in employer-sponsored plans, government and pension experts say.
"Opting out was a misguided policy by the government that freedom of choice was doing people a favor. On the whole, it's done more harm than good," said Graham Wright, pensions manager for Courtaulds PLC, London.
Opting out is "an absolute nightmare for 90% of the population because they don't realize their whole pension is dependent upon interest rates on the day they retire," he added. That's because benefits are converted into annuities at going rates.
The SIB estimates there are some potential 600,000 cases involving former employees who withdrew their deferred vested benefits, while about 330,000 involve people who left the plan while still working for their employers. Another 533,000 people never joined their employers' plans, taking out personal pensions instead.
The scandal has given another black eye to the pension industry, coming on the heels of the Maxwell pension debacle. While it actually is the life insurance agents and financial planners who recommended switching, the publicity has tarnished the pension industry as well.
While industry groups have urged employers to reaccept members to lessen the taint, employers are under no obligation to do so.
Many might not. For one thing, many employers warned employees against opting out of their plans, although many felt barred by the Financial Services Act from giving advice about specific firms seeking workers' accounts.
For another, employees who left the plans received cash values based upon their accrued benefits. Future service and benefit increases were not included in calculating those benefits, noted Roger Key, partner, R. Watson & Sons, Reigate, England.
To buy back into their employers' plans, employees will have to pay a higher amount than they paid out, because benefits costs will be based on the time they were out of the plans, future accruals as well as any lost investment opportunities.
An employee who left the scheme in 1989 would have five years of pension benefits to buy back, Mr. Key said.
Some experts believe insurers and financial planners will have to make good any investment losses plus refund commissions and exit charges, but others say it's not so clear.
Meanwhile, employers should be wary of subsidizing employees who opted out of their plans at the expense of those who stayed in, cautioned Paul Greenwood, research actuary with William M. Mercer Ltd., Chichester, England.
Still, many employers, including Courtaulds, will accept individuals back into their schemes, particularly if they still are employed by the same firms.
Sales agents targeted thousands of employees, with many of them being teachers, nurses and mineworkers. The high proportion of those opting out of governmental schemes is particularly surprising because they gave up fully index-linked pensions.
Now, many of those sales agents have been laid off, while many financial planners cannot afford to refund the assets. An industry-funded compensation scheme will provide refunds to individuals.
But in any case, the burden for paying back these accounts will be shouldered by shareholders and policyholders of insurance companies, experts said.