An unusual case of pension mis-selling which was detailed recently on national radio, is not as uncommon as it might first appear, say pension fund administrators.
The mis-selling of Additional Voluntary Contributions (AVCs) to members of the civil and public service happens more often than members of the life and pensions industry wish to admit, Family Money has been told.
The case concerns a civil servant who was sold a retirement annuity contract - a personal pension plan - by a local broker about five years ago. She kept up her modest monthly contributions but then stopped paying them. Since so much of the early payments were absorbed by charges and commission, the policy is now virtually worthless. This woman thought she was buying an AVC, which civil servants are permitted to purchase under very specific circumstances. What the broker did not tell her, however, was: a) he was not authorised to sell her the AVC, since they must be approved by her Minister and are usually bought through group schemes set up by the civil or public service unions; b) it wasn't an AVC he was selling her in the first place, but a retirement annuity contract, more commonly referred to as a personal pension plan, designed for the self-employed or for private sector employees whose companies do not provide an occupational pension scheme.
She also thought she was getting the tax relief associated with pension-policy contributions, but in fact was not, since her contract was not an approved one. A key feature of this case is that the broker in question "never asked me if I already had a pension", reported the woman. Establishing a person's current pension position is the first item that must be determined when a broker meets a client, a spokesman for the Irish Brokers' Association told Family Money.
Mr Paul Kenny is a senior pension administrator with Sedgwick IPT, the largest pension trust in the State. The firm acts as an administrator and trustee for thousands of private-sector and civil/public service pension and AVC schemes. According to Mr Kenny, it often emerges during a presentation to groups of civil servants about their retirement investment options, (which include the purchase of added years of service instead of an AVC) that one or two people in the group - and sometimes even more - already have what they believe is an AVC, "but isn't".
"The guidelines are very clear," says Mr Kenny. "A public sector AVC is normally sponsored by a trade union with the approval of the department minister. Outside trustees are usually appointed because the department, quite rightly, does not want to be the trustee. Ourselves and others are appointed. The AVC can be purchased only if there is scope for it - that the person has some emoluments that are not pensionable in the normal manner or they have a service years shortage.
"Good AVC advisers will always understand and present the option to buy service years through the `purchase of added years' scheme, though it is fair to say that this scheme doesn't suit everybody since the entry conditions may be restricted, such as in some cases only being able to buy into it within five years of joining the civil service. The scheme is not always very flexible when it comes to making regular contributions either or the purpose for which it is being purchased. Nevertheless, it is often the better solution to an AVC."
Mr Kenny believes this particular case was an example of how "unscrupulous sales people will go after a soft target", i.e. a person who does not understand how the system applies to them, but has a vague idea that they too need to increase their pension contributions. "In the private sector what happens is that these salespeople persuade someone in a defined contribution pension scheme that usually isn't performing very well, to opt out of the company scheme and to defer the existing benefits. They convince them to buy a private retirement annuity contract instead. The salesman earns his commission, but he never explains to the client what he has given away: not just an occupational pension, but the employer contribution, a death-in-service benefit and total transferability of the company pension within his industry if he ever changes jobs."
As for the civil servant and her bogus AVC (the broker is no longer in business), "there is not very much recourse, I'm afraid," says Mr Kenny. "This case goes against every industry code of practice, but there are very few legal sanctions available to her. If it was indeed a broker who sold her the policy, the insurance company has no legal responsibility to indemnify her. If he wasn't a member of the IBA [Irish Brokers' Association] they cannot compensate her. Either way she says he's not in business anymore. "Because the contract was written in error, the life company will dismantle it as if it never existed and probably only repay her her contributions - but she will have lost any investment value there may have been. The Insurance Ombudsman cannot get involved in cases involving brokers, since they are not within the Ombudsman's remit."
Mis-selling cases, says Mr Kenny, should be dealt with according to statutory regulation (which does not currently exist) and there should be criminal sanctions against anyone who intentionally mis-sells something as obvious as a private-sector retirement contract to a civil servant. If there is a silver lining in this case, it is that a victim compensation scheme is expected to be introduced before the end of the year; there are also serious proposals before Government for the setting up of a Pensions Ombudsman, whose office will hopefully have sufficient freedom to investigate and compensate victims of this kind of blatant malpractice.
