# **Box 2: The Scandal of Mis-Selling Personal Pensions in the United Kingdom**

When personal pension plans were authorized in the United Kingdom in the late 1980s, no requirement was imposed on providers to ensure that transferring from an occupational to a personal pension scheme was in the best interests of the employees. This led directly to the personal pensions mis-selling scandal that erupted in December 1993.

Between 1988 and 1993, 500,000 members of occupational pension schemes had transferred their assets to personal pension schemes following high pressure sales tactics by agents of PPS providers. As many as 90 percent of those who transferred had been given inappropriate advice. Miners, teachers, nurses and police officers were among the main targets of the sales agents. Many of these people remained working for the same employer, but they switched from a good occupational pension scheme offering an index-linked pension into a PPS towards which the employer did not contribute and which took 25 percent of the transfer value in commissions and administration charges.

An example reported in the press concerned a miner who transferred to a PPS in 1989 and retired in 1994 aged 60. He received a lump sum of £2,576 and a pension of £734 by his new scheme. Had he remained in his occupational scheme, he would have received a lump sum of £5,125 and a pension of £1,791. The poor miner lost 50 percent of his lump sum and 60 percent of his pension. As a result of a public outcry, PPS providers have had to compensate those who had been given inappropriate advice to the tune of £11 billion.

Source: Blake (2001:6)

**Switching.** In traditional fixed life annuities, switching annuity provider is not permitted. Fixed life annuities are irrevocable and non-portable contracts. The irreversibility of annuity contracts is justified by the pricing of fixed life annuities, which is based on the projected life expectancy of the pool of annuitants at the time the contracts are issued and the then prevailing financial market returns. A loss of a contract because of switching would upset the actuarial and investment calculations of insurance companies and would require the levying of relatively hefty exit fees.

However, the right to switch providers is increasingly seen as a legitimate consumer right. If this is allowed, the regulators would need to stipulate clear rules on the valuation of portable balances, the share of transferors in the collective (unallocated) bonus reserve, and the levying of exit fees. Estonia has included a switching right in its 2009 law on the payout phase. To guard against adverse marketing effects and discourage excessive focus on low-risk annuitants, the regulations require annuity providers to use the same guaranteed interest rates, mortality tables and operating fees for all the annuities they provide on the same day. Annuity providers would not be allowed to discriminate among annuitants on the basis of health status.<sup>25</sup> Yet, this approach would prevent the offer of more advantageous terms to people with impaired health.

Switching may expose pensioners of advanced age to unscrupulous pressure by predatory brokers and providers inclined to take advantage of the declining mental ability of older persons. Thus, while switching may control some abuses by brokers and providers with regard to younger retirees, special safeguards would be required to protect the interests of persons of advanced age.<sup>26</sup> This is a good example of the complexity of marketing and pricing policies raised by

> 25 See Vittas et al (2010) for a more detailed discussion of this issue.

> 26 I am indebted to Mark Fowler for this important observation as well as for several other insightful comments that have been incorporated in this paper.

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