Collective Defined Contribution Pension Schemes

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It emerges that the annuity market is not working for consumers in the UK. What a surprise! Not only are pension savers losing a large proportion of their savings (and their employer’s share too) but when they ‘de-cumulate’ (or convert … Continue reading

Evolution of mis-selling in the UK

So when did mis-selling of financial products become ‘normal’ in the UK? The truth is it always went on but not until a few massive scandals in the 70s and 80s did the Government of the day decide to introduce regulation in the form of the Financial Services Act 1986. From 1988 all financial firms dealing with consumers had to be authorised by self governing bodies or directly by the Securities and Investment Board (SIB). Later this morphed into the Financial Services Authority bringing together the Personal Investment Authority (PIA), Investment Management Regulatory Organisation (IMRO), Life Assurance & Unit Trust Regulatory Organisation (LAUTRO) and the Financial Intermediaries, Managers, Brokers Regulatory Association (FIMBRA). Certain professional bodies could regulate their own members such as the actuarial, legal and accountancy professions.

In the 1986 pensions legislation the Conservative Government allowed anyone from 1988 to opt out of an occupational pension scheme. Previously it was often compulsory to remain in an occupational pension scheme and this could be part of your contract of employment. Individuals could also contract-out of the State Second Pension (known as SERPS at the time) and use a personal pension as a vehicle for this.

The first wave of massive personal pension mis-selling then occurred with the now notorious ‘telephone number’ illustrations making no mention of inflation and assuming compound growth of as much as 13% per annum (later reducing to 12%, then 9%, and eventually 7% with various caveats). Lower growth rates were also used as comparators, but one wonders how much prudence was used in selling the transfers and opt outs at the time. This was the era of the yuppy and commission hungry salesmen with very little training and a mission to sell, sell, sell!

Eyebrows were raised and eventually the regulators made some enquiries into anecdotal evidence of mis-selling, but by the time the problems were unearthed much of the damage had been done. Multi-billion compensation claims followed and large teams worked on the review for several years. Legal & General, Allied Dunbar and Prudential were the some of the worst hit.

Whilst selling pension transfers and opt outs became a ‘no no’ it was then noticed that a concerted effort was being made to sell Free Standing Additional Voluntary Contribution Schemes. Again these were often front end loaded with huge fees and commissions deducted from the first 2 years premiums. Again the mis-selling was raised with the regulators who at first just suggested it was anecdotal. Evidence was provided and eventually with consumer pressure groups all helping it was proven that systematic mis-selling had taken place to the detriment of consumers.

What next? Endowments were systematically mis-sold because of the huge commissions possible. Then income protection policies as well as the now infamous Payment Protection Policies linked to loans and credit cards.

The common link has been commission incentives that have driven mis-selling behaviour. And now we see large pay day loan companies, often backed by mysterious overseas financial firms exploiting technology and ruthless terms and conditions to fleece the poorest in society. When will the Government stop pontificating and actually do something? People need protecting from these vultures – a free market has to have controls.

Something is not quite right! $850m payment by Mercer parent?!?

So here we have Mercer and Marsh UK’s parent company in the US being ‘fined’ for allegedly taking backhanders from insurers without any disclosure to their clients. A bit of a conflict of interests one could say.

Of course, to avoid a lengthy legal battle and potentially even more bad publicity they settle without admitting anything. But action speaks louder than words – would you pay $850m just to get rid of an irritation, unless you had been caught bang to rights perhaps? I think there is more to this than first meets the eye.

Let’s take a look at the three favoured investment platforms that Mercer currently recommend in the UK. They seem to like Friends Life, Zurich (the old Allied Dunbar) and Aegon (formerly Scottish Equitable).

Is it just a coincidence that these 3 platform providers used to be very popular with IFAs due to the higher levels of commission payable? Could it be that Mercer favour these 3 platforms for reasons other than what’s best for the client? Could that American culture have possibly permeated into the UK subsidiaries? Surely not!

One could ask is there some sneaky benefit being derived that clients are not aware of? Why is it that Fidelity and BlackRock don’t get a look in? Surely they are highly regarded and super efficient, especially when you compare their back offices with the likes of Aegon. I think they still use a 1980s mainframe by the look of their printed output.

The extract below is from this site:

http://tech.mit.edu/V125/N1/long5_1.1w.html

Insurance Broker Marsh & McLennan Fined $850 Million for Rigging Prices

By Joseph B. Treaster

The New York Times — NEW YORK

Marsh & McLennan Cos., the largest insurance broker in the world, agreed Monday to pay $850 million to settle a lawsuit accusing it of cheating customers by rigging prices and steering business to insurers in exchange for incentive payments.

Although the company did not formally acknowledge any wrongdoing, Michael G. Cherkasky, the chief executive of Marsh, apologized for what he called the “shameful” and “unlawful” behavior of “a few people” at the company. But he said, “We don’t believe that our corporate entity has ever been involved in a pattern of covering up or a pattern of criminal behavior.”

The $850 million, which Marsh will pay over a four-year period, will be used to compensate about 100,000 corporations and smaller businesses whose commercial insurance was arranged by Marsh from 2001 and 2004.

In the days after the charges were filed in October, Marsh stopped taking incentive payments from insurers and its chief executive, Jeffrey W. Greenberg, was forced to resign. The company agreed Monday to fundamental changes in the way it does business.

The lawsuit, brought by Eliot Spitzer, the New York attorney general, maintained that Marsh received kickbacks from insurance companies that increased the cost of coverage for its customers and did not serve as an unbiased broker. He has also been investigating other brokers and insurance companies around the country for similar activities, and attorneys general and insurance regulators in many states have joined in with their own inquiries.