Lack of sales expertise leads to pension misselling

When Ms A became the director of a small company two years ago, she and her colleagues decided they needed directors' pensions. They invited their bank's life assurance arm to prepare the contract. Also during the past few years, Mr L, R and K, who work together at a large manufacturing company near Dublin were each cold-called at their homes by three different insurance company salesmen. They each ended up buying a personal pension plan paying monthly contributions of between £50 and £250. Unfortunately, none of these people were entitled to these pension plans since they were already members or holders of a legitimate pension contract.

The thousands of pounds they had contributed over the past few years had to be refunded, minus any tax relief claimed. Had the mistake not been uncovered so early (by chance they attended a seminar at their company given by an independent financial adviser) each of these people would have had an even greater shock at retirement when they were informed by the Revenue Commissioners that they had simply been giving the pension company an interest-free loan and would not be entitled to their pension fund. Ms A didn't realise that she couldn't have a personal pension and a director's one. The three colleagues thought that because their company pension plan was "non-contributory" - that is, the company made all contributions with no specific deductions taken from their monthly salaries, that they were entitled to take out a personal pension. The pension company representative in each case failed to determine that these people were already members of a pension scheme.

In any case, the clients could not recall any lengthy conversation about their existing pension position; given that fact-finds are still only being introduced by the direct sales departments of many of the life and pensions companies, this is not surprising. The mis-selling of pensions is "not uncommon" and may be more frequent than the cases that come to light each year suggest, say independent financial advisers.

A few advisers believe the holding of multiple-type pensions is "widespread" and that the cases we unearthed "is just the tip of the iceberg". Insurance companies we spoke to, however, describe incidents as "rare" and "infrequent", but admit that a number of cases are usually reported each year and are usually due to lack of disclosure of previous pension contracts by the client. A mix-up on the part of the salesperson can sometimes result in a personal pension contract being taken out instead of an AVC, they say. In such a case, the Revenue may approve the transfer of the contributions into a proper AVC, assuming, of course, that the employee is eligible to purchase one and the occupational trustees approve.

Few advisers Family Money spoke to suggest that this kind of pension misselling is intentional - for the most part it seems due to incompetence: understandable enough on the part of the purchaser, but less so in the case of the salesperson since pension proposal forms, though technical in nature, are quite specific about who is, and who is not entitled to take out a pension (though they do not come right out and ask if you are a member of a company or personal pension plan.) In the hands of an inexperienced, or badly trained salesperson, however, "the wording of these forms is a recipe for disaster," says Paul Kenny of Irish Pensions Trust, the country's largest pension administrators. "I believe there are still salespeople out there who do not know the difference between occupational schemes, AVCs and personal pension plans and that in my experience, this includes brokers as well as direct sales staff." According to Mr Kenny, the legislation pertaining to pensions, including Section 235 (8) of the Income Tax Act 1967 is quite specific - you may have an occupational pension if you work for someone else and there is a pension scheme in place. You may also take out an Additional Voluntary Contribution (AVC) if you do not have sufficient years of employment for a full service pension from your company, but you will usually have to arrange it through your pension scheme trustees.

You may only hold a personal pension plan if you are self-employed or if your employer does not provide an occupational scheme. You may only have an occupational and personal pension plan if you have a separate source of income from your company job and the combined benefits of the two do not exceed the total pension value permitted by the Revenue Commissioners (i.e. two thirds of your final income less any State pension benefits). (Some civil and public servants are permitted to take out an AVC, but only under specific and very limited circumstances, and pension administrators like Irish Pensions Trust says there has been widespread, inappropriate selling of AVCs in the civil service.)

Even though some independent advisers believe this problem is widespread, it does not attract much critical attention, says Paul Kenny, "because the insurance companies tend to move very fast to dismantle the missold contract and refund the contributions immediately. The problem is that usually all you get back is your contributions minus any tax relief, not the actual fund value or even interest on your contributions. In effect, you have given the insurance company a tax-free loan." Given the substantial returns that have been generated by investment markets over the past several years, Mr Kenny believes the pensions companies "have a moral responsibility to at least pay interest" on the funds. The onus, he says, is on the company and not the client to ensure that the client is indeed eligible for a personal pension. Kay Roche is an independent financial adviser with the private client's department of KPMG, and has come across pension misselling many times: "Cases like this usually only emerge when you do a complete financial review. Clients are at first shocked to find out that their pension is invalid, but then they are thrilled that they are going to get a big refund," she says. But the windfall, is in fact, a very poor one since it does not represent any investment growth or interest. A serious repercussion of this kind of misselling she says, has to do with attached life cover: "In another case, I really had to fight to get back the contributions paid on the Section 35 life assurance element of the contract - the insurance company at first said it was only obliged to refund the pension contributions. Yet had my client died while paying into that pension, his dependents would have received nothing since the contract was illegal. I got him the refund." Our experts suggest that proper training of direct sales staff in particular is necessary to avoid these pension sales blunders. " The LIA Foundation Course test, which all life assurance sales people must pass in order to sell to the public is simply not of a sufficiently high standard to ensure that someone is giving proper pension advice," says Eddie Hobbs, an independent financial adviser and financial services spokesman for the Consumer Association of Ireland. "Pension legislation and tax issues are extremely complicated and if you are not properly versed, these are the sort of problems that are going to emerge."

Anyone who suspects they may be contributing to two different types of pension plans should immediately seek an independent review of their contracts. Aside from seeking a better compensation deal from the insurer and putting your money to better use elsewhere, the adviser, where appropriate, can also immediately arrange to replace any life assurance or other benefit provisions for your spouse or other dependents.