Example 1 - Pension comparison

IAS was approached by Mr X seeking an independent assessment of advice he had received four years previously from a well-known firm of advisors.

Essentially, the advice sought by Mr X originally was on whether or not to join the Group Personal Pension scheme offered by his employer or whether to effect separate pension policies outside the in-house arrangement. The original advice proffered in a report was that effecting personal pension policies independently would not financially disadvantage him and Mr X duly effected policies with two well-known pension providers. Four years down the line, IAS was asked to comment on whether this had been the right thing to do.

Our conclusions

On investigating, it transpired that Mr X's employer operated a flexible benefit remuneration policy, a proper understanding of which would have been crucial to the pension advisory process. In essence, although there was no explicit level of employer pension contribution on offer, personal pension contributions under the in-house scheme were paid via salary sacrifice (and treated therefore as employer contributions) and the attendant employer-related national insurance savings were passed on to the employee in the form of additional salary, increasing the effective tax relief obtained on the pension contribution for a higher rate taxpayer from 40% to nearer 47%.

Furthermore, equally importantly, the investment terms applying to the in-house scheme were demonstrably lower than the charges applying to the fully expensed external personal pension policies which Mr X had been recommended. Essentially, under the in-house scheme, Mr X benefited from access to "nil commission" investment terms, further enhanced on account of the large size of the group. The employer carried all advisory and administration costs associated with the group scheme. By contrast, the policies taken out independently carried heavy commission loadings, reflected in significantly higher policy charges.

IAS ran a spreadsheet comparing what Mr X's pension fund would have been worth, had he paid equivalent contributions into the in-house scheme against what it was actually worth, as measured by the aggregate transfer values of the policies he had been recommended. To this IAS added the effect of the lost national insurance saving which would have accrued over the four years and advised him that in total, he could reasonably be said to have suffered a loss in the region of £18,000 over the four years concerned. IAS concluded that the advice he received had not taken account of the details of the in-house remuneration package, nor had it involved an objective comparison of pension policy charges.

On Mr X's behalf, IAS wrote a letter of complaint to the original advisor, setting out the loss position and requesting compensation. The contention that the client had suffered loss was flatly refuted at the outset. After 18 months of negotiating with lawyers and actuaries acting for the original firm of advisors, and with the FSA Ombudsman poised in the wings to adjudicate, lawyers acting for the original advisors agreed to settle the claim for £22,000, including our costs. The client was naturally delighted with the outcome.

At the outset, the client found it difficult to believe that his decision to follow the advice he had received could have resulted in such a large financial loss in such a short space of time. If nothing else, this case demonstrated the importance of obtaining objective input at the outset (and paying a fee for it, if necessary). In this particular case, redress was ultimately obtained. In our experience, however, especially where relatively complex issues are involved, the cost of obtaining redress in terms of both the stamina levels required and the professional fees involved (in presenting the case effectively), will deter all bar the most tenacious from ever pursuing a remedy.

Objectivity is our watchword - it could save you a lot of grief!