Page last updated at 12:38 GMT, Wednesday, 9 May 2007 13:38 UK

Pension opt-outs 'not mis-sold'

Two pensioners
8 million people have opted out of the S2P at one time or another

There is no evidence of widespread mis-selling of policies used to opt out of the State Second Pension (S2P), says the Financial Services Authority (FSA).

Since early 2005, the regulator has been investigating the sale of these polices, known as Appropriate Personal Pensions (APPs).

That year it concluded that many of the "contracted-out" savers had made the wrong decision to buy an APP.

But the FSA says most of the sales met the regulatory standards of the time.

Contracting out

The opportunity for people to leave the S2P, and its predecessor Serps, was a flagship policy of the Conservative government in the late 1980s and early 1990s, which wanted to encourage private pension saving.

In exchange for opting out of the S2P, the government pays part of a person's National Insurance (NI) contributions into an APP, which is then invested to build up a lump sum for retirement.

Of the eight million APPs sold since they were first made available in 1988, about 120,000 (1.5%) were bought by people who, in theory, should have been too old to benefit.

However, the FSA has concluded that even though some of them may have been wrongly advised to opt out of the S2P, they may still have had valid reasons for doing so.

Valid reasons

"Some consumers may have wanted the option to leave their pension savings to their dependants if they died before retirement," said the FSA.

The FSA is right to look at this issue firm by firm through the normal and effective supervisory process
Stephen Haddrill, ABI

"Or they may have preferred control over their investments rather than relying on government pension policy."

The FSA's conclusion was welcomed by the Association of British Insurers (ABI).

"Individual companies themselves set 'pivotal ages' as a guide for customers and advisers on whether people would benefit from contracting out," said Stephen Haddrill, the ABI's director general.

"There was no regulatory requirement for them to do so.

"The FSA is right to look at this issue firm by firm through the normal and effective supervisory process," he added.

Mistaken policy

The entire policy of encouraging people to leave the S2P is now widely regarded as a mistake.

In August 2005 the FSA itself warned that "contracted-out" savers were likely to receive 4 a week less in pension than someone who had never opted out.

Later that year, the country's biggest insurance company, the Prudential, wrote to 440,000 customers with APPs, advising them to opt back into the S2P.

It warned that their NI rebates were no longer big enough to compensate for the investment risk they were taking on by holding a private pension.


The latest advice to the FSA from its own outside consultants is that since 2005, the relative position of APPs has improved.

But those older savers who contracted out are still looking at a potential shortfall of 7 a week.

It is thought there are still about three million people paying into these policies.

The FSA will be publishing a guide later in May for those who still feel they may have been mis-sold an APP.

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