Page last updated at 16:34 GMT, Tuesday, 27 October 2009

Pension choice 'poorly explained'

Middle aged couple
An increasing number of people are in defined contribution schemes

Some pension schemes are failing to give enough information to their members when they are about to retire, the Pensions Regulator has said.

Some defined contribution (DC) schemes were not briefing members properly on how to use the cash from their schemes to buy a pension, a survey found.

A survey of literature from 97 DC schemes found that 30% were in breach of pension regulations.

A small minority of schemes, 6%, needed "substantial changes" to their advice.

"The review shows us that there is a lot of good practice in the industry now, and that this is found across a range of scheme types and sizes," said the regulator.

"However, the results also give us some cause for concern as members are not always presented with helpful and timely information as they approach retirement."

Under defined contribution schemes, staff pay money into a pension fund during their working life, which is topped up by their employer. When they retire they use this fund to buy a financial product - known as an annuity - which provides them with an income in retirement.

Need for improvement

The regulator's review focused on the information given to scheme members in the run-up to their retirement.

It examined the advice given about shopping around for a pension with the cash from their pension funds - known as the open market option.

And it looked at whether or not scheme trustees and administrators used plain English.

The regulator found that:

• 57% of the schemes it examined had "some scope for improvement" in the standard of information they gave

• 30% were breaking the law, mainly by not giving out information to their members on their options at least six months before retirement

• 6% had serious problems with their literature or retirement processes

• 2% did not offer the open market option at all.

"This exposes the members of those schemes to the risk of making uninformed decisions about their retirement income," the regulator warned.

"This could lead to the member receiving a lower level of income than if they had been equipped with clear, straight forward and relevant information."

Growing numbers

The regulator is increasingly concerned about the standards of administration of the existing 4,500 DC schemes because the number of people who are members of them is growing rapidly.

They already have 2.5 million members and it is thought that 10 million more people will be in DC schemes when the government's new system of "personal accounts" is introduced in 2012.

The key decision for someone retiring from a DC scheme is what to do with the cash that has been saved on their behalf.

If they want to buy an immediate annual pension the law says they should be given the option of shopping around, both for the type of pension they want and the provider they prefer.

They should not merely be invited to accept a quote from whichever insurance company is running the DC scheme for their employer.

Just over 450,000 annual pensions were set up in 2008, according to the Association of British Insurers (ABI), but the size of pension on offer from insurers can vary by as much as 35% between the best and worst quotes for an identical sum of money.

However, the regulator's survey found that only 23% of retiring members exercised their right to shop around.

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