THIS TRANSCRIPT IS ISSUED ON THE UNDERSTANDING THAT IT IS TAKEN FROM A LIVE PROGRAMME AS IT WAS BROADCAST. THE NATURE OF LIVE BROADCASTING MEANS THAT NEITHER THE BBC NOR THE PARTICIPANTS IN THE PROGRAMME CAN GUARANTEE THE ACCURACY OF THE INFORMATION PRINTED HERE. Tape Transcript by JANE TEMPLE MONEY BOX Presenter: Paul Lewis TRANSMISSION 14 FEB 2004 1200-1230 BBC RADIO 4 ________________________________________________________ ANNOUNCER: Now it’s four minutes past twelve and time for MONEY BOX with Paul Lewis: LEWIS: Hello. In today’s programme the pension bill – will it give us security, simplicity and choice in retirement or will it mean more broken pension promises? No change in the State pension age but if we retire later we could get £30,000. The financial watchdog takes a bite out of a financial advisor for WOMAN: Failure to assess attitude to risk, failure to consider annuity risks, failure to assess customers’ need for income in retirement, failure to prioritise LEWIS: We look at loans to develop your career and the ISA wars begin as companies compete for our cash. But first will the government’s new pensions bill be another pension promise that ends in disappointment? The bill was published on Thursday promising simplicity, security and choice in saving for retirement. There’ll be a pensions protection fund when companies go bust and a new watchdog – the pensions regulator. But there’s been much disappointment already about what isn’t in the 235 page bill – missing details, no guarantees and nothing for tens of thousands of peoples whose employer has already gone bust leaving them will little or no pension. Andrew Smith is the Secretary of State for Work & Pensions. He couldn’t come on Money Box to answer our questions this week but here he is on Thursday launching the new Pension Protection Fund: SMITH: It’s a form of insurance really which will ensure the ten million or more members of occupational pension schemes will be able to know that they’ll get their pension when they retire even if their company goes bust so it’s a big step forward in strengthening pension protection in this country. LEWIS: All pension schemes will pay into the new fund at a cost of more than 300 million pounds in the first year and even more in the future but there are concerns that the fund could still be overwhelmed if even one large employer goes bust in its early days. Ros Altmann is an independent pensions consultant. She explained her concern that the fund may not be bale to bail out companies waiting in the wings: ALTMANN: There are lots of companies waiting to dump their pension fund on the PPF as soon as it starts. Actuaries are telling us that a lot of companies are lumbering on letting their subsidiary keep going knowing that it is not going to last and that it really can’t afford to pay all the pensions but it doesn’t want to let its members suffer in the way that others have suffered. And so they’re going to keep going for another year and then let it go. If that is going to happen at the beginning then it’s hard to see that this insurance scheme will remain solvent and I really would have preferred to see the government putting in a sum of money to underpin it. LEWIS: At its best the new fund will protect people in the future but it does nothing for the tens of thousands of people who’ve already lost their pensions after their company went bust leaving too little money in the pension fund. Andrew Smith says it’s wrong to expect the new protection fund to help them: SMITH: Like any insurance policy you can’t really make it retrospective to cover people before it came in but look I’ve met members of these other schemes and where workers have lost out because their firms went bust – we’re examining very carefully their case – there is actually legal action against the government on this as well so I’ve got to be careful not to raise false hope. LEWIS: But Ros Altmann believes helping these past cases is part of restoring confidence in the pension system for the future: ALTMANN: I can’t believe that these people will not end up getting compensation. Whether the government agrees to do it or ultimately the government loses in court and is forced to do it, I can’t believe they won’t be compensated because after the 95 Pensions Act members of schemes were told you’re going to be safe in future because we’ve put in a minimum funding standard, you’re going to have a regulator to look after you, you’re going to have member nominated trustees. We were told all the same things in this Pensions Bill but those measures have left people without a pension and if the government refuses to make good on those pension promise then it’s hard to really say that if these measures don’t work we won’t have the same thing again. LEWIS: Ros Altmann. Well listening to that in Cambridge is Christine Farnish the chief executive of the National Association of Pension Funds. Christine, first, what about that extraordinary claim by Ross Altman that lots of companies are waiting in the wings to dump their pension problems on the new Pension Protection Fund? FARNISH: Well I am a little bit surprised to hear that. Certainly it’s the first I’ve heard about it and if that is the case I’d very much like to see some hard evidence. LEWIS: So you don’t know any companies or subsidiaries who are struggling, waiting to do that? FARNISH: We certainly haven’t had that bought to our attention no, but clearly any introduction of a scheme like this is going to distort behaviour and there’s a lot of debate about the moral hazard that a compensation scheme like this is going to causes. LEWIS: And what about the adequacy of the fund – if one big scheme went bust in the first two years it would be too much for the fund wouldn’t it? FARNISH: Yes it would, not just in the first years – if a big scheme went bust at any point in the future it would probably mean that it could bring a lot of other companies down. And it’s inevitable I think that the government would at some point have to step in. LEWIS: Well of course the government has made it pretty clear it won’t do that or at least it won’t say in advance it will do that. Is that a disappointment to you? FARNISH: Well there are other compensation schemes in financial services where everybody knows if a huge firm went bust the government would probably have to step in otherwise the whole sector like banking or insurance would be very very severely damaged so I think it’s likely to happen even though it’s not written into the legislation. LEWIS: So you’re reasonably happy with this Pension Protection Fund and of course the extra cost it’s going to impose on your members? FARNISH: I wouldn’t say that – I wouldn’t say that by any manner of means. I’m extremely unhappy about the lack of detail in the bill. There’s nothing on which anyone who’s looking at this proposal can judge how much it’s going to cost and how much individual firms with defined benefit schemes are going to have to pay and I think that uncertainty for firms is going to drive more and more people out of wanting to keep defined benefit pensions which is very very sad. LEWIS: Yes I mean there certainly has been criticism of the bill as I said – that in its 235 pages a lot of the key things people were desperately looking for weren’t there. Is that one of the main ones to you – that you don’t know the detail of what it’s going to cost your members? FARNISH: Absolutely and I think if I was a Parliamentarian I would be very very cross indeed that I was going to be asked to vote on something where I wasn’t being told what the implications and the cost was. LEWIS: Yeah because I suppose we’ll get those details at some point. Now you mentioned companies pulling out of these final salary defined benefit schemes – the Confederation of British Industry has told us it expects to see many companies pulling out of them. Is that already happening? Do you see the evidence for that? FARNISH: There’s lots of evidence yes – over the last two or three years there has been a flood really, a growing huge number of firms who’ve closed their final salary schemes to new members. The vast majority of these schemes have closed. The next thing that could happen of course is that they could close for existing members because companies are now faced with huge costs keeping these things going and they’ve got all the uncertainty of the new Pension Protection Fund arrangements and many of them will probably find this a bridge too far. LEWIS: So in a strange perverse way this could all make these pension funds less secure? FARNISH: It could. I mean there will certainly be improved security for the nine million people who are currently members of defined benefit occupational schemes but don’t let’s forget there are 36 million workers – people of adult age in this country – and there’s not much security for them. LEWIS: Thanks very much Christine Farnish – the National Association of Pension Funds. And if you have views about company pensions you can have your say on our website – that’s www.bbc.co.uk/moneybox. Now all these fears about pensions might lead you to conclude you’ll just have to work longer. And buried away in the pensions bill is a promise that if you do your State pension at least will be higher and you can take the extra as a lump sum that could be up to £30,000. The bill sets out the detail of these offers for the first time and they are more generous than we expected. With me is Mervyn Kohler, head of public affairs at Help the Aged. Mervyn how will this new scheme work? KOHLER: Yes Paul – the £30,000 is a bit of a best case scenario. LEWIS: There’s a surprise – that came from the DWP. KOHLER: It does assume that you’re working for five years beyond retirement. The normal for people who do choose to defer is to work for about two years. But you do get a reasonable deal out of that – I mean if you were heading for a normal pension of £77 odd then the enhancement for doing two years extra work would be either £16 and a few pennies if you took it in a weekly form or £8,500 if you took as a lump sum. LEWIS: And that lump sum will that include some interest accruing to it? KOHLER: Yes the arithmetic which calculates the lump sum takes what pension you are not claiming and adds it up at 6% so that’s a pretty good rate of return these days. LEWIS: Yes that’s their illustrative rate isn’t it – we’ll have to wait and see exactly what they give us in a few months time I think but if they gave us less than that it’d be a bit of a surprise. Now lump sums can be a problem can’t they? They can affect your other benefits, your pension credit – and they can be taxed. How are they dealing with that? KOHLER: Yes – this is where the complications come in because both the enhancement or the lump sum would find themselves liable to tax if you were in the tax bracket. And if you were entitled to pension credit that would probably be affected as well – if you took the enhanced pension it would affectively reduce the amount of pension credit you get. If on the other hand you took the lump sum it wouldn’t affect your pension credit. So, the people who stand most to benefit from this are those with pretty small pension prospects who hope to top up with pension credit, who can work a bit longer and get a lump sum. LEWIS: Yes and as I understand it it could be tax free as well if their income was below the tax threshold when they claim it which is also quite a good deal isn’t it? KOHLER: It would be a good deal if they were in that situation certainly. LEWIS: So when does all this start? KOHLER: It’s going to come in to affect assuming the bill goes through parliament but April of 2005. LEWIS: So – and that’s earlier than we expected cos they were talking of 2006? KOHLER: Yeah – it had originally been posted at 2006 yes LEWIS: So all in all you welcome this proposal? KOHLER: Well I think it helps a little bit – in a bill which is fairly short on incentives for anyone in the pensions world as we’ve been hearing earlier on – here at least is a genuine incentive for people to actually think about working longer. LEWIS: Mervyn Kohler from Help the Aged thanks very much and our phone-in MONEY BOX LIVE is all about pensions – State pensions, company pensions, private pensions – that’s Money Box Live – Monday afternoon here on Radio 4. The Financial watchdog has fined a company that used cartoon style adverts on Sky TV to encourage people in their 50s to take money early from their pension fund and use it to buy holidays and luxury goods without warning them about the dangers. Money Box reported on these so called ‘pension unlocking schemes’ two months ago. The Financial Services Authority told this programme then it would fine or close down firms that were mis-selling these products. This week it acted fining Rochester based IFA Berkely Jacobs £175,000. It ordered a full review of 5000 sales from December 2000 to March 2003 and the company has set aside a million pounds for compensation. In a damning indictment the regulator accused Berkely Jacobs of “misleading and unbalanced advertising” and “a fundamentally flawed approach” to dealing with its customers. It identified nine separate failures in the company’s work: STATEMENT: Failure to assess attitude to risk, failure to consider annuity rates, failure to assess customer’s need for income in retirement, failure to prioritise competing objectives, failure to assess the affect on benefits, failure to issue financial promotions that are fair, clear and not misleading, failure to gather sufficient information about customers, failure to make suitable recommendations LEWIS: Well they went on and David Kenmir is director of the investment firms division at the FSA. I asked him whether the fine and the compensation were adequate? KENMIR: There’s not a great deal of point in us fining a firm so much money to it goes bust when our prime objective is actually protection of consumers and getting them redress where that’s appropriate. LEWIS: But the compensation figure of a million pounds among the 5000 people who may have been mis-sold is very little isn’t it? You told us before Christmas people could have lost thousands of pounds each? KENMIR: Yes in some cases they may have done. Of course in other cases the loss actually might be quite small. It will depend on the individual circumstances of each case. It’s also important to remember that if the compensation package exceeds a million pounds we will want to discuss the position with Berkely Jacobs parents – we’ll be asking them to put more money into the business to cover the package – we should of course say though that the parent company is actually quoted and therefore has duty to its shareholders. LEWIS: You’re saying that because the parent company is a separate company although it owns Berkely Jacobs now – it doesn’t actually have to cough up if the compensation exceeds a million pounds in total? KENMIR: That is true, yes. We must give the consumers the opportunity to actually seek redress if they feel they’ve been unfairly disadvantaged. LEWIS: But of course they may not know that yet may they – they may have had their lump sum and not realised what a devastating affect it’s had on their pension? KENMIR: Yes, but that is something that we’re making clear though the publicity around the case to actually explain to people that if they do get these letters they should take them very seriously and they should consider the longer term consequences of the transaction they’ve entered into. LEWIS: David Kenmir, and if you’re one of the thousands of customers of Berkely Jacobs then please don’t ignore that letter and if you don’t get one write to the company and ask for a review. No-one at Berkely Jacobs would be interviewed on Money Box but Paul Gardener-Bougard a director of IFG Group who’s now running Berkely Jacobs told us the company had removed the management team, had reviewed its procedures and implemented changes. Well Vincent Cable, the Liberal Democrat Treasury spokesman has welcomed the action against Berkely Jacobs but he’s worried there are lot of misleading adverts for financial products and the regulator should be taking tough action against more of them: CABLE: What strikes me is that there is often quite tough regulation of the advertisements governing investment products. If you want to invest your money there are clear warnings but if you borrow or if you draw cash against your assets the advertisements can be very lose and offer very little protection for customers. LEWIS: So would you like the Financial Services Authority to clamp down on adverts like that? CABLE: Yes it is very much the role of the FSA as the consumer watchdog to really get very tough on all these things. The adverts are clearly aimed at people who are often vulnerable and are not necessarily very sophisticated in their understanding of money and a lot of people particularly with rising personal debt are short of cash and they see this as an easy way to get cash and what they tend to overlook is the fact the companies are probably pocketing most of it. LEWIS: Vincent Cable. And the FSA has now told Money Box it is forming a new unit of up to 30 people, some from the advertising industry, to monitor adverts on television, on radio and on the press. More on that story on our website – www.bbc.co.uk/moneybox. We’ve heard a lot recently about student debt with the increases in tuition fees and changes in the way student loans are repaid. But debt doesn’t end with your degree. Postgraduates who want to train for a job and people who want to retrain later in life can’t get student loans or local authority help but three banks do offer what are called ‘career development loans’ They’re subsidised by the government but picking the best and even getting one at all can be tricky. Penny Haslam’s been finding out more: HASLAM: Career development loans were introduced in l988. Since then they’ve helped more than 200,000 people pay for courses and training. They’re operated by the Department for Education and Skills through three high street banks. You don’t have to be a graduate to take one out but you must enrol on a vocational course. You can borrow anything from £300 to £8,000. JAMES: I’m currently studying to become a Microsoft certified systems engineer. I took out a large loan of £8,000 to undertake the course. It works out at about £40 per week which is say £160 a month for five years. HASLAM: 21 year old James Buttle is studying in Bristol and took out the loan because he wanted to advance his career in computing but he didn’t have any savings. JAMES: Most people wouldn’t be able to pay for the course outright - £3000 plus exam fees is an awful lot of money to spend on a course so most people will find themselves having to take out a career development loan. HASLAM: What makes CDLs different to normal personal loans is that you can defer the repayments. You don’t pay anything while you’re studying because the government covers the interest payments during this period. You start to repay the debt a month after you’ve finished your course. The banks offering career development loans are Barclays, Royal Bank of Scotland and the Co-op. Although the loans are very similar the rates the banks advertise are very different. Barclays says 7.6%, RBS says 10% and the Co-op says 14%. Andy Hamiton explains why the Co-op rate is so much higher than the others: HAMILTON: Our interest is based over the period that you repay your loan so if you take a course for one year and you repay over 2 years our advertised rate is based on the two years that you’re repaying the loan only whereas our competitors calculate their advertised rate over the moment that your course begins. HASLAM: So on the face of it the Co-op’s rate looks much higher but if you work out the Barclays rate in the same way you’d get a figure closer to 13%. If you borrowed £3,600 which is the average amount of a career development loan the amount you’d pay back to both Barclays and the Co-op would roughly be the same at around £170 a month. All very puzzling. So what does Barclays suggest consumers do in light of this confusion? STATEMENT: Barclays would advise consumers comparing the different career development loans available to look further than just the quoted interest rates and APRs and to compare the total amount payable on the loan amounts over the full term. This will provide them with a simple and fair way of comparing the different CDLs on the market. HASLAM: But it’s not just a question of shopping around to get the cheapest deal: Keith Houghton at the National Association of Student Money Advisors says there are a number of barriers to getting the money in the first place: HOUGHTON: We see a few problems with these - I mean they are mainly students being turned down because either they’ve got no credit history, students being turned because they’ve got a bad credit history or students being turned down because perhaps they’re doing a course that’s not – doesn’t meet the vocational requirements of the CDL scheme. HASLAM: And given the government’s plans to increase tuition fees to up to £3000 a year he thinks it’s going to be even harder for students to carry on learning in the future: HOUGHTON: Those that start from 2006 onwards are going to graduate with potential debts of in the region of £20/30,000 and my personal view is that we’ll see a lot lower recruitment rate to post grad courses that are funded by CDLs. HASLAM: But in the meantime, the key thing to remember is that career development loans are not like under graduate student loans where you don’t have to start paying the money back until you earn a certain amount. Unless you’re unemployed the banks want you to begin repaying the debt straightaway whether or not you’ve got the well paid job you hope the training would lead to. JAMES: When I first looked into taking requalification I did a search on the Internet for jobs that were available and there were 80 or so every day. However, very recently I’ve discovered that there really aren’t very many jobs with that qualification. Obviously I’m obliged to pay the money back with no excuses – it’s not a standard student loan where you only have to start paying it back when you’re on so much money – you will pay this back when you say you will. LEWI.S: Student James Buttle ending that report by Penny Haslam. A battle has broken out to attract our savings into cash ISAs. Each tax year every adult can put up to £3000 into a tax free individual savings account. Since ISAs began in l999 the cash option has proved the most popular with more than 70 billion pounds saved up. Banks, building societies and even supermarkets have tried to get in the top position on the best buy tables. Last year Safeway was among the most successful – now Marks & Spencer is entering the frame. On Monday it launches a cash ISA offering one of the best deals – 4.5% interest with a guarantee to keep that rate half a percent above the Bank of England rate at least until next year. Alistair Milne is marketing director at Marks & Spencer Financial Services. I asked him why the guarantee ran out in April 2005? MILNE: The regulations for ISAs are going to changing next year and so we’re going to wait to see exactly how that shapes up but we will be reviewing our guarantee before the end of the next tax year. Our intention absolutely is that we continue to be competitive in this market. LEWIS: So does that mean what? – within the top two or three? MILNE: We’d certainly hope to be in the – in the top players. LEWIS: The top players – come on what does that mean, be more specific? MILNE: Well it varies from time to time but I would certainly expect us to be in the top half a dozen or so. LEWIS: Sol it’s not a plan to tempt people in and then let the rate drift down? MILNE: That’s not something that Marks & Spencer would condone. LEWIS: Oh well we’ll see. You can put £3000 into a cash ISA now and another £3000 from April 6th. Most cash ISAs allow transfers so if you already have one you can move it to an ISA paying a higher rate of interest. Marks & Spencer lets you do that so by April you could have more than £18,000 earning 4.5% tax free. You must transfer it directly without cashing it in and there can be delays: MILNE: What happens is once we’ve received the forms we then pick up all of the administration to ensure the transfer happens as smoothly as possible but it can take up to 30 days. LEWIS: Why does it take so long because if you’re transferring to get the best rate you could actually lose more than you gain if the money’s in limbo for 30 days? MILNE: Unfortunately most of this rests with the company that’s transferring the money across to us so we entirely reliant on their own processes being able to keep the customer as advantages as possible. LEWIS: Alistair Milne, but there is lots of competition out there. Money Box’s Louise Greenwood’s with me. Louise, is Marks & Spencers cash ISA the very best? GREENWOOD: Well not quite Paul – the highest rate of interest on a cash ISA from next Friday will be with Intelligent Finance. It’s announced this week it’s putting its rate up to 4.6% from the 20th February. That’s a fraction above Marks & Spencer’s 4.5% but its guarantee is only to pay 0.3% above base rate and only until next February. You can get it by the phone or Internet. It’s denied that it was raising its rates next week in response to Marks & Spencer’s bid to become the best buy leader even though it might look that way. LEWIS: And Louise, some of the details of the Penrose report into the collapse of Equitable Life have been given to the board of the company? GREENWOOD: Yes the financial secretary to the Treasury Ruth Kelly said in a written statement this week that senior management at Equitable had been given what’s described as limited access to Lord Penrose’s report. That means that his findings into the near collapse of the life insurer have now been made available to the DTI, the FSA, the Serious Fraud Office as well as company management. Meanwhile long suffering policy holders will have to wait until at least after the Parliamentary recess a week on Monday for the Penrose report to finally be made public. LEWIS: Thanks Louise. That’s all we have time for today. You can follow up all today’s items on our website; bbc.co.uk/moneybox where there are stories and further information as well as details of how to contact the programme. Don’t forget to have your say on pensions. All that information with the BBC Action Line 0800 044 044. Don’t forget our phone-in MONEY BOX LIVE on Monday afternoon looking at pensions, Working Lunch has personal finance stories each weekday. I’m back here next weekend with MONEY BOX as usual. Today the reporter was Penny Haslam, the producer was Louise Greenwood and I’m Paul Lewis.