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Hargreaves warns of '1980s'-style pension scandal

Wealth manager Hargreaves Lansdown alarmed history could repeat itself as more people switch from valuable final salary pensions.

Hargreaves warns of '1980s'-style pension scandal

Wealth manager Hargreaves Lansdown has warned transfers from final salary pension schemes threatens to be a 'mass mis-selling scandal' to rival that of the 1980s. 

Its claim comes amid evidence of a jump in the number of people using the 2014 pension freedom rules to transfer their stakes in 'defined benefit' (DB) schemes provided by employers to self-invested personal pensions (Sipps).

Rising transfer values are thought to have encouraged more people to consolidate their pensions with Sipps even though they may be giving up valuable retirement benefits to do so.

According to technology provider Selectapension, there were 48,278 transfer analysis requests by independent financial advisers in the 12 months to 31 March – almost double the previous year when 24,501 were recorded.

It is not known how many of these analyses led to transfers, although data from Willis Towers Watson has shown over half (55%) of defined benefit scheme members who spoke to an IFA about transfers, proceeded with the switch last year. This was from a survey of 170,000 members in 350 schemes.

In January the (FCA) issued an alert which said it was ‘concerned’ over transfer practices it had seen.

Hargreaves Lansdown has now echoed these concerns and warned of the potential risks involved with transfers from defined benefit schemes.

Tom McPhail, head of policy at Hargreaves Lansdown, told Citywire: ‘We are increasingly concerned of the risks both to investors and to the financial services industry. In this post pension freedom world, and with pension transfer values at record levels, it is very easy to be seduced by the lure of short-term cash.’

Referring to the mis-selling scandal in the mid-1990s where people were advised to leave their employer’s pension scheme, McPhail said there was a risk history could be repeated.

‘There is nothing today to suggest the world is fundamentally different from 25 years ago, when the industry perpetrated a mass mis-selling scandal on unsuspecting final salary scheme members,’ he said.

‘There is a risk we could see the same thing happening, with investors losing money, followed by extensive regulatory intervention and a very substantial cost to the industry, both financial and reputational. Let’s make sure that doesn’t happen again.’

Several large financial advice and pension providers have indicated their interest in increasing the amount of DB transfer work they undertake. St James's Place has said it is re-thinking its approach to DB transfers. This followed Prudential gaining approval for transfers in February. Adviser group True Potential has been marketing its own transfer service for the clients of IFAs.

Current government rules require people to seek advice before transferring from a DB scheme if their pension is worth £30,000 or more.

The 1980s mis-selling scandal followed the de-regulation of the pension market by then Conservative chancellor Nigel Lawson when members of DB schemes, including teachers and nurses, were wrongly persuaded to switch to more expensive and less valuable personal pensions by firms, including Prudential. Critics have drawn parallels with the more recent pension freedom reforms of his successor George Osborne, who removed restrictions on what people could do with the cash in their pension pots.

35 comments so far. Why not have your say?

archie scott

Apr 11, 2017 at 13:54

Last year I requested a small pension transfer < £20k across to my Tilneybestinvest SIPP from a defined contribution scheme managed by WillistowersWatson. Incredibly 18 days were wasted by WillisTowers Watson because despite having transferred numerous previous pensions over to Tilneybestinvest ( including a previous one from myself 4 years previously) - they were not prepared to sanction my transfer until they had written to HMRC and received written confirmation back from them that Tilneybestinvest were not potential fraudsters / scammers but had a legitimate HMRC certificate as bona fide financial advisers approved by HMRC.

Absolutely ridiculous.

If you didn't know better you'd said that the likes of WillisTowers Watson were being deliberately obstructive doing everything to actively discourage pension transfers - even where they were perfectly legitimate requests.

Far from protecting customer interests they seem more interested in protecting their own fees - which of course disappear once a pension is transferred.

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Apr 11, 2017 at 14:34

There is always one big snag with all these pension, and other, schemes that involve risk. If the customer does well, he takes the proceeds and keeps quiet. If things go badly, he claims he was mis-sold the scheme and wants compensation. This has applied to the earlier pension mis-selling, ppi and tax avoidance schemes,

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Apr 11, 2017 at 14:40

aside from the DC transfer delay detailed by Archie, here is my experience of trying to get the present value of a defined benefit scheme from a company scheme.

db pension 20,000 pounds a year. my expectation of the present value based on a mid-market annuity rate of 5% =

20,000 pounds times 100 divided by 5 (that is the inverse of the annuity rate)

= 400,000 pounds

offer from the company pension scheme = 250,000 - wich working back, is an annuity rate of 20,000 divided by 250,000 or 8%.

in other words, the company DB scheme has an annuity rate bid/offer spread of 5% to 8%.

the effective vale retained by the company at my expense for that 3% bid/offer is 150,000 pounds or to out it another way, if i consolidated the company's DB pension into a private annuity I would cut my pension from 20,000 a year to 12,500 for a reduction of 37.5% in my pension.

this is the "scam" that serves to reduce the funding deficit in compnay pension schemes.

if you thought that company pension scheme trustees act in their members interest, think again.

a law that compels defined benefit schemes to compete directly with the annuity business (itself a perpetrator of scams, though not as egregious) is desprately needed.

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Rob Walker

Apr 11, 2017 at 14:47

We are bombarded with claims that our financial services industry represents prudence and wisdom and works in our best interests. In reality there are a lot of deceptive practices out there always looking for a mug to offload a pension into their coffers. Behind the facade of a regulatory body lies the FCA, checking the sales small-print and tightening-up controls on anti-money laundering while allowing the big sharks to operate their devious practices with complete impunity.

Until we get a truly independent regulatory body with teeth this will always continue. The current set-up, like the previous FSA is just an old-pals act. That is why we are still getting scandals exposed which happened back in 2012 and before. That is why we can have the waves of product mis-selling happening right under the noses of our regulators without it being stamped out as soon as it first appeared.

The evidence is all there.

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Apr 11, 2017 at 21:13

Right on the nail Rob Walker.

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Apr 11, 2017 at 21:25


DC pensions are usually effectively index linked and your £20,000 pa from an IL annuity paying 3% would be worth £667,000.

If you have been offered £250,000 the difference is not much more than the usual profit margins expected in the financial services industry.

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Apr 11, 2017 at 22:25


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Apr 12, 2017 at 14:09

Hooligan - are your at retirement age? Your numbers are meaningless without this information as you need factor in potential investment returns up to retirement (and the chance of dying etc...).

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Apr 12, 2017 at 14:30

thanks for your concern Mr Angry. I have been battling scheme actuaries for some time with exchanging views on discount factors to be applied to present values of monthly streams of inflation (RPI) adjusted monthly income streams, etc etc.

Neither the actuary nor myself dispute the maths behind "discounting the present value of monthly income streams" - it is the discount rate that is at issue.

I say, "why not use the rate of three leading providers" - the actuary says "we will use 8%". the difference in present value terms of an inflation adjusted monthly income stream commencing in a few years, between the two methods, is 37.5%, as is the value of the monthly inflation adjusted annuity.

My retirement date is irrelevant and life expectancy are not relevant variables.

As iwth any DB scheme, the investment returns are also irrelevant, since the DB scheme promises a pension (annuity) based on years service divided by 65, not investment returns.

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Mark Gregory

Apr 12, 2017 at 16:18

I had a similar problem with Willis Towers Watson when transferring my money purchase pension to an Interactive Investor SIPP. However when I pointed out that Interactive Investor were a well known and long established name within the financial services industry they acted quickjly.

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Chris Clark

Apr 15, 2017 at 09:12

One of the big difficulties of employed life and defined benefit schemes is that it is rare to have an employed life where you work for a small number of large employers offering DB schemes for your whole life. So the article is talking about a declining demographic here.

And the thing about a SIPP is if you succeed in managing it well, it can be arranged so there might be some of it to hand down in the future.

So far, so OK.

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Henry via mobile

Apr 15, 2017 at 10:07

My objection is to the requirement that the IFA can effectively determine your decision about leaving a DBS. Makes sense to require an individual to seek advice but without appealing directly to her schemes' trustees, my wife can not proceed with a transfer unless the IFA gives her the nod ... and will charge 1% of the notional transfer value for his trouble. This means gambling £5000 for a possible "No". Would we tolerate this level of intervention in our life decisions if we wanted to buy/sell a house? Agree about jobs for the boys, too. Requiring financial advice for sums over £30k is a licence to print money for the FS industry.

By the way, Hooligan, I think you're being shafted. My wife (55) has been given a transfer value of £511k on a pension of £12,500 pa!! Best of luck.

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Apr 15, 2017 at 10:21

I'd just be glad to have a £20,000 per annum index linked pension. It is a fantasy to suppose that you can manage a SIPP successfully - just as much as it is a fantasy to think you can select winning lottery numbers. Who knows what will happen to investments over the next 30 years? Or even the next year?

Do pension fund trustees have a duty to people who want to opt out? Or shouldn't they act in the best interests of the people who want to remain in the scheme?

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Apr 15, 2017 at 10:43


Do you mean an individual is not expert enough to manage a SIPP or even a Wealth manager could not do it either?

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Apr 15, 2017 at 10:43

hit the nail on the head, uncommercial.

it is a conflict of interest that can only be resolved by segregating the two liability types and appointing separate investment plans with separate trustee boards for each

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Apr 15, 2017 at 11:00

I mean that nobody actually knows much about investment. The future of companies is unknown. Fund managers do no better than chance. It's far too glib to suppose that you can do better with a SIPP by being smart.

I have a SIPP and it's not doing badly; it's true that there might be some left over for our children. But there are plenty of downsides. Costs are a big issue. They're usually stated as a percentage of the investment. But given that the safe level of withdrawal from a fund to last indefinitely is now considered less than 4%, a 0.5% per annum charge is a big cost. And you have to add up platform costs and investment costs (which can be hard to decipher).

The future of investment is highly uncertain. The last few years have been good. But the next ten years could see any or all of:

* A third of all jobs being lost to automation

* Nuclear war over Korea

* Severe disruption to agriculture through global warming

* Mass migrations caused by global warming

* Who knows what else?

Even after you've factored in all that, a serious consideration is one's own capacity. At 65 you may be competent to manage an investment portfolio. But there is evidence that ability to do so declines after age 70. You may even suffer dementia, and there is likely to be a sizeable period between onset and others taking control of your affairs. How can you plan for all that?

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Apr 15, 2017 at 11:01

Oh, and if you farm it out to an investment manager, costs will eat up much more of your fund and it may still do badly.

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Apr 15, 2017 at 11:37

you can run your own SIPP on the HL platform for a few hundred a year. easy plan = half a dozen shares that pay dividends that cover your bills - pick a utility, an oilcompany, a grocery company and a "sin" company that matces your leisure interest - then look for stable to rising dividend history (minimum 5 years) and a PE to earnings growth ratio of close to 1 as possible.

200 pounds to run your own portfolio works out at 0.2% per annum for a 100,000 portfolio (0.4% for 50,000 and 0.1% for 200,000). using the criteria i have given should net you a 4-5% dividend yield with capital at risk, but

assuming zero percet price appreciation and drawing 4-5% from your SIPP will leave the capital intact over the long term.

of course, health care costs have been encouraged to grow at 3 times the rate of inflation by successive governments interest in taxing profits on the price gouging and fast growing health care sector, from drug companies to hospice care, so you really ought to invest more of your 5-6 stock portfolio in this sector to cover rapidly rising costs.

as far as dementia is concerned, that is a risk as well. if you don't have a smart and trustworthy family member, or a cheapish and trusted solicitor, you need to plan for the worst (pay for a few future years of assisted lving!).

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Apr 15, 2017 at 11:41

If you are talking Armagedon are Legal & General going to carry on paying your annuity or the [depleted] pension fund going to carry on with your index linked final salary pension.

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Apr 15, 2017 at 11:48

DB pensions, especially the fully-indexed final-salary ones in the public sector, are simply unaffordable without massive increases in contributions.

People are living longer or being kept alive longer with advances in medical science.

Too many are already receiving more years of pension payouts than they have worked.

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Apr 15, 2017 at 11:52

Hooligan, you are being unduly complacent. Yes, my SIPP is with HL and I know the charges. Utilities are regulated and their future ability to pay dividends is at the whim of governments. Oil companies are likely to be significantly affected by the steadily decreasing cost of solar energy, if not by environmental regulation. Past performance, as you are constantly warned, is not a guide to the future.

The incapacity problem is far more severe than your dismissive remark suggests. If you are managing your own finances, there is a severe risk of making bad decisions before there is any opportunity for someone else to take over. There is then a risk that the person taking over is either dishonest or incompetent.

Hengist, I'd agree that there is a risk of default by annuity companies, and there is also a risk of the guarantee of 90% of the benefits being withdrawn. I'd also prefer to spread risk across annuity companies, at least to some extent, as well as retaining some direct investments.

But I still think the future holds substantial risks for retirement.

Malcolm, you may be right, although it is largely to do with demographics. If you're right, that is all the more reason for trustees of pension funds to resist making cash payouts. Although what may be more relevant is how the fruits of massive automation are shared through society, given that the number of available workers will be much less of a constraint.

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Apr 15, 2017 at 11:55

OTOH as a taxpayer and consumer, transferring longevity risk back to an individual should be encouraged,

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John Dickinson

Apr 15, 2017 at 12:05


I have just transferred my DBS pension and note your comments re charges. If you use HL and limit yourself to shares and investment trusts these are capped at £200 per annum plus dealing charges-not unreasonable. I would not consider funds as these are charged on a percentage. I chose AJ Bell for my platform as shares and investments trusts are capped at £100 per annum prior to drawdown and then £200 once funds are taken.

The most expensive option is to employ someone to make your investment choices for you. My own opinion is that if you are not comfortable making your own investment decision, then do not transfer out of your company scheme. The other key factor is of course the multiple you are offered to leave your pension scheme. Most schemes offer 1 free transfer request per year.

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Apr 15, 2017 at 12:38

Malcolm, I don't agree. The risks are too great for any individual to handle effectively. And the problem of incapacity is one that may or may not strike.

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Christopher Holmes

Apr 15, 2017 at 15:07

I am a professional engineer, but in my financial naivety I was persuaded to transfer part of my final salary pension to an investment company (HBS) which lost much of it in highly risky investments before going bankrupt. There must be many more hard-working savers suffering from what they thought was wise advice from investment companies in whom they placed their trust. My case is with the FSCS.

I now have more time and have learned about volatility, Sharpe ratios, and diversification, and am managing my investments without trusting experts.The results are encouraging, and I would urge others to do the same.

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Apr 15, 2017 at 16:02

bravo mr holmes.

everyone learns the expensive way, perhaps mitigated to some extent by education, training and research, but there is no substitute for experiencing investment first hand.

investment managers of pooled funds have no particular expertise in managing money to suit your circumstances, only their own (for fat fees). i have yet to see a large fund manager that can deliver an (adjusted) Sharpe ratio AFTER fees, expenses and costs OVER ROLLING THREE YEAR PERIODS AND OVER THE LONGER TERM (10-20 years) against any index or benchmark of a fixed weight portfolio.

could i ask how much of your capital was paid for conversion from DB to the investment scheme (SIPP) ?

that is, what capitalization rate was used to crystallize the present value of the monthly/quarterly/annual pension payments you were owed in the pension scheme.

here is why i am curious.

taking a simple example, discounting pension payments of 10,000 per annum for the next ten years (ignoring inflation adustments) results in a present value of 77,217 pounds to be transferred to you if a discount rate of 5% is used to calculate present value, but only 67,101 pounds if an 8% cap rate is used - making a difference in (present) value to you of over ten thousand pounds or one entire years pension.

each 1% difference in the discount factor applied to your future pension stream is worth around 3,600 pounds in this example of ten single payments of 10,000 each.

this is where I see the "scandal" for people transferring from DB to a SIPP or similar pension pot. the higher the discount rate applied, the lower the value you get.

the annuity market pays arund 4-5% but i suspect the discount factor to crystallize the pension is of the order of 6-8%.

this is the equivalent of transferring the title deeds of your house from one solicitor to another and paying both solicitors 5% each for the privilege.


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Christopher Holmes

Apr 15, 2017 at 16:40

Hello Mr. Hooligan,

I was persuaded to transfer the maximum tax-free amount. Sorry I don't know the capitalisation rate used, although given time I could dig out the records, but I'd rather look forward now. I hope the FCA takes the strongest line possible on any company offering 'advice' to pull funds out of a good scheme such as my company provided.

And I am keeping my fingers crossed about the FSCS outcome.

Best wishes,


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Apr 15, 2017 at 16:46

ok, good luck to you. i have a feeling you will do well :>)

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Christopher Holmes

Apr 15, 2017 at 18:24

I will take hope from your feeling, as you sound like someone with knowledge of these matters. Thank you.

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Apr 15, 2017 at 18:40

Just picked up on archie scott's original post on the subject of the performance of Willis Towers Watson (WTW).

I have a SIPP with HL and pension fund from my employment with Lloyds TSB (now LBG) which is administered by WTW. Unfortunately LTSB had abandoned their DB scheme just before I joined so the pension fund is mainly DC however there is a miniscule minimum guaranteed pension of £46/annum.

I am disappointed by the performance of the LBG scheme and they were only prepared to offer me a pathetic pension or annuity. I wanted to use draw down so my best option is to move the fund to my HL SIPP. I instigated the transfer on 25th November 2016 and I am still, nearly five months later, waiting for the funds to be transferred. This delay is entirely due to the inefficient and ineffective performance of WTW and the actuaries.

The result of this delay is that I have lost a five figure sum in missed investment earnings. After three months I raised a complaint with the scheme trustees but they fobbed me off to WTW who sent me a holding email and then ignored my complaint. This despite me escalating the latest complaint due to missing information from the WTW documentation.

Is there anyone else who has been subjected to unnecessary delay by WTW and/or LBG trustees? If so we should get together and look at starting a class action - it would be more effective than pursuing individual complaints that can be ignored.

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Apr 17, 2017 at 11:14

It has always been advised by the governement that you do not transfer out of a DB scheme without getting expert advice. I learned that in late 1980's and the the facts are still the same. The transfer value out of any pension fund should be based on the fair value of the fund to all its members and not on any gimmicky calculations of what one person thinks he is due. In any case the final sum or the procedure of calculation has to be overseen by the trustees of the fund otherwise they are open to charges of negligence or worse. So to be clear a defined benefit scheme promises to pay a guaranteed income in retirement not a guaranteed sum before retirement.

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Mr J

Oct 06, 2017 at 08:06

I think the government would do well to allow partial transfers rather than insisting it is all or nothing. This would reduce risks on all sides whilst maintaining freedom.

The next generation will have no alternative other than a DB pot. Therefore if this model is good enough for them it is good enough for this generation to have the freedom to adopt it via transfers if they so wish.

The biggest problem is that 75% of the population are completely incapable of understanding how to manage a pension fund. In the past it was done for them in a collective scheme managed by trustees not financial advisers on their behalf. Now they have no hope of anyone saving them from their own ignorance.

So what is needed is managed collective funds run by a board of trustees and with very low costs which people can use to invest their pension funds into. I guess Investment Trusts come close to this. However I doubt that more than 5% of the population have any clue what an IT is. Perhaps they need to be renamed as Pension Trusts and subject to massive publicity and education programmes.

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Christopher Holmes

Oct 06, 2017 at 16:27

Following Hooligan's hopeful comment on 15 April, I can report that the FSCA awarded me their maximum compensation. It does not cover my losses, but gets me more than half way there. I am now trying hard to choose diversified, high return investments which will at least get my nominal losses to zero, although it will not cover inflation and missed returns over the many years since I entrusted my savings to HBS. But we live and learn, as they say. I sometimes feel regret that in all our years of school and university we are never taught about any of these essential life skills.

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Oct 06, 2017 at 16:40

good to hear Mr Holmes - even though the maximum does not compensate you for your losses.

in the old, politically incorrect days, the HBS people would have been traced down for a quiet "chat". not allowed these days of course. i ownder where those people are now - still investing other people's money perhaps?

sorry to hear you didn't get all your money back, but pleased for your success.

i would offer one other "rule of thumb" that has stood me well over the years - that is the Price Earnings to Growth ratio, or PEG. i use this to check whether i am paying too much for expected earnings growth.

that is, i am more comfortable paying for a share (or fund/trust etc) with a PE of 25, if the growth in earnings has been (or is highly likely to be) 25% for a PEG of 1.

somewhere between 0.7 and 1.5 works for me, after I have filtered stocks (trusts/funds) for dividend yield, free cash flow and a few others. lastly, i never own more than 15-20 stocks since every additional stock does not materially reduce risk.

anyway, bravo again, i am pleased for you.

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Christopher Holmes

Oct 06, 2017 at 22:43

Thank you Hooligan. I don't know how the 'chat' would have gone, but if the outcome would have been better for the client I would have had no objection. Since doing it myself I have been a 'momentum' investor, looking for consistent growth with the least volatility, and I get it mainly from how the graph looks, although I also have built some spreadsheets to help with the analysis. You have given me some homework and I will be reading up on PEG ratios. If it corresponds with, or improves upon my existing methods I will be delighted. If not I will learn. Either way the outcome will be positive, so I am grateful.

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