From rogues to rights: buyers are protected

Investing in pensions was once thought to be as safe as houses. You paid money regularly into a pension scheme, this was invested on your behalf and, when you retired, you lived off the accumulated capital. But just as negative equity and falling prices during the early 1990s shocked a generation used only to house values rising inexorably, so the mis-selling of personal pensions and the Maxwell scandal rocked everyone's perception of the pension industry. Insurance companies were suddenly seen in a different light. No longer were they institutions of probity and reliability. Instead, they were seen to have used roguish sales methods to increase their own commission and profits at the expense of, in many cases, people who had been laid off or who were in safe and good-quality public pension schemes.

By comparison, company pensions, in the light of the Maxwell affair, were seen to be at risk from unscrupulous bosses.

Following public outcry, action has been taken to remedy the abuses. The previous government made changes in the way pensions operate and the new government is continuing the process and, if anything, stiffening the controls.

The 1996 Pensions Act affects company pensions. Pension fund managers now have to justify their strategy and there are strict controls over what investments they can make. Buying shares in the employer is no longer on the agenda.

Among other important changes introduced by the new law, workers in most medium and large companies now have the right to appoint their own representatives as trustees of the schemes. And the independent trustees have to be seen to be independent.

The mis-selling of personal pensions is now well documented. People in perfectly good occupational pension schemes were enticed to transfer their funds into personal pensions that would not give as good a return as the occupational scheme. The Personal Investment Authority (PIA), the regulator in charge of personal pensions, has spent the past couple of years trying to get the insurers concerned, many among the best-known and largest companies, to come up with their own compensation plans for those affected. Progress, however, has been slow. Last month, Helen Liddell, Economic Secretary to the Treasury, carpeted the two dozen companies most involved asking them to outline what actions they were taking. Two, Legal & General and the Sedgwick Group, were last week "named and shamed" in parliament.

Meanwhile, changes brought about in the past couple of years by the PIA have led to a tightening up in the way personal pensions are sold. Most important, the buyer is now shown the charges associated with purchasing a pension plan and the rate of commission being paid to the sales person, whether an independent financial adviser or employed by the insurer. All companies now use the same growth rates, a standard 9 per cent a year, to illustrate the future likely value of investing in a personal pension, but which highlight the effect of charges. Anyone looking to buy a pension today is more likely to be better informed than before. While problems remain over the high charges imposed by some companies, the advent of direct providers selling personal pensions over the phone, with their low cost structures, is forcing down the level of charges levied by the traditional providers. And while compensation is still being sorted out for past abuses of the system, buying a pension is a lot safer today.