When pension plans go bad

Clifford German finds there is often little redress

Many readers have called The Independent this week to ask what they can do about the poor pension plans they realise they have been sold without understanding how high the charges levied by the providers are in the early years of a policy's life, or how much they would lose if they have to stop contributing or even surrender policies because of illness, unemployment, divorce or having a family, or any of the other uncertainties of life.

In practical terms the answer is not much, unless they have proof that pension salesmen failed to record evidence while compiling their fact- finds that pension products would be unsuitable. The charges levied in the early years and the high penalties for early lapsing of a pension plan are almost certainly in the small print somewhere. For most people the best advice now is to try to keep the pension going until retirement.

They could however ease their pain by writing to the Pensions Ombudsman and the Personal Investment Authority. Neither may be able to do much about individual cases, but several thousand letters on their door mat would provide irresistible proof of the need for reform.

The Independent does believe it has the proof required to show that there is an ongoing problem of mis-sold pensions, and that some companies behave notably better than others. Charges are only part of the arithmetic that decides how big a pension an employee will eventually receive out of a set contribution, and the investment performance will be much more important if pension plans are allowed to run for 20 years or more. But we believe there is a strong moral and practical case for pension providers to restructure their charges so that early lapsers get a better deal. If that cannot be done for existing policies and we suspect it could, it must certainly be done for new policies starting from the earliest possible date.

We also think that there is a strong case for the industry to devise a blueprint for a new, clear, comprehensible and above all cheap personal pension plan with charges more evenly spread throughout the life of the plan, and with built-in flexible periods when holders can reduce contributions to a token level at times when they are out of work or are working for an employer with a more attractive company scheme.

That blueprint should become the basis for a standard policy. Without it the latest revelations can only increase the reluctance of individuals to take out a pension plan to meet the undeniable need to provide for their own pensions in future. If the industry cannot do it, perhaps Government can.

Government must in any case play its part by changing the Inland Revenue rules that now oblige an employee to cease contributions to a personal pension if he or she wants to join an employer's pension scheme.

No one suggests anyone should get full tax relief simultaneously on two pensions but tax relief should certainly be available on a token contributions needed to keep a personal pension scheme ticking over, against the day when the employee might want to reactivate it.

Employers could also help by agreeing to contribute to personal pension schemes as well as company schemes, thereby giving employees a fairer choice whether to join a company scheme or continue with their portable pension plan.

Too many employers take the view that employees with a personal pension can look after themselves and there is no need for the employer to match the contributions he would make to a company scheme.

There is no time to waste. It is essential individuals provide for their own future pensions. But it is foolish to try to force people to join pension schemes when the formula is frequently so unsatisfactory.