'Millions will lose' on private pensions

UP TO 2.4 million low earners could lose money because they were persuaded to opt out of the state pension scheme in favour of personal pensions sold by life insurance companies, according to a leading accountancy firm. For many, contracting-out incentives do not cover administration charges.

The figure represents about 40 per cent of the six million people who have taken out personal pensions, a cornerstone of government strategy to curtail the burgeoning cost of state pensions.

The problem faced by low earners seems to dwarf a separate scandal in which employees were wrongly advised to transfer retirement savings out of an occupational pension scheme. It is estimated that compensation for that will cost life insurers, banks and financial advisers up to pounds 1bn.

Pat Wynne, a partner in the actuarial practice of Coopers & Lybrand, said the new revelation 'will make pension transfers pale into insignificance'.

Most personal pensions are only funded by the rebate of National Insurance contributions that the Government pays to those who 'contract out' of the State earnings-related pension scheme, Serps, which is paid in addition to the basic state pension. For many low earners, the rebate is too small to cover charges made by life insurance companies. Some insurers have introduced minimum earnings thresholds for those wanting private pensions.

On the basis of some recently published figures from the Department of Social Security, Coopers & Lybrand believe that up to 2.4 million people, on earnings of less than pounds 10,000, have suffered financially by contracting out of Serps and into personal pensions. Another 85,000 were too old to benefit from the move.

Coopers & Lybrand has made the crude estimate that it is necessary to earn pounds 10,000 to benefit from a personal pension. Although this is higher than the pounds 8,000 - pounds 8,500 threshold used by insurers, Mr Wynne said: 'With some (life insurers), you would need to be earning pounds 12,000 to meet their charges.'

The Department of Social Security disputed Coopers' conclusions yesterday. It said those earning less than pounds 10,000 would include people who were made redundant or worked only part of the year. The recent DSS survey only presented a snapshot for 1991/92; what mattered was income over a lifetime.

However, Coopers & Lybrand stood by its analysis. Strong stock market performance over the past 18 months has limited the damage. Mr Wynne said: 'By good fortune, that's saved their bacon. If all (2.5 million) of them are written to tomorrow and told to contract back in, then the problem goes away. But if it's allowed to drift for a couple of years then it becomes monumental.'

The Securities and Investments Board, the senior financial regulator, has held preliminary discussions about the Serps problem with the DSS. It is still investigating the scale of the pension transfer scandal and trying to find ways of helping losers. Jean Eaglesham, head of money policy at the Consumers Association, said: 'The SIB has got to take some action, and it's dodging it at the moment.'