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--------------A845DEB1CF8DACBA2F81AB42
> WALL STREET JOURNAL August 10, 1998
>
> Britain's Social Security Debacle May Send Warning Signals to U.S.
>
> By STEVE STECKLOW and SARA CALIAN
> Staff Reporters of THE WALL STREET JOURNAL
>
> LONDON -- Anyone suggesting Americans should get a say in how their
> Social Security contributions are invested might look at the British
> system. A little scrutiny might help avert a big disaster.
> Britain's pension industry is reeling from the financial fallout of a
> decade-old, government-backed program that led millions of Britons to
> opt out of their public and company-sponsored pension plans and invest
> the money themselves.
>
> Dubbed the "pension misselling" scandal, it is expected to cost British
> insurers an estimated $18 billion in compensation payments to nurses,
> miners, schoolteachers and other workers who were hurt by bad advice.
> Regulators here have fined insurers and financial advisers more than $7
> million for allegedly deceptive sales practices and delays in making
> settlements. And Scotland Yard is conducting a criminal inquiry to
> determine whether insurance-company directors bear any responsibility.
> Final resolution of the mess will take years.
>
> PROTECTIONS NEEDED
> The debacle suggests that if Americans eventually are allowed to manage
> part of their Social Security savings, as some people have proposed, the
> system will "have to be structured in a way to protect people against
> themselves," says Roberta S. Karmel, a New York securities lawyer.
> How did Britain slip into such a mess? It all began with a debate over
> retirement benefits that partly parallels the one now going on in
> Washington. In the early 1980s, the British became concerned that their
> own Social Security program would go bust when the bulging population of
> baby boomers retired. Many also contended that people could earn better
> returns on their Social Security contributions and might save more if
> they could invest in equities and other instruments. In addition, the
> government wanted to encourage labor mobility by correcting a glaring
> inequity: Many people who switched jobs had their retirement benefits
> reduced or frozen by their former employers.
>
> The solution -- enacted by Britain's Conservative government in 1986 and
> put into effect two years later -- was the "personal pension." All
> workers still would pay into a basic, government-run pension plan, but
> higher-income workers, who previously also contributed to a
> supplementary pension program, could opt out of it and manage their own
> contributions. Employees also could get out of employer-sponsored
> pensions -- or transfer funds from them -- and invest the money in new
> personal-pension policies.
>
> PROMOTED HEAVILY
> Hoping to lure a lot of people out of the costly supplementary plan, the
> government heavily promoted personal pensions, offering financial
> inducements and staging an extensive media campaign. One television
> commercial featured a Houdini-like character tied up in chains and ropes
> and stuffed inside a sack. "Hello. I've been asked to tell you about the
> new pension arrangements," the man says, emerging from the sack. As he
> busts out of his shackles, he proclaims, "At the moment, millions of you
> are bound by the existing system. But soon you'll have the freedom to
> choose your own personal pension."
>
> Insurance companies, banks and financial advisers all began pushing
> personal-pension policies. The insurers were especially aggressive;
> increasing competition and declining sales of mortgage insurance
> (because of a crash in the housing market) made them hungry for new
> sources of revenue. David Hitchcock, a former salesman at the Pearl
> Assurance unit of AMP Ltd., says the companies viewed the new policies
> as "a bonanza," thanks to the government endorsement. "All we were doing
> as salespeople was chasing around selling pensions."
>
> Mr. Hitchcock, a veteran life-insurance salesman who sold pension
> policies between 1988 and 1991, says his typical sales pitch began with
> a suggestion that the prospective customer opt out of the government's
> supplementary pension plan -- a move that actuaries even now say was
> usually wise. But then, he says, he would ask, "Are you going to stay in
> your job forever?" If the prospect said no, as was usually the case, Mr.
> Hitchcock would suggest the client also opt out of his or her
> company-sponsored pension plan. "The sales pitch was, 'You need a
> portable pension. You need to take the pension with you from one place
> to another,' " he says. Then he would offer a personal pension.
>
> OFTEN A BAD DEAL
> The trouble, actuaries and regulators now say, was that personal
> pensions usually were a bad deal compared with company plans. Customers
> often paid hefty upfront commissions and management fees for personal
> pensions. (Mr. Hitchcock estimates that he once earned nearly $16,000 in
> commissions in one week.) Even worse, most companies that matched or
> topped employee contributions in workplace plans contributed nothing to
> personal pensions. So, a policyholder either would have to make up the
> difference or get giant rates of return.
>
> Mr. Hitchcock says he and other salespeople, coached by their managers,
> had a ready answer if customers questioned this: "The returns will be so
> much higher that it doesn't matter."
>
> That proved to be wrong. Regulators, who failed to realize the scope of
> the problem until about four years ago, now say many of the more than
> two million people who quit or didn't join a company plan and bought a
> personal pension shouldn't have done so, and suffered losses. Pearl
> Assurance said in June it had set aside nearly $1 billion to compensate
> thousands of personal-pension buyers. "We were one of the first, if not
> the first, of the companies to actually admit that we missold pensions,
> to publicly apologize," a spokesman says. "We accept responsibility."
> Pearl isn't alone. Joyce Douglas, a Durham schoolteacher, says she quit
> the teachers' plan in 1990 and purchased a personal pension after an
> insurer told her the switch would enable her to retire four years early.
> The company, Abbey Life Assurance Co., is now owned by Lloyds TSB Group
> PLC, a London-based bank and financial-services company.
>
> FAST-FADING PROMISE
> "They told me they were investing the money and it would be worth much
> more than if I stayed in the teachers' plan," she says. "I assumed they
> were the experts." The promise of early retirement quickly vanished;
> after all, her employer no longer was contributing 9% of her salary into
> her pension plan each year. In the end, she says, Abbey paid her $19,000
> so she could rejoin her old plan and recoup the money she lost over six
> years by not remaining in it. An Abbey spokeswoman confirms the
> settlement, saying, "We take the whole situation very seriously. If
> anyone has been missold a personal-pension plan, they have been
> compensated."
>
> But many victims still are waiting. Regulators have forced
> personal-pension sellers to review more than two million cases to
> determine whether compensation is merited. Many companies have been slow
> to act; regulators have fined dozens of them for failing to meet
> compensation deadlines.
>
> Many insurers were hoping to argue that their personal-pension policies
> weren't "missold" and that customers, in fact, got sound advice and were
> responsible for any losses. Under rules that took effect about the same
> time personal pensions became available, pension sellers were required
> to "know" their customers by obtaining detailed information from them
> and provide an adequate comparison between the client's existing plan
> and a personal one. "It's actually a very difficult actuarial
> calculation to work out," says Julia Black, a lecturer at the London
> School of Economics.
>
> Many companies found that their customer records were in disarray or
> nonexistent, says David Addison, a partner with Watson Wyatt Worldwide,
> a British actuarial and benefit consulting firm. "That audit trail
> simply isn't there," he adds. "So, they couldn't produce positive
> evidence that the sale was compliant even if in practice it had been."
>
> CRITICAL STUDY
> Indeed, a study that KPMG Peat Marwick prepared for regulators in 1993
> found that 91% of 735 personal-pension policy files reviewed were
> "unsatisfactory" or "suspect" in terms of giving clients appropriate
> advice. In 35% of the cases, salespeople apparently hadn't even asked at
> what age the client planned to retire.
>
> Lacking adequate documentation, most large companies bowed to intense
> pressure from government officials and regulators who fined and publicly
> humiliated companies that were slow to review cases and make
> compensation; they decided to pay up and move on. Mr. Addison says many
> companies now simply assume most of their personal pensions were missold
> and "go straight into determining loss."
>
> That has been costly, Dr. Black notes. The educator says pension sellers
> have had to hire teams of consultants and actuaries to calculate
> compensation. And if an employer refuses to let the policyholder back
> into a company pension, as some have, the pension seller must promise to
> pay out, when the client retires, the same benefits the employer plan
> would have provided. The result, she says, is that some companies will
> be paying compensation for decades.
>
> In recent weeks, banks and insurers have reported huge charges related
> to pension misselling, on some days rocking the London stock market. On
> July 31, Lloyds TSB said its first-half pretax profit fell 11% from a
> year earlier to $2.09 billion, partly because its provisions for missold
> pensions totaled $653 million, far more than the $490 million most
> analysts expected. Its stock fell 7.4% that day.
>
> Regulators and personal-pension sellers have encountered another
> obstacle in untangling the mess: public apathy. Despite widespread
> publicity in Britain, about 40% of policyholders haven't bothered to
> answer letters from life insurers seeking information that could bring
> them compensation. One reason, surmises Ron Devlin, who is directing
> Britain's pension review, is that "pensions are absolutely boring" and
> people pay little attention to them. Another problem, he says, is that,
> given their past experience, "they don't trust the life-insurance
> industry and think they're trying to sell them something."
>
> REGULATORY MOVES
> To help combat such problems, Mr. Devlin's agency, the Financial
> Services Authority, recently began running a public-service TV ad urging
> personal-pension policyholders to take action to get their cases
> reviewed. The ad shows an ostrich that sticks its head in the sand.
> Mr. Devlin says regulators have moved to prevent misselling in the
> future by, among other things, requiring salespeople to undergo rigorous
> training and licensing and clarifying the information they should
> provide prospective buyers.
>
> Meanwhile, some of the politicians responsible for introducing the
> personal pensions aren't talking. Former Prime Minister John Major, who
> served as a Social Security undersecretary in the mid-1980s, declines to
> comment, "due to the many other pressures on his time," a spokeswoman
> says. A spokesman for former Prime Minister Margaret Thatcher, after
> learning the subject matter, declined to pass a message to her and said
> she was on holiday. And an assistant to Norman Fowler, who as secretary
> of state claimed credit for the legislation that permitted personal
> pensions, responded by sending a chapter on pension reform from his 1991
> memoir, "Ministers Decide."
>
> The book, which appeared before the misselling scandal broke, declared
> personal pensions "in many ways the most spectacular success" of the
> welfare reforms of the 1980s. "The public have been provided with more
> choices, and have shown that they want a pension which is theirs by
> right," he wrote.
--
Michael Perelman
Economics Department
California State University
Chico, CA 95929
Tel. 530-898-5321
E-Mail [EMAIL PROTECTED]
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Date: Thu, 03 Sep 1998 18:22:55 -0700
To: [EMAIL PROTECTED]
From: Sid Shniad <[EMAIL PROTECTED]>
Subject: Britain's Social Security Debacle May Send Warning Signals to
U.S.
WALL STREET JOURNAL August 10, 1998
Britain's Social Security Debacle May Send Warning Signals to U.S.
By STEVE STECKLOW and SARA CALIAN
Staff Reporters of THE WALL STREET JOURNAL
LONDON -- Anyone suggesting Americans should get a say in how their
Social Security contributions are invested might look at the British
system. A little scrutiny might help avert a big disaster.
Britain's pension industry is reeling from the financial fallout of a
decade-old, government-backed program that led millions of Britons to
opt out of their public and company-sponsored pension plans and invest
the money themselves.
Dubbed the "pension misselling" scandal, it is expected to cost British
insurers an estimated $18 billion in compensation payments to nurses,
miners, schoolteachers and other workers who were hurt by bad advice.
Regulators here have fined insurers and financial advisers more than $7
million for allegedly deceptive sales practices and delays in making
settlements. And Scotland Yard is conducting a criminal inquiry to
determine whether insurance-company directors bear any responsibility.
Final resolution of the mess will take years.
PROTECTIONS NEEDED
The debacle suggests that if Americans eventually are allowed to manage
part of their Social Security savings, as some people have proposed, the
system will "have to be structured in a way to protect people against
themselves," says Roberta S. Karmel, a New York securities lawyer.
How did Britain slip into such a mess? It all began with a debate over
retirement benefits that partly parallels the one now going on in
Washington. In the early 1980s, the British became concerned that their
own Social Security program would go bust when the bulging population of
baby boomers retired. Many also contended that people could earn better
returns on their Social Security contributions and might save more if
they could invest in equities and other instruments. In addition, the
government wanted to encourage labor mobility by correcting a glaring
inequity: Many people who switched jobs had their retirement benefits
reduced or frozen by their former employers.
The solution -- enacted by Britain's Conservative government in 1986 and
put into effect two years later -- was the "personal pension." All
workers still would pay into a basic, government-run pension plan, but
higher-income workers, who previously also contributed to a
supplementary pension program, could opt out of it and manage their own
contributions. Employees also could get out of employer-sponsored
pensions -- or transfer funds from them -- and invest the money in new
personal-pension policies.
PROMOTED HEAVILY
Hoping to lure a lot of people out of the costly supplementary plan, the
government heavily promoted personal pensions, offering financial
inducements and staging an extensive media campaign. One television
commercial featured a Houdini-like character tied up in chains and ropes
and stuffed inside a sack. "Hello. I've been asked to tell you about the
new pension arrangements," the man says, emerging from the sack. As he
busts out of his shackles, he proclaims, "At the moment, millions of you
are bound by the existing system. But soon you'll have the freedom to
choose your own personal pension."
Insurance companies, banks and financial advisers all began pushing
personal-pension policies. The insurers were especially aggressive;
increasing competition and declining sales of mortgage insurance
(because of a crash in the housing market) made them hungry for new
sources of revenue. David Hitchcock, a former salesman at the Pearl
Assurance unit of AMP Ltd., says the companies viewed the new policies
as "a bonanza," thanks to the government endorsement. "All we were doing
as salespeople was chasing around selling pensions."
Mr. Hitchcock, a veteran life-insurance salesman who sold pension
policies between 1988 and 1991, says his typical sales pitch began with
a suggestion that the prospective customer opt out of the government's
supplementary pension plan -- a move that actuaries even now say was
usually wise. But then, he says, he would ask, "Are you going to stay in
your job forever?" If the prospect said no, as was usually the case, Mr.
Hitchcock would suggest the client also opt out of his or her
company-sponsored pension plan. "The sales pitch was, 'You need a
portable pension. You need to take the pension with you from one place
to another,' " he says. Then he would offer a personal pension.
OFTEN A BAD DEAL
The trouble, actuaries and regulators now say, was that personal
pensions usually were a bad deal compared with company plans. Customers
often paid hefty upfront commissions and management fees for personal
pensions. (Mr. Hitchcock estimates that he once earned nearly $16,000 in
commissions in one week.) Even worse, most companies that matched or
topped employee contributions in workplace plans contributed nothing to
personal pensions. So, a policyholder either would have to make up the
difference or get giant rates of return.
Mr. Hitchcock says he and other salespeople, coached by their managers,
had a ready answer if customers questioned this: "The returns will be so
much higher that it doesn't matter."
That proved to be wrong. Regulators, who failed to realize the scope of
the problem until about four years ago, now say many of the more than
two million people who quit or didn't join a company plan and bought a
personal pension shouldn't have done so, and suffered losses. Pearl
Assurance said in June it had set aside nearly $1 billion to compensate
thousands of personal-pension buyers. "We were one of the first, if not
the first, of the companies to actually admit that we missold pensions,
to publicly apologize," a spokesman says. "We accept responsibility."
Pearl isn't alone. Joyce Douglas, a Durham schoolteacher, says she quit
the teachers' plan in 1990 and purchased a personal pension after an
insurer told her the switch would enable her to retire four years early.
The company, Abbey Life Assurance Co., is now owned by Lloyds TSB Group
PLC, a London-based bank and financial-services company.
FAST-FADING PROMISE
"They told me they were investing the money and it would be worth much
more than if I stayed in the teachers' plan," she says. "I assumed they
were the experts." The promise of early retirement quickly vanished;
after all, her employer no longer was contributing 9% of her salary into
her pension plan each year. In the end, she says, Abbey paid her $19,000
so she could rejoin her old plan and recoup the money she lost over six
years by not remaining in it. An Abbey spokeswoman confirms the
settlement, saying, "We take the whole situation very seriously. If
anyone has been missold a personal-pension plan, they have been
compensated."
But many victims still are waiting. Regulators have forced
personal-pension sellers to review more than two million cases to
determine whether compensation is merited. Many companies have been slow
to act; regulators have fined dozens of them for failing to meet
compensation deadlines.
Many insurers were hoping to argue that their personal-pension policies
weren't "missold" and that customers, in fact, got sound advice and were
responsible for any losses. Under rules that took effect about the same
time personal pensions became available, pension sellers were required
to "know" their customers by obtaining detailed information from them
and provide an adequate comparison between the client's existing plan
and a personal one. "It's actually a very difficult actuarial
calculation to work out," says Julia Black, a lecturer at the London
School of Economics.
Many companies found that their customer records were in disarray or
nonexistent, says David Addison, a partner with Watson Wyatt Worldwide,
a British actuarial and benefit consulting firm. "That audit trail
simply isn't there," he adds. "So, they couldn't produce positive
evidence that the sale was compliant even if in practice it had been."
CRITICAL STUDY
Indeed, a study that KPMG Peat Marwick prepared for regulators in 1993
found that 91% of 735 personal-pension policy files reviewed were
"unsatisfactory" or "suspect" in terms of giving clients appropriate
advice. In 35% of the cases, salespeople apparently hadn't even asked at
what age the client planned to retire.
Lacking adequate documentation, most large companies bowed to intense
pressure from government officials and regulators who fined and publicly
humiliated companies that were slow to review cases and make
compensation; they decided to pay up and move on. Mr. Addison says many
companies now simply assume most of their personal pensions were missold
and "go straight into determining loss."
That has been costly, Dr. Black notes. The educator says pension sellers
have had to hire teams of consultants and actuaries to calculate
compensation. And if an employer refuses to let the policyholder back
into a company pension, as some have, the pension seller must promise to
pay out, when the client retires, the same benefits the employer plan
would have provided. The result, she says, is that some companies will
be paying compensation for decades.
In recent weeks, banks and insurers have reported huge charges related
to pension misselling, on some days rocking the London stock market. On
July 31, Lloyds TSB said its first-half pretax profit fell 11% from a
year earlier to $2.09 billion, partly because its provisions for missold
pensions totaled $653 million, far more than the $490 million most
analysts expected. Its stock fell 7.4% that day.
Regulators and personal-pension sellers have encountered another
obstacle in untangling the mess: public apathy. Despite widespread
publicity in Britain, about 40% of policyholders haven't bothered to
answer letters from life insurers seeking information that could bring
them compensation. One reason, surmises Ron Devlin, who is directing
Britain's pension review, is that "pensions are absolutely boring" and
people pay little attention to them. Another problem, he says, is that,
given their past experience, "they don't trust the life-insurance
industry and think they're trying to sell them something."
REGULATORY MOVES
To help combat such problems, Mr. Devlin's agency, the Financial
Services Authority, recently began running a public-service TV ad urging
personal-pension policyholders to take action to get their cases
reviewed. The ad shows an ostrich that sticks its head in the sand.
Mr. Devlin says regulators have moved to prevent misselling in the
future by, among other things, requiring salespeople to undergo rigorous
training and licensing and clarifying the information they should
provide prospective buyers.
Meanwhile, some of the politicians responsible for introducing the
personal pensions aren't talking. Former Prime Minister John Major, who
served as a Social Security undersecretary in the mid-1980s, declines to
comment, "due to the many other pressures on his time," a spokeswoman
says. A spokesman for former Prime Minister Margaret Thatcher, after
learning the subject matter, declined to pass a message to her and said
she was on holiday. And an assistant to Norman Fowler, who as secretary
of state claimed credit for the legislation that permitted personal
pensions, responded by sending a chapter on pension reform from his 1991
memoir, "Ministers Decide."
The book, which appeared before the misselling scandal broke, declared
personal pensions "in many ways the most spectacular success" of the
welfare reforms of the 1980s. "The public have been provided with more
choices, and have shown that they want a pension which is theirs by
right," he wrote.
--------------A845DEB1CF8DACBA2F81AB42--
