Pension rules risk mis-selling scandal

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The pensions we get at work are set to be shaken up in the next couple of years. From April 2012 we will see the start of something known as auto-enrolment, which will make a massive difference to the retirement plans of millions of people.

However, one expert has warned it could lead to the next mis-selling scandal.

The new rules

The rule changes are known as auto-enrolment. At the moment if you want to join the pension scheme at work you usually have to opt in. In future, the rules will change so that you automatically become a member unless you opt out. The employer will then automatically contribute to the scheme on your behalf and you will automatically pay a chunk of your earnings in too.

It is expected to mean that millions of people who currently have no pension provision at all will have something of their own to fall back on retirement, and is widely seen as a very positive move that has been a long time coming.

The flaws

However, one expert has warned that the system is so flawed that it could mean a massive mis-selling scandal is just waiting to happen. David Pitt-Watson, chairman of fund management firm Hermes, says that the problem lies in the schemes that people will be enrolled into.

There's a government scheme called NEST which has low charges and a sensible investment strategy. However, this has a fixed maximum amount that can be paid in during any one year, which means higher earners will have to be enrolled into a different private scheme.

Pitt-Watson is warning that unless sufficient planning and thought is put in during the early stages, there's a chance that these alternative schemes will have high charges and will invest in inappropriate things.

When workers come to cash in their pension decades down the line they may find it has been eroded by charges as high as 2% or more and decimated by poor performance or by falls because the fund has taken too many risks. This, he says, is when the scandal will hit.

The government has countered this argument by saying it has the power to cap charges and is not afraid to use them. Employers also have enough time to make the right decisions if they start planning now, so they can select pensions with reasonable charges and sensible investment strategies.

But what do you think? Do you like the idea of being forced to start a pension? Is the fact that your employer will have to contribute enough to win you round to the idea, or will you be opting out? Let us know in the comments.
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