SERPS - the next mis-selling scandal?

An estimated 15 million people were recommended to contract out of the state earnings-related pension scheme because the projected benefits available from investing SERPS contributions in a personal or company scheme outshone the projections for those remaining contracted into the state scheme.

But, projections are just that - projections - and, if the assumptions on which they are based are wrong or overly optimistic, they will fail to meet expectations. Inevitably, as with other mis-selling cases, the wisdom of hindsight has shown that the projections used were, indeed, too optimistic. The state scheme has fared better than the private sector, which has suffered from reduced pension fund returns and diminishing annuity rates, as the equity markets failed to match long-term expectations.

Many experts now believe that most people would have been better to remain contracted in and that they would, even now, be well advised to consider contracting back in to SERPS.

SERPS claims are complex. Each claim will turn on its own facts and will depend on key issues such as the individual's age, earnings and attitude to risk. An assessment of whether an individual has suffered a loss will rely on actuarial calculations and a comparison of the position the individual would have been in, had they not contracted out. Frequently, it will not be possible to assess an individual's financial position accurately until they near retirement.

Advisers will need to be able to show not only that they explained the potential benefits of contracting out but also, importantly, the risk that, if pensions fund returns and annuity rates do not come up to expectations, the individual would be worse off than if they had stayed contracted into SERPS. Good record-keeping (such as attendance notes of advice and meetings, as well as detailed letters of advice) will be essential to assist the successful defence of SERPS claims.

Brokers whose clients include IFAs would be well advised to ensure that the extent of any proposed professional indemnity cover by insurers is wide enough to include such claims. Equally, brokers will need to advise their clients properly on the duties of disclosure in the context of obtaining professional indemnity insurance.