Pension Opt-Outs: Can You Complain?

In the past year, the Financial Ombudsman has received a record number of complaints about opt-outs from the state second pension (S2P)- previously known as SERPS. According to the Financial Services Authority (FSA), about 120,000 people may have been wrongly advised to opt out of their S2Ps to invest in alternative private pensions. Concerns over such miss-selling led to 115 compliants by savers in 2005-6. But in 2006-7, that figure shot up to 954, as people have increasingly realised they might have a case to claim compensation for lost pension payments (estimated by the FSA to be £7 a week on average).

People were given the right to leave SERPS and then the S2P by the Conservative government in 1988. In return for giving up their claim to a second state pension (an additional state pension that is paid to employees earning above a certain level, on which national insurance contributions have been paid), employees could divert rebates of national insurance contributions into a personal pension run by an insurance company of the saver's choice.

However, in recent years, the opt-out policy has been heavily criticised with the FSA concluding that most people would have been better off staying in SERPS or the S2P, rather than contracting out. Insurers agreed and some firms, including Norwich Union and the Prudential have advised hundreds of thousands of their customers to opt back into the S2P.

Particularly affected by the opt-out controversy are those who were advised to opt out at or beyond a 'pivotal age', roughly 45 for men or 40 for women - although pivotal ages differed slightly between different providers/advisers. Although some of these people may have had valid reasons to do so, the FSA argues that such an age group would have been too old to benefit from contracting out.

But how do you know if you meet the criteria to make a successful claim for compensation? While many people might have lost money by opting out because of low investment returns and high costs, complaints are only likely to be successful in certain cases. You are unlikely to make a successful complaint, for example, if you contracted out without receiving advice - or you were advised to not contract out, but did so anyway.

The following guidelines, published by the FSA, should help you decide if a complaint is worth pursuing:

1. If you were an employee at any time between 1988 and 1997
2. Between July 1988 and 5 April 1997 you were advised to contract out of the SERPS/S2P to use a personal pension
3. If you were above a certain age - roughly 45 for men or 40 for women - when you opted out

If you can respond positively to the above points, you could well be in a position to take the matter further, in which case you first need to complain to the firm that advised you to contract out. If it was a financial adviser, your pension provider should have the details. If you're not sure whether the firm still exists, the FSA consumer helpline might be able to help. If you complain, but you are still unhappy with your firm/adviser's reply, you can take your complaint to the Financial Ombudsman Service, although you must do this within six months of receiving your firm/adviser's response.

With recent rises in complaints, it looks likely that the next financial year is going to be another difficult one for some firms that poorly advised customers in the 1980s/1990s. If you think you have lost out financially because you were also advised to opt out, now may be the time to join the many other complainants. Just be sure to check your details first to ensure you meet the criteria that makes you potentially eligible for compensation.