Pensions - how Osborne can have his cake and eat it

Ructions in the world of pensions could see the Chancellor saving billions of pounds for the government, while stripping the rich of their lucrative tax relief, and giving an extra handout to the average saver.

Instead of everyone getting their tax back when they put money in a pension plan, 40% taxpayers would pocket a lot less.

Meanwhile, millions of basic rate payers would receive not just their 20% tax refunded; they would be given a bonus on top.

But now it is becoming clear how George Osborne could exploit such changes to help in his battle to control the deficit.

The pension cards were thrown in the air in the July Budget when Mr Osborne signalled that major reform was on the way. In the last few days calculations have been emerging which show the gigantic sums at stake.

This is how the ground is shifting: millions, 9 million eventually, are beginning to save in workplace pension plans for the first time under the government programme called Automatic Enrolment.

The development will have a dramatic impact on the Treasury's finances because the more money is saved, the more it has to pay out in tax relief.

Plus, it puts into stark relief what many see as the unfairness of giving more tax relief to higher earners, because most of the new pension savers pay the basic rate.

The other factor is that the new savers aren't putting aside nearly enough. The minimum to start with is a combined 2% of pay from both worker and employer, catastrophically less than the 12% or so needed for a decent pension.

So the priorities for reform have been: saving more, making it fair and getting a grip on the bill.

The cost of pension tax relief to the Treasury is considerable, around £27bn a year. With auto-enrolment, it will rise to over £30bn, according to the Pensions Policy Institute.

And the cost rises even further once you start tinkering.

People in the pensions business want a new flat rate of relief, so basic rate taxpayers get more while higher rate payers get less, with the most optimistic arguing for a flat rate of 33%.

The way this works, if you put in £2 the government adds £1, which would be easy to sell as "Buy Two, Get One Free"..

But that would push up the bill for the relief even higher, to more than £34bn.

What is more, the Pensions Policy Institute points out that such a system would encourage people to salt away greater sums in their pensions, earning additional tax relief.

This is a murkier area in which to make forecasts, but projections from the Institute suggest the overall cost could rise to £40bn or more.

More saving is one objective of the reform process, but so is trimming the bill.

In the current climate, George Osborne is unlikely to plump for a rise in the cost of relief from £27bn to £40bn. He would prefer to economise.

Setting the flat rate at a lower level of 25%, sellable to basic rate taxpayers as "Buy Three Get One Free", would do exactly that. It would reduce the cost to less than £25bn, netting the Treasury billions.

Taking the relief down to 20%, refunding tax at just the basic rate to all taxpayers would pull the cost below £20bn.

There are other options. The Chancellor could make a gain by clamping down on the way some pension contributions escape National Insurance, he could put tighter limits on how much you are allowed to put in a pension or he could get rid of pension tax relief completely and replace it with something else.

He could give us an inkling in his Autumn Statement next month.

But leaving the pension system as it is, doing nothing, is looking less and less likely, because the cost of supporting our pensions could just keep on rising.

Cutting pension tax relief

The Pensions Policy Institute and Age UK are floating the idea of cutting pension tax relief for higher earners and introducing a flat rate of 30%.

In other words, whether you paid 20% income tax or 40% or 50%, you would get a tax refund in your pension plan equivalent to 30% tax.

The PPI presents this idea as revenue neutral, for the Treasury, and as potentially incentivising lower earners to save more in pensions.

There are two ways in which this idea could be of major interest to George Osborne:

1. The big problem with auto-enrolment, under which workers are being automatically signed up for company pensions and having money deducted from their pay, is that the resulting pensions for most will be tiny.

So boosting the value of contributions at the lower end, makes auto-enrolment look more viable.

2. The Chancellor could save as much as £16bn a year.

The PPI calculates that a 30% flat rate would cost the same as the current system: £35bn. However, restricting tax relief to the basic rate of 20% would reduce the annual cost to £19bn-£22bn. It could be tempting to grab some or all of that £16bn difference - in the name of fairness, of course.

Higher rate taxpayers have a big advantage in the pension game. So far the Coalition has steered clear of removing some or all of that advantage.

But this research gives a little extra push to the argument that this is a cherry ripe for the picking.

Public sector pensions cut by a third

Nurses, teachers and other public sector staff will see a reduction of a third in the value of their pensions as a result of the Coalition's reforms, according to the Pensions Policy Institute.

Four million workers in the NHS, teaching, local government and civil service are in schemes which promise many of them a pension based on salary when leaving, or final salary.

But in future the pensions will be based on average salaries, members will have to contribute more and the retirement date will be aligned with the State Pension Age.

Typically the pensions are worth an extra 23 per cent on top of pay, according to the Institute, which is an independent research body.

That benefit will be cut to 15 per cent as a result of the reforms, though anyone anyone already retired or retiring within the next nine years won't be affected.

The findings don't mean that actual pension payments will be cut by a third. It's the combined effect of some pensions being lower, of people receiving them for a shorter period and of having to pay in more while working.

The Institute also forecasts that the long term cost of public sector pensions will fall as a percentage of the economy as a result of the reforms, from 1.1 per cent to 0.8%.

There has been heated debate about public sector pension schemes, because most private sector workers have to make do with much less generous provision.

Public sector workers have already seen annual increases in their pensions restricted to a lower rate of inflation, the CPI.

Crackdown on claims firms

The Ministry of Justice has announced a new measure to stop unscrupulous claims management companies from cashing in unfairly on the billions being paid to people who were mis-sold Payment Protection Insurance.

The firms will have to get written agreement from clients before pursuing a lucrative PPI claim and charging a fee.

Many have been randomly phoning and texting possible mis-selling victims, then signing them up on the basis of a verbal agreement and - in some cases - charging substantial amounts up front.

The Ministry of Justice has confirmed that it will implement a crackdown on the practice this summer.

Claims management firms will need to obtain customer signatures on contracts before charging for assistance over financial mis-selling and personal injury complaints.

Firms have been breaching regulations by cold-calling potential customers without prior permission. 260 were stripped of their licences by the Ministry of Justice in the latest financial year.

3,000 firms are licensed to pursue claims, many of them charging fees of 30% of the compensation paid.

PPI payouts to victims average just under £3,000. The total being paid out by the banks responsible for the mis-selling is expected to exceed £15bn.

Crackdown on 250 PPI claim firms

The Ministry of Justice says it has shut down or warned 252 claims companies dealing with compensation for Payment Protection Insurance mis-selling in the past year.

 A specialist team created to crackdown on bad practice has banned 103 PPI firms from business and warned 149 for poor practices.

The the main causes for consumer concern were: misleading marketing, high-pressure selling, poor complaints systems and unclear fees.

The firms contact PPI victims using texts, phone calls and advertising in newspapers and online. They encourage people to claims and then take 30% of any compensation as a fee.

The majority of complaints the Ministry receives about claims management companies are related to PPI  – 2,405 between 2011-12.

In a drive to further improve the industry, the team will be revisiting the companies who have received official warnings - those that haven’t addressed poor practice will face being banned from business. 

Barclays boss gives up bonus

Antony Jenkins, new chief executive of Barclays and Bob Diamond's replacement, is giving up his bonus for 2012.

He says it's because the year was "a very difficult one" after the Libor scandal and the mis-selling of PPI and interest rate swaps.

What will he lose?

His package consisted of:

£1.1m basic pay

Up to £2.75m bonus, paid in shares over 3 years (it’s up to 250% of salary)

Up to £4.4m long term incentive, in shares (up to 400% of salary)

£363,000 cash in lieu of pension (33% of salary)

Taking the package to a potential £8.6m

So not taking the bonus reduces the potential total to just under £6m, effectively, a 32% pay cut – in theory, anyway.

However he was only appointed at the end of August, so while he is giving up his bonus for the whole year, some of it is an amount applicable to his previous job as head of the retail bank.

Threat of PPI deadline

Bank customers who were mis-sold Payment Protection insurance with loans and credit cards could find that a deadline is imposed to restrict their ability to put in a compensation claim.

The financial watchdog, the FSA, has confirmed that it is considering a request from banks to introduce a time limit on claims for PPI compensation.

But it said in a statement that "Our key priority is to ensure consumers are protected, so the FSA Board would need to be convinced that any proposals would be in the interests of consumers."

It is understood that the British Bankers Association is pushing for a cut-off point in May next year.

Normally, victims of mis-selling can make a claim within 6 years of the event, or within three years of becoming aware of the problem.

Banks have set aside nearly £13bn to pay compensation. The bank of England has warned that the huge sums involved are affecting the banking industry's ability to lend. In exchange for a time limit on claims, banks would fund an advertising campaign to ensure people understood their options.

However, the FSA said there would be no rule change without a full public consultation.

FSA Statement on PPI

The Financial Services Authority (FSA) has been approached by the British Bankers' Association (BBA) to discuss the potential for introducing a time limit for Payment Protection Insurance (PPI) complaints - if the banking industry funded a sufficiently widespread advertising campaign to ensure consumers are aware of the PPI issue and how to complain.

Our key priority is to ensure consumers are protected, so the FSA Board would need to be convinced that any proposals would be in the interests of consumers.

We have had initial discussions and are prepared to consider the merits of this and other options. A key consideration will be the potential to get compensation to more consumers, more quickly.

We will continue to hold discussions with the BBA as well as actively seeking the opinions of consumer groups and other stakeholders.

However, no changes to existing FSA, or future Financial Conduct Authority (FCA), rules would take place without a full public consultation.

PPI costs hobbling banks

The mushrooming cost of paying  compensation to victims of Payment Protection Insurance mis-selling is leaving banks with inadequate resources to absorb possible future losses.

The Bank of England's governor, Sir Mervyn King, warned today that banks needed to raise more capital, partly because of the PPI bill which has reached nearly £13bn and is expected to rise higher.

A statement from the Bank's Financial Policy Committee said UK banks have "underprovisioned for costs for conduct redress, notably for payment protection insurance mis-selling."

"In 2012, the number of identified conduct issues has grown and it seems likely that banks could face additional sizable costs."

The Committee said that likely losses on bad loans and over-optimistic calculations of capital adequacy were also to blame for the fact that banks had too little set aside to be sure of coping with future financial problems.

Astonishing PPI figures

Many are saying that the mis-selling of Payment Protection Insurance or PPI has turned into the biggest financial scandal in UK history.

The figures are staggering: £12.7bn is already set aside by banks and other firms to compensate their customers, but there are predictions that this will rise to £15bn or even higher.

So what is actually happening out there?

By a rough calculation, banks are sending out 10,000 payments or cheques a day, with typical payments averaging around £2,750.

That means nearly £30m is being shelled out daily to the growing ranks of customers who lost out and have made a claim.

At that rate it would still take a further 9 months to distribute all the compensation money which has been set aside.

If the claims keep coming in and banks have to provide more money, which seems highly likely, it will take more than a year.

The number of customers who have been paid compensation has probably already risen above 2.5 million.

Who knows what impact this will have?

It's welcome news for anyone who gets a payout. Some will save it, some will spend it.

Not so brilliant from the taxpayer's point of view, though, because two of the biggest PPI offenders (Lloyds and RBS) are partly state-owned.

And potentially it's not great for people and businesses looking for loans. The less banks have in their coffers, the less they can lend out.

Commission culture at banks

The incoming chairman of Barclays has told MPs that banks must jettison the "commission culture" which has led to sales of inappropriate products.

Barclays and other banks are beset by scandals including the mis-selling of Payment Protection Insurance, sales of unsuitable add-ons to small business accounts and the attempted rigging of a key market interest rate called LIBOR.

Sir David Walker, who will occupy the chairman's seat at Barclays from November, said that bankers "must get away from remuneration linked to revenue sales" and that boardrooms must be readier to intervene to prevent managers from putting their banks' reputations at risk.

He told the committee that "making quick returns...overtook old fashioned concerns about standards" and he lamented the fact that cashiers in branches had been tainted because of the way pay and commissions were structured.

Sir David is giving evidence to the Banking Standards Committee, set up to report on the industry in the wake of the LIBOR affair.

78% get compensation cold calls

More than three quarters of people asked in a poll said they had received unsolicited texts or phone calls encouraging them to claim compensation.

That's despite the fact that 92% said they had no grounds for demanding a payout.

The finding underlines how claims companies are cashing in on two lucrative waves of compensation: the epidemic of whiplash claims against car insurers and the £9bn payout from banks which mis-sold Payment Protection Insurance or PPI.

Claims companies have been advertising widely, on TV and in the newspapers, but they have also been saturating mobile phone networks with messages and calls.

The Association of British Insurers commissioned the survey, asking 2,600 adults. Most of them backed a ban on the unsolicited messages.

Some useful help here from the Information Commissioner's Office.

Payment Protection Insurance bonanza

The extraordinary scale of the PPI compensation grab:

£5bn compensation still to be paid out

12 million are to get letters saying they may have been mis-sold

800 claims management companies  trying to get a slice of the money

£2m a month being spent on advertising by these claims companies

They charge 25% or more in fees, plus VAT

Banks are making 50,000 compensation payments a week

That's around £400m a month being paid out

The payments average £2,750, some are £16,000 or more

Some say this massive cash payout could give a boost to the economy

How to claim compensation? Contact your bank, or the Financial Ombudsman Service.

My report on BBC News today.

12 million PPI letters

Millions of letters are about to be sent out by banks, telling customers that they may hav e been mis-sold Payment Protection Insurance and can apply for compensation.

Today the Financial Services Authority is expected to tell banks what the letters should say, in a move which is likely to trigger billions of pounds worth of additional claims.

Payment Protection Insurance or PPI was sold by banks, credit card companies and other financial firms to cover payments on loans if the policyholder fell ill or lost a job. But often it was to people who didn't need the insurance or couldn't use it.

£2bn has already been paid to customers who complained. On top of that, banks have been preparing a mass mailout of up to 12 million letters.

They are under pressure from the FSA, which is anxious that they contact possible victims of PPI mis-selling who haven't yet put in a claim.

The FSA is worried that the letters wo't be clear enough to prompt people to seek compensation. So the watchdog is likely to require banks to state clearly that the customers may have been mis-sold, may be entitled to compensation and should act quickly.

The trawl for more people who have lost out could lead to compensation payments worth £3bn. Banks have already set aside £7.6bn to cover the total compensation bill.

Top HSBC pay packet

So what does the chief executive of HSBC, Stuart Gulliver, get paid?

For 2011 it breaks down like this:

£1.25m basic pay

£2.16m annual bonus - in shares

£3.75m long term incentive plan - in shares

Total: £7.16m

He has taken a hit for PPI mis-selling and the mis-selling of investments to elderly people by a subsidiary, NHFA. The total is £1.3m lower than it would have been otherwise.

He can't sell the long term incentive shares until he retires - and they can be clawed back over the next 5 years  if performance turns out to have been worse.

Your PPI money is coming back

There's been a sharp acceleration in the payments of compensation for mis-sold Payment Protection Insurance. Payments reached £37m in May and £65m in June according to the Financial Services Authority.

The insurance, called PPI, was sold with loans to cover repayments if the borrower fell ill or lost a job. But the policies were widely sold to people didn't need them or would never have been able to claim.

The FSA says the scandal has left "an indelible stain on the financial industry's record". It is publishing compensation figures to measure firms' progress in making payouts.

They have a long way to go. Leading banks have set aside over £6bn to cover compensation for mis-selling the policies.

Payouts so far this year add up to £215m.

Barclays PPI complaints up 93% from last year

Barclays admitted today that complaints about sales of Payment Protection Insurance or PPI have soared.

In the first 6 months of this year the bank received over 73,000 insurance complaints, mostly about PPI. That was up from 59,000 in the second half of last year and 38,000 in the comparable period in 2010.

The bank set £1bn aside earlier this year to meet PPI compensation costs and promised to compensate all customers who complained they had been mis-sold PPI before 20 April on a "no questions asked" basis.

Overall Barclays saw a 14% drop in complaints about its services. However, it expects complaints about PPI to continue rising.

The teeth to deal with financial rip-offs

How would you stop the PPI, endowment and pension scandals of the future?

You could have an enforcement body whose job it is to:

*ban flawed financial products,

*stop misleading promotions,

*and make firms compete honestly with each other.

Plus, you could tell it that when respected bodies such as Which? and Citizens Advice flag up that a lot of people are being ripped off in the same way, it must take swift action to make sure everyone affected gets full compensation.

It's called "mass consumer detriment".

Today's White Paper on financial regulation promises to give these powers to the new Financial Conduct Authority, replacing the consumer regulation side of the FSA and taking in the Office of Fair Trading.

Millions of ripped-off consumers will be wishing that the powers had been in place for years and that they'd been used to protect them.

How many PPI claimants are trying it on?

Banking insiders are suggesting an interesting reason that Lloyds Banking Group is not following Barclays' lead on PPI compensation.

You remember that Barclays caught other banks on the hop this morning by promising no quibble payouts to tens of thousands of complainants.

These were the ones whose cases had been on hold during the months of court wrangling over how thorough the banks would have to be in identifying cases of misselling.

Lloyds says it will be handling all complaints consistently, regardless of when they were received. In other words, everyone gets treated in the same way.

And -- here's the interesting bit -- it's been suggested to me that 20% of the complaints Lloyds receives may be from people who didn't buy Payment Protection Policies from Lloyds.

Most probably come via claims management firms and at least some of the claimants could be trying it on. That's what some bankers think, anyway.

The Lloyds line is that you have to establish how valid complaints are before paying out money willy nilly.

No quibble PPI compensation

Barclays is promising to compensate all customers whose PPI complaints were on hold, without quibbling about whether the complaints were justified.

They were on hold while leading banks fought a court battle with the Financial Services Authority over how many should receive payouts, a battle which the banks lost.

How generous is Barclays being?

It appears that tens of thousands could benefit. And it must be possible that some will receive payouts even if their claims were pretty flimsy.

On the other hand, figures from the Financial Ombudsman Service show that 75% of the Barclays cases it received were decided in favour of the complainant in any case.

What's more, Barclays has to pay £500 for each case that the Ombudsman has to deal with after an appeal. So contesting claims can be costly.

The numbers of complaints upheld by the banks are high as well, though Barclays won't comment on its own figures.

And they have large teams of people trawling through all these complaints. It's an expensive exercise if you are usually in the wrong.

Perhaps Barclays has decided that the cost of not quibbling isn't much higher than the cost of quibbling. It's certainly an easier route to take.

There is no sign of Barclays raising the £1bn provision it has made for PPI compensation.

Here's the link to a recent BBC article on who can put in a PPI claim and how to do it.

The staggering number of dodgy PPI sales

Just to be clear about the number of Payment Protection Insurance policyholders who may be in line for compensation, this is what the Financial Services Authority is saying...

16.1m policies sold since 2005, worth £17bn
The significance of 2005 is that the FSA took over regulation of the sector at this point. It issued tighter definitions of its selling rules in 2010: the court case was about applying these back to 2005.

1.5m policyholders have already complained about misselling
Some of these have been held up by the banks during the court case, so haven't yet been resolved. Not all will be paid compensation.

2m non-complainants will be paid compensation
These will be the the result of the banks looking back through their records and contacting customers who haven't complained but were affected by systemic failures in sales. The obvious evidence of this is when lots of others in a group of customers have already complained about misselling.

750,000 future complaints
These are the number of people the FSA believes will be paid compensation after putting in complaints over the next few years.

Total: 4.25m, more than one in four!

These figures don't include pre-2005 cases, where different rules apply but banks may pay out compensation. Lloyds, for instance, says it might go back another 10 years.

Also, the number of future complaints is an uncertain figure. The banks don't have to contact all their customers to tell them they can make a claim.

But common sense suggests it may grow significantly, now that more people are aware of the issue.