Budget fuels mis-selling debate

Insurance companies may have to pay hundreds of millions of pounds more compensation to victims of the pension mis-selling scandal in the wake of the Government's withdrawal of ACT credits from pension schemes, it emerged yesterday.

Bills will soar because the cost of any compensation payable is linked to the benefits pensioners would expect to receive at retirement.

Employers who run schemes based on final salaries at retirement face increases of up to 1 per cent a year in their payroll costs as a result of the abolition of ACT credit.

Some insurers who wrongly persuaded people to leave generous employer- run schemes have offered to match the same benefits at retirement.

They could be forced to stump up the same amount for 20 or even 25 years, in effect costing them 20 per cent or more in extra bills.

One company that has pushed for "guarantees" to be used more widely within the industry is Legal & General, which has about 26,000 pension mis-selling cases under review. A spokeswoman for the company said: "We are aware of the issue. [Heavier costs] are a possibility but our technical people are looking at the matter now."

The Association of British Insurers (ABI), the trade body trying to co-ordinate the efforts of its members in resolving the mis-selling scandal, said: "We are aware of this and are trying to resolve the matter. It certainly is another complication."

In addition, fears were raised last night that many pension fund trustees faced with requests to reinstate former members into their schemes right away would be far more reluctant to agree because of the extra costs involved in meeting any guarantees involving final salary at retirement.

Matthew Demwell, a spokesman for the Association of Consulting Actuaries (ACA), said: "Schemes which are looking at reinstatement in the near future will have to think hard whether to accept them. If I were advising trustees, I would have to tell them to look for higher amounts than before the Budget."

One independent expert, who declined to be named, predicted that the tough negotiations now certain to take place between insurers and pension funds would probably delay even further the compensation process, which has already lasted more than two years.

He said: "Having thrown a spanner in the works of the compensation process, the Government will then blame the industry for not sorting it out quickly enough."

The ACA is also concerned at the way the abolition of ACT credits has in effect skewed down earnings assumptions which led to the carefully devised rebate payments for opting out of the State Earnings-Related Pension Scheme, Serps.

In April, the Government announced changes to the rebate system, designed to encourage Serps opt-outs and minimise its long-term spending bill.

The rebates range between 3.88 per cent of earnings for a16-year-old to 9.48 per cent for those aged 46 or over.

Rebate levels were calculated by the Government Actuaries Department (GAD), which based its figures on certain assumptions about stock market growth in the next 40 years. These did not include the abolition of ACT credits, predicted to knock up to 1 per cent per year off share price values.

Mr Demwell said: "Anyone opting out has been retrospectively misled. If the GAD had known at the time what was likely to happen, the rebate figures would have had to be different. The Government has changed the terms of the rebate. This is not fair."