Costs of pension scandal to rise

The Securities and Investments Board, the financial regulator, yesterday warned insurance companies and independent advisers that the cost of compensating pensions mis-selling victims would have to rise in the wake of tax changes in the Budget.

The SIB said it would be publishing new tables on how to calculate redress to policyholders in the wake of the abolition of advance corporation tax relief for pension funds.

The SIB's quarterly guidance on pension compensation takes into account a range of factors likely to affect the amount companies must set aside to meet anticipated bills.

Any guidance must take into account a complicated set of factors, including changes in investment conditions, interest and inflation rates and anticipated returns on equities and gilts. Compensation offered by companies must be based on these SIB assumptions.

A SIB spokeswoman said: "We expect offers to be calculated in respect of cases where top-ups are offered because reinstatement is not available. It is impossible to say exactly what difference the ACT changes will make.

"For example, those who are in the urgent category of cases to be reviewed because they are close to retirement would be switching to gilts to protect their investments. They will not be substantially affected by the ACT changes."

However, independent actuaries believe the change could add hundreds of millions of pounds to the existing pounds 4bn compensation bill.

They warned earlier this week that the abolition of ACT credits, announced on 2 July by Gordon Brown, the Chancellor, would mean the returns that many insurers expected their pension funds to achieve would have to be scaled down, increasing the bill for most companies.

Fears have also been raised that the Chancellor's ACT statement will raise the stakes between insurers negotiating to reinstate policyholders back into occupational pensions and the trustees of those schemes. Trustees are likely to demand higher reinstatement payments.