Outlook: Meeting the costs of pension mis-selling

As the Government prepares to announce a spanking new stakeholder pensions policy for the next millennium, the industry and its regulators are still struggling to come to terms with the mess left by the last attempt to reform the way people save for retirement. The Financial Services Authority yesterday estimated the eventual costs of the pensions mis selling fiasco at a staggering pounds 11bn - more than double previous official estimates.

Ministers would do well to learn the lessons, for although blame for pensions mis selling lies largely with the industry and its over enthusiastic salesmen, a substantial part of the mischief is down to the government itself and the direct encouragement it gave to people to take out personal pensions. Given this level of culpability, the exchequer is perhaps lucky that it's not picking up at least a part of the tab. With ministers seriously considering the idea of introducing compulsion into saving through stakeholder pensions - egged on as ever by the industry - the Treasury is going to find itself doubly liable this time round when it all goes horribly wrong.

Fortunately the new lot in Downing Street are able to blame incompetent Tories for the last great foul up (step forward John Major, the responsible minister at the DHSS when the government launched its campaign to convince us we would be better off with a personal pension). Equally fortunately for our cost conscious Chancellor, it is the industry that is picking up the bill.

Now for the bad bit. Unfortunately, as far as the rest of us are concerned, the ultimate cost will be born largely by those who buy life assurance - through lower benefits on existing policies and higher charges on future ones. In mutually owned life companies, the whole cost is down to policyholders, since it is they who own the company. Even in a proprietary company, there appear to be no hard and fast rules on how the cost should be divided between policyholders and shareholders.

Most companies have provided something in their accounts against the priority cases already settled, but in nearly all instances the provisions are only a fraction of the total costs. The balance, we must assume, is met from the life fund. The present Government seems as incapable as the last of finding a satisfactory way of ring fencing policyholders from these costs and making shareholders and directors wholly liable for the scandal.

In essence, then, we end up with a tax to pay the compensation after all , albeit a hidden and random one. Ho hum.