Compensation to those affected could total hundreds of millions of pounds. Companies are obliged to reinstate any benefits a saver might have been entitled to under the previous pension scheme. Between pounds 4bn and pounds 7bn is thought to have been transferred.
The Securities & Investments Board, the City's most powerful regulator, will review all of the 500,000 transfers from occupational to personal pensions since 1988.
News of the review hit the shares of the leading life insurers. Prudential Corporation fell 9p to 361p, Legal & General eased 7p to 532p, and Lloyd's Abbey Life shed 4p to 450p.
However, shares in the five listed composite insurers were strong, with Commercial Union, which has the largest life business, rising 8p to 625p.
The SIB review follows an initial inquiry into a random sample of thousands of personal pension transfers carried out since 1988.
The SIB, which worked with other frontline financial regulators to uncover the extent of the problem, is thought to have discovered that more than a third of transfers in the review were wrongly carried out. Its inquiry found that poor advice ranged from deliberate mis- selling by salespeople aiming to boost commission earnings, to seeking too little information for a proper judgement on whether the transfer was warranted. If the information was sought and given, it was inadequately recorded, raising doubts about its accuracy.
In conjunction with the review, the SIB is setting up a task force with the frontline financial services regulators Fimbra, Lautro and Imro, and other industry figures, to agree compensation for those out of pocket.
The SIB has asked KPMG, the accountancy firm, to report on how many people are likely to have been affected. The findings are expected before Christmas.
An SIB spokeswoman said yesterday: 'The survey was on a closely selected basis and is believed to be statistically sound. The initial results appear to show that a significant level of non-compliance with our rules has taken place.'
She added that even if the full- scale review backed up early research findings, this did not mean that every case would necessarily lead to compensation.
In some cases the advice may have been sound but was simply not recorded properly. In other instances, clients may be happy with the performance of their personal pension as compared to their previous one.
The review also calls into question the Government's determination to promote personal pensions. Its 2 per cent tax incentive for those opting out of state provision has been described within the industry as an important selling tool.
Alistair Darling, the Labour Party's City spokesman, said: 'The fact that SIB has to investigate the sale of 500,000 personal pensions is a scandal. Yet again, the failure of self-regulation is evident.'
Keith Bedell-Pearce, chief executive of Prudential Financial Services, said his company had discouraged most transfers since 1988.
'There's no reason to think we have a particular problem. There are virtually no circumstances where it would be best advice to transfer out of an occupational pension scheme into a personal pension.'
Chris Hatry, managing director, sales and marketing at Legal & General, said: 'We are confident that the overwhelming number of people who transferred to Legal & General personal pensions have received good advice.'
Malcolm Oliver, director of Barclays Life, said his company pulled out of the transfer market nine months ago. 'A lot of people were laughing at us then, but we felt that investment returns could not match those of occupational schemes. The number of cases where that was not the case was too small for us to get involved.'Reuse content