Insurers face pounds 3bn pensions bill: Life insurance companies and financial advisers to bear burden of mis-selling

The total bill for compensating policyholders who have been mis-sold personal pensions is likely to exceed pounds 3bn, double many recent City estimates.

The cost of compensation proposals published yesterday by the Securities and Investments Board will be borne by the life insurance companies and independent financial advisers who sold their policies.

The full scale of compensation will not be clear for at least three years because of the time it will take to trace all those investors who have been mis-sold personal pensions.

Many independent financial advisers will be forced out of business by the costs, and the industry predicts some small life insurance companies will become vulnerable to takeover.

Anthony Nelson, Treasury minister, welcomed the report by Andrew Large, chairman of the SIB, and said it would 'ensure that everyone who has lost out through mis-selling will be entitled to compensation. The investment industry can and will meet the cost.'

But, defending the Government's campaign for personal pensions, he said they remained 'a highly desirable product'.

The Association of British Insurers, the trade body representing the life insurance industry welcomed the proposals. Tony Baker, director- general, said: 'Any speculation now about the total bill will only be a guess.'

He said that from the research done so far all his members would be able to meet any compensation liability. The cost of reinstating someone into an occupational scheme was likely to be a few thousand pounds in each case.

He added that the incidence of mis-selling was not uniformly spread throughout the industry - some companies had a much higher level of opt- outs and transfers than others.

Many life insurance companies have already made provisions to allow for compensation, but these may now have to be increased.

David Prosser, Legal & General's group chief executive, called for occupational pension schemes to share the burden. He said: 'We believe the SIB is unfairly putting too great a burden on the of the costs of resolving the issue on the policyholders and shareholders of the life assurance industry.'

Legal & General made a provision against the costs of possible redress in the 1993 financial year. However, this did not make enough allowance for the administrative costs that are now proposed, he said.

Labour also criticised the SIB proposals. Alistair Darling, City spokesman said: 'The Government has a heavy responsibility for the lax regime of the late 1980s. The present system is increasingly discredited. The Government has ducked its responsibility.'

Chris Broxsom, chief executive of Axa Equity & Law, said: 'The important thing is that we restore confidence in personal pensions. The key is that we do not fall into the same trap again.

'One of the things that concerns me is the effect this will have on independent financial advisers. Many will be forced out of business. Others will have to find a lot of money. That will have to come from somewhere.'

John Beishon, director of the Consumers' Association, which helped to devise the guidelines, hit out at the compensation time scale involved. He said: 'Even for cases which will be reviewed, the time scales appear to have been arranged at the convenience of the pensions industry rather than the harm suffered at the hands of the individual pension holders.'

Mr Beishon demanded that the SIB should act to force company shareholders to pay. Much of the bill will be paid out of policyholders' rather than shareholders' funds, which he thought was unfair.

Geoffrey Lister, chief executive of Bradford & Bingley Building Society and a member of the Personal Investment Authority board, said that although he fully supported the SIB's stance, the scale of the problem was 'surprising'.

Bradford & Bingley is one of a handful of building societies that still operates an independent advice arm. Mr Lister said: 'It saddens me that many of our smaller brethren will go out of business as a result of their compensation liabilities.'

Despite using 100 out of its 600-strong authorised sales force to check on their colleagues to ensure proper advice, Bradford & Bingley has still set aside pounds 5m to compensate for past mistakes. Mr Lister said the figure would have to double this year.

Garry Heath, chief executive of the IFA Association, a trade organisation representing 3,000 independent advisers, fears that some of his members will be driven out of business.

He said: 'The SIB has adopted a sensible and practical approach.'

Mr Heath added that professional indemnity insurers would pick up some of the bill for advisers.

If advisers went out of business because of the claims, the Investors Compensation Scheme would be forced to pay out. The scheme is funded mainly by the insurance companies.

Insurance shares, which fell sharply when the City realised that cost estimates would be raised, lost only a few pence. View from City Road, page 29 (Photograph omitted)

Start your day with The Independent, sign up for daily news emails
News
ebooksAn unforgettable anthology of contemporary reportage
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Digital Optimisation Executive - Marketing

£30000 - £35000 per annum: Recruitment Genius: The UK's fastest growing, multi...

Recruitment Genius: Financial Reporting Manager

£70000 - £90000 per annum: Recruitment Genius: A Financial Reporting Manager i...

Recruitment Genius: Payments Operations Assistant

£23000 - £25000 per annum: Recruitment Genius: They win lots of awards for the...

Recruitment Genius: Telephone Debt Negotiator

£13500 - £20000 per annum: Recruitment Genius: This nationwide enforcement com...

Day In a Page

Sepp Blatter resignation: The beginning of Fifa's long road to reform?

Does Blatter's departure mean Fifa will automatically clean up its act?

Don't bet on it, says Tom Peck
Charles Kennedy: The baby of the House who grew into a Lib Dem giant

The baby of the House who grew into a Lib Dem giant

Charles Kennedy was consistently a man of the centre-left, dedicated to social justice, but was also a champion of liberty and an opponent of the nanny-state, says Baroness Williams
Syria civil war: The harrowing testament of a five-year-old victim of this endless conflict

The harrowing testament of a five-year-old victim of Syria's endless civil war

Sahar Qanbar lost her mother and brother as civilians and government soldiers fought side by side after being surrounded by brutal Islamist fighters. Robert Fisk visited her
The future of songwriting: How streaming is changing everything we know about making music

The future of songwriting

How streaming is changing everything we know about making music
William Shemin and Henry Johnson: Jewish and black soldiers receive World War I Medal of Honor amid claims of discrimination

Recognition at long last

Jewish and black soldiers who fought in WWI finally receive medals after claims of discrimination
Beating obesity: The new pacemaker which helps over-eaters

Beating obesity

The new pacemaker which helps over-eaters
9 best women's festival waterproofs

Ready for rain: 9 best women's festival waterproofs

These are the macs to keep your denim dry and your hair frizz-free(ish)
Cycling World Hour Record: Nervous Sir Bradley Wiggins ready for pain as he prepares to go distance

Wiggins worried

Nervous Sir Bradley ready for pain as he prepares to attempt cycling's World Hour Record
Liverpool close in on Milner signing

Liverpool close in on Milner signing

Reds baulk at Christian Benteke £32.5m release clause
On your feet! Spending at least two hours a day standing reduces the risk of heart attacks, cancer and diabetes, according to new research

On your feet!

Spending half the day standing 'reduces risk of heart attacks and cancer'
With scores of surgeries closing, what hope is there for the David Cameron's promise of 5,000 more GPs and a 24/7 NHS?

The big NHS question

Why are there so few new GPs when so many want to study medicine?
Big knickers are back: Thongs ain't what they used to be

Thongs ain't what they used to be

Big knickers are back
Thurston Moore interview

Thurston Moore interview

On living in London, Sonic Youth and musical memoirs
In full bloom

In full bloom

Floral print womenswear
From leading man to Elephant Man, Bradley Cooper is terrific

From leading man to Elephant Man

Bradley Cooper is terrific