Insurers must meet pension claims from their reserves

Insurance companies are being told by the Department of Trade and Industry that compensation to victims of the pension transfer scandal should not come out of other policyholders' funds.

The DTI has written to the chief executives of all British life insurance companies saying the money should in most cases come instead from their firms' free reserves.

Companies will also have to inform the DTI by the end of February of estimates of potential liability to their clients.

Earlier this week the Securities and Investments Board, the City's leading regulator, announced that up to 1.5 million private pensions might have been mis-sold.

The DTI's initiative follows fears that many insurers were preparing to penalise other policyholders' funds to meet any compensation claims, thought to be in excess of pounds 3bn.

A spokeswoman said: 'We have given companies some guidance in terms of how costs will be allocated. Many with- profits life offices have extensive reserves. We will expect them to meet claims from there wherever possible.'

Free reserves are assets held by insurers in addition to their other liabilities to policyholders. Estimates for the entire insurance industry suggest total reserves of pounds 30bn to pounds 40bn.

Although not supposed to affect rates paid to policyholders, large free reserves allow greater investment flexibility by life companies.

Chris Brocksom, chief executive at Axa Equity & Law, which sells largely through independent advisers, said: 'We have very good free reserves of pounds 1.75bn, which is a very high proportion of our total assets, well over 20 per cent.

'Any compensation claims we are likely to face will have no material effect on the expectations of our policyholders. Our own internal research showed that meeting claims out of free reserves should not pose a major problem to any company.'