The insurer's provision came yesterday as the company announced after- tax profits of £33m for 1994, up 34.2 per cent on the previous year.
However, most of the profits increase came from the sale last year of its consumer finance business and residential mortgage book. Without these sales, profits in 1994 would have gone up by only 1.3 per cent.
Earnings in the company's core insurance business increased by 5.6 per cent across its life, pensions and managed funds last year.
David Hubbard, the company's chairman, said: "London and Manchester's achievement of improving its overall volume of new annual premium income represents a strong and commendable performance."
"The successful disposal of our consumer finance and residential mortgage business represents key strategic moves and together eliminate £375m of asset-backed debt from the group balance sheet."
London and Manchester's chain of 85 estate agencies, based in London and the south of England, lost some £1.2m last year despite cost cuts.
The insurer's provision for pension transfer compensation reflects its 0.7 per cent share of the transfer market. It indicates that the financial services industry's overall compensation bill may well top £3bn.