The fall in new single premium pension business was blamed largely on nervousness among customers caused by bad publicity for the industry that has hit the pensions transfer market.
The Securities and Investments Board on Tuesday announced a programme to assess compensation for those wrongly sold policies, which is expected to exceed pounds 3bn.
Other life insurance companies have experienced similar drops in personal pension sales this year, and that is expected to be reflected in the sales figures for the third quarter, due out next month. In the first six months, single premium personal pensions sales were down 12 per cent from a year earlier.
The effect of falling sales and the disclosure of commissions for the first time from January is expected to lead to an extensive restructuring of the life insurance industry and the independent financial advisers sector, which sells about a third of personal pensions.
Industry experts also predict that it will weaken many smaller unquoted life companies to the point at which they may cease new business.
But the stock market took the increased cost of the personal pensions compensation in its stride, because quoted life and composite insurance companies are regarded as strong enough to absorb the costs easily. Prices of most composite and life insurers were either steady or slightly higher.
Most of the compensation will, in any case, come from policyholders' rather than shareholders' funds. Lloyds Abbey Life, which was regarded as most vulnerable because compensation to its unit-linked policyholders will come from shareholders, rose 10p to 336p.
Although the brokers Smith New Court predicted the cost to the Pru will be pounds 200m, the company said it did not need to make any specific provisions in its accounts. The Pru said it had always forbidden its sales representatives to sell personal pensions to active members of company schemes through opt-outs. It does, however, accept transfers from those who have left company schemes, and this was a large part of the fall in the first nine months.
In the third quarter, single premium personal pension sales were down to pounds 44m.
The Pru confirmed that its chief executive, Mick Newmarch, had made a pounds 203,000 profit by selling options in the company hours before the SIB report was published. He exercised options on 208,750 shares at 198.9p, selling later in the market at 296p.
A spokesman said: 'It was the last day he could do it. If he had not done it yesterday he would have lost the options.' The sale on the day of the SIB report was 'completely coincidental'.
Yesterday, the Pru's share price rose 10p to 308p because its overall new business figures for the nine-month period were better than expected. There were also signs of buoyancy in some new products that the Pru is introducing to replace lost pension and endowment policy business. Sales of regular premium PEPs were pounds 82m in the first nine months, compared with pounds 19m a year earlier.
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