New pensions windfall for 60,000

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The Independent Online
THOUSANDS OF victims of the pensions mis-selling scandal are to receive extra compensation payments averaging pounds 3,000 because of a blunder in the way their entitlements were calculated.

The additional payments, to up to 60,000 people, will add about pounds 200m to the pension industry's bill for clearing up the scandal. But it will also mean a further delay of up to a year in settling claims because of the number of cases that now need to be reviewed.

The Treasury's latest estimate puts the total cost of the scandal at pounds 11bn. More than 600,000 victims, many of whom are already retired or have died, have been offered an average of pounds 13,000 each in compensation.

But the watchdog conducting the review, the Financial Services Authority, has confirmed that many of them have been paid too little - because insurers failed to take account of changes in employment when they worked out the compensation.

The payments are designed to reimburse policy holders for the employers' pension contributions that they missed out on by switching to a personal pension. More than pounds 2.5bn has already been paid out.

But most payouts failed to take account of further losses accrued when victims changed jobs, thereby missing out on contributions from their new employer. Compensation was instead confined to the first job.

PricewaterhouseCoopers, one of the leading consultants helping insurers with the review, estimates that up to 60,000 cases will have to be reviewed. Payouts are likely to rise by 20 per cent each, or around pounds 3,000.

The FSA only clarified the situation last month - four years after the review began in October 1994.

After pressure from the industry, the regulator issued a bulletin instructing firms to revisit all cases where a change in job may have taken place since the review began.

Ron Devlin, the FSA official in charge of the review, said: "Without a doubt, further compensation could be payable to some investors. If that weren't the case we wouldn't be asking firms to revisit these cases."

Joe Chiaro, a pensions review expert at PricewaterhouseCoopers, said 90 per cent of firms involved would be sent back to the drawing-board. This would add up to a year to the time it will take to complete the review, he said.

"Every company that hasn't done this is going to have to revisit every case. Most of the companies involved in the review have not considered the new-employer scenario.

"The longer the issue is not addressed, the more it will cost."

The industry fears the pounds 11bn compensation bill will rise still further because of the recent plunge in long-term interest rates - a key factor in deciding how much compensation must be offered.

Insurers are privately expressing anger at the way the issue has been handled by financial regulators. They believe the situation should have been clarified much earlier.

Derek Adams, who heads a forum for project managers working on the review, said: "The real difficulty is that few companies are going to have records of job changes. So you'll have the nonsense of phoning people up and asking if they have changed jobs recently.

"This whole thing has been a nightmare from start to finish."

The pension mis-selling review, which began nearly four years ago, has been dogged by delay. More than 2 million people, including many nurses, teachers and local government staff, were wrongly advised between 1987 and 1994 to leave employers' pension schemes in favour of a personal pension.

After the election the Government stepped up the pressure on financial services firms which had mis-sold pensions to speed up compensation.

Companies which have mis-sold personal pensions are required to compensate victims for any reasonably foreseeable loss caused.

Recently MPs on the Treasury select committee said the pay of sales staff at financial service firms depended too heavily on commissions. In a report published last month they urged the Financial Services Authority, the City regulator, to develop guidance so that excessive dependence on commission- based selling can be reduced.

The pension review is now due to go into its next phase, compensating younger victims of mis-selling whose cases were deemed less urgent.