Scottish Widows could be hit with a compensation claim which could cost it up to £1bn, following accusations it gave negligent advice to around a hundred final salary pension schemes.
The claim relates to advice given in 1999/2000 by internal Scottish Widows actuaries to switch out of with profits guaranteed deferred annuity funds into the Scottish Widows Managed Fund.
Independent consultancy Actuarial Review Company, which represents one affected scheme, estimates this decision lost schemes around £300m. However, the cost to Scottish Widows of full restitution (putting the schemes on the same guaranteed footing as before the switch) could create an extra liability of £1bn.
The loss to schemes makes it impossible to keep pension promises to members without massive increases in funding and some schemes have been forced to close as a result, ARC claims.
The switches took place when the stock market reached its all time high and at the time of the take-over of Scottish Widows by Lloyds TSB. Pension schemes affected were recommended to give up investments which yielded around 7% per annum guaranteed in favour of equity based investment. These would have had to grow around 10% per annum to break even but only produced around 3.5% per annum from 1999 to May 2008, ARC says.
ARC believes the behaviour of Scottish Widows, where actuarial advice was given by employees of the organisation also providing the investment funds, may show mismanagement of a conflict of interest.
However, as part of a dossier sent to the FSA, demanding an investigation into the advice given, ARC also says it believes the problem of guarantee removal is not limited to Scottish Widows. It believes the case concerns the industry as a whole and has alerted a range of industry bodies including the Pensions Regulator and the Actuarial Profession.
ARC director, Roger MacNicol says: “The switch advice was given by employees of Scottish Widows, not by independent actuaries. Was the advice in the interests of the pension schemes or was it in the interests of the Scottish Widows? Was there a fundamental conflict of interest? One man’s liability is another man’s asset – a reduced liability for Scottish Widows is reflected by a reduced asset base for these schemes.”
“ARC’s conclusion is quite clearly that Scottish Widows has a case to answer. Our concern is not to criticise Scottish Widows but to ensure our clients gain the redress they deserve. The last thing the financial services industry needs is another misselling scandal and we hope that Scottish Widows agree and work with us to grant compensation or restitution in early course.”
In response, Scottish Widows says: “We are not in receipt of any claim, complaint or dossier and have had no advance notification, of the dossier that has been reportedly submitted to the FSA, FOS, Pensions Regulator and Actuarial Profession. As a result it is very difficult to make any substantive comment on its content .
“We are only aware of one complaint ever being lodged from a company pension scheme relating to a similar issue to the one described and we are not able to comment on specific cases.
“We are not aware of any High Court action being taken against Scottish Widows by a company pension scheme on this issue and are not aware of any company pension scheme managed by Scottish Widows having contact with the company named in the article, Actuarial Review Company. Investigation into the claims will continue once we are in receipt of the dossier.”
What made financial headlines over the weekend?
To promote 'long-term investment'
Switching 'hard and expensive'
Smaller funds still packing a punch