Watchdog offers hope of compensation deal

More than 100,000 policyholders could be on their way to compensation payments from pensions scandal No 2 - the first was personal pensions- according to figures released this week by the watchdog, the Financial Services Authority. But these figures are likely to be just the tip of the iceberg.

The payments to this group alone, likely to total £200m, are recompense for the mis-selling of free standing additional voluntary contributions - the top up retirement plans better known as FSAVCs.

These policies were sold mainly by commission-driven direct salesforces, but often by IFAs, to employees who would nearly always have been better off with a top-up AVC plan from their own employer where charges are far lower.

Because of the huge costs involved in FSAVCs, their values will be lower than AVCs invested in the same underlying fund. Some employers also added cash of their own to match workforce contributions - FSAVC holders lost out on these as well.

FSAVC sales started in April 1988. And 1.2m were sold before the FSA started to probe the plans for potential mis-selling in August 1999.

The mathematics involved in working out who lost out - and to what extent - are complicated. And it has, so far, been left to insurance companies to identify the worst hit victims. Their cases go to a review process ahead of possible compensation offers.

Up to this week, the insurers have found 109,800 policyholders who "will be invited to request a review" - a formality to set the ball rolling.

But there could be many more. The FSAVC review has ordered life companies to look at cases in phases with the biggest losers coming first.

This week's figures cover those who would otherwise have been in matched AVC schemes where the policyholder could have benefited from extra employer payments and other subsidised AVCs where companies would have enhanced contributions.

But hundreds of thousands of others could be drawn in later. The insurers have until June 2002 to complete their review - a process sure to throw up more losers.

FSAVCs were sold as monthly contracts based on no more than 15% of total earnings after other company pension payments. Many insurers will raid shareholder funds for the eventual compensation bills, although mutuals involved will have to find the compensation cash from their with-profits funds.

But there are no plans to ask salesforces or their directors to pay back the commission they earned.

FSAVC sellers claimed the plans offered wider investment choices and were more flexible for staff who switched jobs.