Scottish Widows could potentially be hit with a compensation claim which could cost them in excess of £3bn, the Actuarial Review Company (ARC) has reported to the Financial Services Authority.
ARC, the independent actuarial consultancy, has written to the FSA alleging that Scottish Widows negligently advised around one hundred final salary pension
schemes to switch out of with profits guaranteed annuity funds and into the Scottish Widows Managed Fund.
The final salary schemes were advised to swap their guaranteed returns, which at the time were achieving investment returns of approximately seven per cent per annum, for non-guaranteed investments in, potentially much higher risk, equities which would have required an annual investment of approximately 10 per cent to keep pace with the guaranteed returns given up. In fact, the Managed Fund has produced approximately 3.5 per cent per annum from 1999 to May 2008.
The switches took place in 1999 and 2000 when the stock market was at its peak and coincided with the takeover of Scottish Widows by Lloyds TSB. The advice was provided by Scottish Widows’ own actuaries, not by independent actuaries and ARC has estimated that as a result of the potentially negligent advice, pension schemes have lost over £300m, making it impossible for these schemes to keep their pension promises to their members without massive additional contributions.
However, the picture for Scottish Widows could be a lot bleaker as the cost of full restitution of the pension
funds could be over £1bn. Interestingly, since acquisition, Lloyds TSB have withdrawn a massive £3.6bn from Scottish Widows’ funds.
ARC believes that there could have been a conflict of interest relying on advice from actuaries employed by Scottish Widows who were also responsible for the investment medium of the pension funds. Commenting on the situation, ARC Director, Roger MacNicol said:"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?
"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."
A spokesperson for Scottish Widows said: "We have not received any advanced notification of the dossier supplied to the FSA and are unaware of any action being taken in the High Court. However, we take all allegations of this nature very seriously and are investigating the matter fully."
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