Two million victims of biggest money scandal

MORE than 2 million people in the UK have been caught up in the pounds 15bn pension mis-selling debacle. But to date not a single criminal charge has been brought, because, say regulators, no one meant to mislead a customer, as far as they knew.

Mis-selling takes place when a life insurance or independent financial adviser's sales person sells an investment product which is not in the best interests of the customer to buy.

The mis-selling took place on a giant scale between 1987 and 1994. In 1987,the Thatcher government applied pressure to life insurance companies to sell personal pensions, and paid for a big TV campaign to encourage people to leave employers' schemes in favour of the new investment vehicle.

Employees with reservations about their employer looking after their pension money were particularly well-targeted. Miners, nurses, teachers and local government officers were among the biggest customers.

The sales people were given an easy sale. As well as leaving the employer's scheme, customers could use the personal pension to replace state earnings related pensions, picking up annual incentives worth one or two percent of their salaries just for doing so.

It seemed a win-win: the customer was getting extra savings from the Government and a pension to call their own.

Sales people did not always explain two crucial drawbacks. In almost all cases employer's contributions were only payable if employees were in the employer's pension scheme. When employees left, a contribution worth up to 14 per cent of salary was forfeited.

The second was the sales person's real motivation. By persuading a customer to save pounds 100 a month into a personal pension, a sales person could pick up a commission of around pounds 1,500 - taken out of the customer's savings.

The small print would set out an initial charge of 5 per cent. But that was 5 per cent of all contributions for 25 years. The money was taken out upfront, so most of the first two years' contributions were spent paying a salesman for his kindness.

While many were well-advised to buy personal pensions, 2 million were persuaded to take them up despite having a better opportunity to be in an employer's scheme.

Some maverick voices warned no good would come of it, but were ignored.

It was not until late 1993 that accountants and actuarial consultants KPMG produced an explosive report which suggested that the majority of employees who ignored their employer's scheme in favour of a personal pension had got a raw deal.

Public pressure persuaded Sir Andrew Large, chairman of the Securities and Investments Board, to press ahead with further studies. A year later, KPMG came back with an official study on behalf of the SIB. It found more than 90 per cent of the pensions in question were likely to have been mis-sold.

If KPMG was right, up to pounds 5bn was at stake - and more than half a million people had lost an average of pounds 8,000 each. Many would never know: they had already died. Others had retired, or transferred their money to another pension.

SIB ordered companies to review all cases in question, and a review of 600,000 urgent cases was meant to be 90 per cent complete by the end of 1996. But it was dogged by delays.

Professional indemnity insurers, such as LIBM, feared bankruptcy if they paid the giant claims and in 1995 they took the regulators to judicial review. Advisers, the judge ruled, could not be required to send out letters explicitly telling customers they may have suffered mis-selling.

In February 1997, The Independent published a leaked memo from the regulators showing that less than 10 per cent of urgent cases had been reviewed.

Since early 1997 dozens of companies have been fined a total of more than pounds 10m because of failings connected to the review. The review's second tranche - of 1.5m less urgent cases - has got under way.