UK - Scottish Widows could face a "type of class action" legal battle over claims it provided 'negligent' advice to around 100 final salary schemes recommending they switch from a deferred annuity guaranteed contract to the Scottish Widows' Pensions managed fund.

The Actuarial Review Company (ARC) has claimed the affected schemes, with several thousand members, have lost around £300m (€377m) following the advice in 1999/2000, although if the complaint is successful ARC suggested the cost of providing full restitution could reach £1bn (€1.3bn).

It is alleged at the time of the takeover of the insurer by Lloyds TSB, internal Scottish Widows actuaries, rather than independent actuaries, advised schemes to switch from a with-profits deferred annuity guaranteed contracts into the Scottish Widows' Pension Managed Fund - in some cases offering 'incentives' if a decision was made within six months.

However, it is claimed this led schemes to forfeit guaranteed returns or guaranteed annuities on members' pensions, and saw funds swapping guaranteed returns of 7% a year for equity-based investments which produced around 3.5% per annum between 1999 and May 2008, instead of the 10% required for the schemes to break even.

ARC argued the loss of £300m has meant schemes have been unable to meet pension promises and in some cases have even closed, as a result, suggesting legal action may follow in a matter of days.

The delay between the allegedly "negligent" advice being given and the complaint being passed to the Financial Services Authority (FSA) and other industry bodies such as The Pensions Regulator (TPR) and the Actuarial Profession, is because ARC was only engaged in 2007 by the scheme related to the complaint.

Roger McNicol, director at ARC, said he issue was only uncovered once work with the scheme had begun but it is said to be "much more widespread" and not an isolated incident.

Over the last year, there had been negotiations and discussions with lawyers on both sides but as  "nothing had come of that" the decision had been taken to involve the FSA and other industry bodies, and also for the trustees of the scheme to consider legal action, according to ARC.

In addition, ARC confirmed it had notified around 100 other schemes that may have been potentially affected by the issue, having held this particular type of contract. Now it has a "template" to work from, ARC suggested the investigation process could be speeded up, although McNicol admitted " a lot depends on what the FSA and other bodies do" in the next steps.

Legal action is only being considered at present by the scheme making the initial complaint, however McNicol suggested the next step is the "development of dialogue with the other schemes" to see what they want to do.

One possible option is to determine whether the other affected schemes would want to get involved in a joint legal case, similar to a "type of class action", as he argued the schemes involved are "significantly less well-funded, less solvent, and require a higher contribution rate from both employer and employee" and "in some cases the schemes have been forced to close".

McNicol said: "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 mis-selling 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 it had "no advance notification of the dossier that has been reportedly submitted to the FSA, FOS, TPR and Actuarial Profession," further adding, "as a result it is very difficult to make any substantive comment on its content".

In addition, the insurer's spokesman said it is "not aware of any High Court action being taken against Scottish Widows by a company pension scheme on this issue" and added it was "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".

That said, it admitted "investigations into the claims made will continue once we are in receipt of a dossier".

The FSA could not confirm whether they had received the dossier or had begun an investigation into the claims, as they "do not comment on regulated firms".

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