Aviva, Britain’s largest insurer, is refusing to compensate fairly customers whose pensions it has underpaid as a result of its own errors.
In doing so it is going against the guidance of the financial ombudsman. Worse, many of its elderly customers will not understand that they are being paid less than they are entitled to.
Aviva is telling customers that the 8pc statutory interest rate on compensation recommended by the courts and the financial ombudsman is “not reasonable”, and instead chooses to use a stingier rate that would chop around a third off a lump sum paid to a customer for 10 years’ worth of losses.
The issue has arisen following Aviva’s admission of widespread pension miscalculations, first exposed in Telegraph Money, where tens of thousands of pensioners missed out on decades’ worth of income. This was because of errors made in calculating savers’ funds.
Typically such compensation is paid with interest added at a rate of 8pc – a rate set down by the Financial Ombudsman Service (FOS) and courts.
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But it quickly became apparent that when Aviva wrote to its out-of-pocket customers telling them of the errors and offering redress, it was using a far lower rate.
On January 27, for instance, pensioner George Fisher received a letter from Aviva explaining that a “calculation error” meant his pension had been underpaid by £3,046 – more than 50pc of his pension pot – which Aviva said was worth £5,707 when he started drawing an income in 1998.
Aviva said it had added interest worth £275.40 to the payout, bringing the total compensation to £3,322. It did not explain how this had been calculated, but Mr Fisher was able to work out that it was much lower than 8pc.
Mr Fisher wrote back to Aviva outlining that he was not satisfied with the offer.
The response, signed by Aviva’s chief operating officer, Kevin Moss, on February 26, states that customers need to “prove they have borrowed money as a result of an error or delay” for Aviva to “consider” applying 8pc.
It also argues an 8pc interest rate is “not reasonable” because “most customers would not decide to borrow money”.
Aviva’s position appears to be that unless its customers racked up expensive debt as a result of not being paid enough income, the 8pc would be “too generous”.
Mr Fisher said: “I do not intend to drop this, particularly because of the condescending way by which Aviva tried to justify the meagre amount of interest they have paid me. In my particular case, I was consolidating my small pensions to put into my company’s pension scheme, which in the period before my retirement produced more than 8pc a year in returns.
“I will be pursuing this with Aviva and then I will go to the financial ombudsman.”
Martyn James, a spokesman for the FOS, said there was no excuse for firms not paying 8pc interest on compensation in cases where firms had identified their own errors.
He said: “Our approach to compensation is long standing and remains unchanged. It is very clear cut. If businesses aren’t paying 8pc interest on compensation in these circumstances, we ask the firm to pay the customer 8pc and in the vast majority (over 95pc) of cases they agree. We will need a very good reason for them to pay less – for example, if there was something the customer could have done to avoid the shortfall in the first place.
“Where firms have found errors auditing their own books, there is nothing customers could have done.
“We would actively encourage people who have received less than 8pc to bring their complaint to us. We are able to resolve the case very quickly and if firms persistently fail to do what we ask we will report them to the Financial Conduct Authority.”
The Pensions Minister, Steve Webb MP, told Telegraph Money that firms should be forced to pay the correct amount of compensation as set by the courts and the financial ombudsman.
He said: “I have no sympathy with insurers’ protests about compensation. If a customer has lost out and it’s the company’s fault, they should receive the proper redress.
“It is unfair that it is so arbitrary. Insurers’ decisions not to offer 8pc interest shows they are doing the bare minimum they can get away with.”
He also said the Financial Conduct Authority was failing to protect consumer interests by allowing savers to be compensated in such an “erratic” way.
Telegraph Money has learnt that Friends Life, another giant insurer, has also been rejecting customers’ requests for 8pc to be added to their payouts.
One reader, Daniel Quinn, 77, who turned £70,203 of his pension into an annuity in 1998, was the victim of two mistakes that have deprived him of his own money for nearly two decades.
In 2004, Axa Life, a firm Friends Life has since bought, wrote to him to let him know an “internal audit” had found his loyalty bonus had been omitted from his pension, resulting in him receiving compensation of £2,775, plus a higher income for life.
Then, on January 21 this year, Mr Quinn received another letter, explaining that his loyalty bonus had been miscalculated, meaning he was entitled to another sum of £1,349 as well as extra monthly payments of £11.08.
Experts estimate that Friends Life owes Mr Quinn a total of £1,250 in additional interest payments, if an 8pc rate was applied.
In a separate case which emerged last week, another reader, Brian Writer, was underpaid by £7,173. Friends is refusing to say how many others are implicated, despite admitting two previous errors affected 1,200 and 5,000 customers respectively.
Have you been affected by a pension error or recieved compensation you're unhappy with? We want to hear about it. Email katie.morley@telegraph.co.uk
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