Standard Life sues insurers over £100m losses on fund

STANDARD Life is suing a group of insurers over more than £100 million of losses incurred on one of its pension funds.

The company, which was last year fined by the Financial Services Authority over the marketing of the Pension Sterling Fund as a low-risk investment, is claiming its professional indemnity policy should cover the losses on the fund, which were triggered by the collapse of Lehman Brothers.

Standard Life injected around £100m into the fund after it saw its value fall sharply in early 2009. The falling housing market and an increase in bad debts led to some 4.8 per cent being wiped off the fund, which was valued at £2.2 billion and had 97,000 customers at the end of 2008.

It had been marketed to people approaching retirement and promoted as a low-risk investment. But around half of the funds under management were invested in mortgage-backed securities, the risky investments at the heart of the credit crunch and financial crisis.

The fall in value prompted complaints from hundreds of investors who said marketing literature had given the impression that the fund was wholly invested in cash and/or there was a very low risk of a significant fall in value.

As well as injecting cash into the fund, Standard Life also compensated a number of customers who had sold their units after the sudden collapse in value.

Former boss Sir Sandy Crombie headed the company at the time the money was injected into the fund, Appearing as a witness for the Edinburgh group at the Commercial Court in London he admitted that the marketing literature for it had been “hopelessly inadequate”.

He said the company’s response to the losses was motivated by a desire to do “the right thing”.

The action brought by Standard Life is against 11 insurers including Ace European, Catlin, and Chartis Insurance – who all declined to comment – and a number of syndicates who provided the company’s professional indemnity cover between June 2008 and June 2009.

A spokesman for the assurance group said the insurers had “refused to indemnify” the company over the payment into the fund but said they were unable to comment further while the proceedings were ongoing.

Last January the FSA fined Standard Life £2.45m for misleading investors over the fund although the sum was reduced from a potential £3.5m as the company had alerted the city regulator to the issue itself.

The FSA said that people had been exposed to a “risk of unexpected capital losses” after Standard Life failed to communicate how the fund’s investment strategy had changed in marketing material to new and existing customers. Policyholders expecting their lump sums to be safe had been unaware that the fund might fall heavily in value if markets went against it, the FSA said.

The regulator also said the company had not acted soon enough over concerns raised about the fund’s marketing. At the time Standard Life said it had “learned important lessons from the mistake” and made “significant improvements” to its process for producing marketing literature to prevent the situation happening again.

The case against the insurers is expected to last for up to four weeks and while a number of Standard Life staff are expected to give evidence, current chief executive David Nish will not be among them.