Hole in pensions is to be filled: Maria Scott on the millions in National Insurance contributions that went astray

THOUSANDS of people will shortly receive letters about their pensions with news that may shock them.

The letters, from insurance companies, will explain that money that has been missing from personal pensions because of an administrative mix-up will now be invested. For some people the amount will run to thousands of pounds. The insurance industry and the Department of Social Security reached agreement this week on how to resolve the mix-up.

Forms signed by 32,000 people up to five years ago to contract out of the State Earnings-Related Pension Scheme went missing. This meant that National Insurance contributions and special government incentive payments that should have been paid into personal pension plans were not paid.

This has left a gaping hole in these individuals' pensions. This week's agreement means that the DSS will hand over a total of pounds 67m of backdated DSS rebates to insurance companies. The companies will invest the money on behalf of policyholders and credit the individuals' policies with the investment growth they have missed out on. This is expected to cost the insurance industry between pounds 6m and pounds 8m.

The average payment due to the 32,000 people will be about pounds 2,300.

Many of those affected will not know there has been a problem with their pensions. Although insurers believe they will be able to trace people whose pensions have been in limbo because of the mix-up, those in doubt about their schemes should check with their pension provider or adviser.

Scottish Widows, one of the largest pension providers in the country, said it had nearly 700 cases. Those most likely to be aware that something was amiss were policyholders who had arranged to make extra contributions to their personal pensions, in addition to the DSS rebates.

People with rebate-only pensions would not be aware because contracts had not been formally set up. Scottish Widows has made no effort to contact these people even though it has been aware of the problem for some time.

Mike Smith, product marketing manager, said: 'I think the view was taken that this would unnecessarily worry them.'

Many of these people arranged their pensions, and were given the relevant forms for contracting out (APP1), through independent financial advisers. These advisers may have been in contact with the individuals, but not necessarily.

Scottish Widows will now have to contact these people, many of whom may have moved and be difficult to trace. Mr Smith said that Scottish Widows had these individuals' National Insurance numbers on record, so if necessary should be able to trace them through these.

Scottish Widows' actions contrast with those of another large pension provider, NPI, which got in touch with more than 200 individuals about four years ago after it realised forms had gone astray, and asked them to fill out the forms again.