A computer error by the Inland Revenue is likely to cost British insurance companies millions of pounds.

They overpaid pension rebates between 1997 and 2000 and last month reclaimed the money, leaving insurance companies, and possibly pension holders, out of pocket.

SERPS

The National Insurance rebates were due to pension holders who had opted out of the State Earnings Related Pension Scheme (SERPS).

Employers have to supply earnings information to the Inland Revenue in order for the rebates to be processed.

Sometimes the details are incorrect and the employer is asked to resubmit the data.

But the Inland Revenue's new computer system, NIRS2, processed the information twice and authorised more than one rebate.

Invested

Last month, the Inland Revenue automatically claimed back the money from insurance company accounts.

But these payments were invested by the insurers in the stock market.

The FTSE 100 has fallen by 40% since the payments were originally made, so insurance companies have lost money.

If an overpayment of �200 was made and invested in the stock market, it would now, on average, be worth around �120.

But since the Inland Revenue claimed back the �200 it originally paid, insurance companies will have lost �80.

Total

The total amount overpaid, or the total losses that will result, can not yet be calculated.

ABI: in dialogue with the Inland Revenue

The Association of British Insurers is waiting for its members to submit information over the coming few weeks.

But it has said that thousands of policies will have been affected and the reclaimed payments will amount to hundreds of pounds per policy.

However, press reports suggesting a total overpayment of �50 million are overstated, according to the ABI.

The Inland Revenue says it did not give out this figure.

Dialogue

Emma Grainge, spokeswoman for the Association of British Insurers, says that its members are working hard to ensure that individual policy holders do not lose out:

"This is the Inland Revenue's fault, not pension holders', and it would be unfair for them to see their pension fund eroded," she said.

The ABI is now in what it calls "constructive dialogue" with the Inland Revenue over how to minimise losses.

A statement the Inland Revenue issued to Working Lunch says: "It is recognised that some investors may be affected by a shortfall in fund value following the recovery of overpaid amounts.

some investors may be affected by a shortfall in fund value

Inland Revenue

"The Inland Revenue is working closely with representatives of the pensions industry, including the Association of British Insurers and the National Association of Pension Funds, to devise the most appropriate method of mitigating any losses incurred."

Deductions

Pension holders may see the deduction on their statement.

The ABI says that insurance companies are likely to communicate with customers if they will notice any unusual changes to their fund.

The problem does seem to have affected private pension funds more than company schemes.

The National Association of Pension Funds says that no members have contacted it complaining of large withdrawals by the Inland Revenue, but that it is monitoring the situation.