By Paul Lewis
BBC Radio 4's Money Box
The ombudsman has just upheld a claim against Prudential
The insurance industry has been accused of being "in denial" over sales techniques which encouraged people to leave the Serps part of the state pension scheme and put money into a personal pension instead.
Theresa Fritz, Principal Researcher at the consumer organisation Which?, told BBC Radio 4's Money Box programme the problem could affect four and half million people.
"It's an industry in denial. We want [it] to realise there is a problem. Our research shows that up to four and a half million people who have contracted out of Serps into a personal pension are losing out."
Which? Research published earlier this year showed people could get 40% less from their private pension than they would have got by remaining in Serps. But the pensions industry challenges those figures.
Director of Pensions at Prudential, Andy Smith, said: "Our conclusion from our latest review is the vast majority [of our customers] will indeed be better off from contracting out.
"It's been a very sensible thing for them to do."
Prudential has, however, just paid more than £200 a year compensation to a customer after the Financial Ombudsman Service upheld his claim that in 1988 he was mis-sold the Pru pension as an alternative to his state earnings-related pension.
But Mr Smith denied there had been a mis-sale: "It is a specific case that led us to conclude that he didn't understand the position at the point of sale."
Prudential was unable to produce the document which it says the customer, Michael Ford, signed to say he did understand the risk.
Mr Ford denies that was ever explained to him: "I actually did state to the representative that I was only interested in a policy with a zero risk situation.
"I made it clear I did not have the kind of money to gamble in stocks and shares.
"They said it would pay me to opt-out of Serps and put it into an additional private pension with them. I couldn't lose, I could only gain. And if things didn't do very well I would at least break even. But there was no way I could lose."
After a year considering a formal appeal to the ombudsman, Prudential has finally decided to give Mr Ford an extra pension worth £211 a year to make his income up to the level that Serps would have provided.
Theresa Fritz of Which? said that in many cases the risk of contracting-out of Serps was not explained.
BBC Radio 4's Money Box
The programme was broadcast on Saturday, 12 November, 2005 at 1204 GMT
"How many of those 4.5 million people who have a loss really understood the risk? That's the key," she said.
"Did the advisor explain there was a risk that your private pension would fall behind the state pension?"
So far, very few people have successfully complained.
The Financial Ombudsman Service told Money Box that it has only received 10 cases a month over the last five years from a variety of insurers, and 30 to 40% of those went in favour of the customer, implying a couple of hundred successes.
Prudential said that it has had only 14 customers complain to the ombudsman. Nine were judged in its favour and three were still undecided.
But Ms Fritz thinks that will change.
"It's almost impossible for people to realise where they stand at the moment compared to the state scheme," she said.
"Very few people who have contracted-out have reached retirement age, so there are very few where the loss has crystallised.
"But more and more will retire, and more and more losses will be seen."
She wants the industry to examine every sale. "We want a review of the contracted-out cases to take place. But first we want the industry to come out of denial and realise there is a problem."
BBC Radio 4's Money Box was broadcast on Saturday, 12 November, 2005, at 1204 GMT.