Standard Life is paying £100 million in compensation to customers who were furious to discover that a fund marketed as a safe haven was invested in toxic subprime mortgage debt.

Almost 100,000 investors in the Pension Sterling Fund saw thousands of pounds disappear from their savings after the insurer made a “valuation adjustment” on 14 January that knocked 5% from the assets. The £2.1 billion fund was typically used by those close to retirement who thought they were acting cautiously.

It recently emerged that up to 13% of the fund was invested in “non-conforming residential mortgage-backed securities”. Standard slashed the value of the fund as these assets tumbled in value. The case attracted the ire of financial advisers, and the attention of regulators and MPs.

Standard Life was accused of misleading customers, and lawyers said there was a clear case for legal action. The insurer initially said there “no case for compensation”, and it would be “wholly inappropriate” to ask shareholders to stump up cash. But it today said it had “listened to feedback”, and will “put customers back in the position they would have been in before the valuation adjustment”.

The payout is a direct hit to profits, which has been expected to reach £600 million for the year. This will put further pressure on chief executive Sir Sandy Crombie, who has not always enjoyed the full support of the City.

The shares today fell 61/4p to 199p.

Customers will be given the option to move their funds into another vehicle solely invested in cash. Standard says the Pension Sterling Fund will continue to be a mix of assets including the mortgage securities that are at the heart of the global crisis.Company literature did not always make it clear how the fund was managed.

A brochure from 2005 said the fund “is invested wholly in cash — the most stable investment”. It added: “This fund helps investors who are looking for a temporary home for their investment just before they retire.”

Customers who felt they had been misled have taken their complaint to the Pensions Ombudsman. Ian Middleton, a 59-year-old retired company director, said: “I tried to do the right thing by protecting my money before I retired. I have been misled into believing my money was safe.”

Standard Life had been in contact with the Financial Services Authority over the issue, but insists it was not bounced into today's move by the watchdog. It says the fund will recover over time, but admits: “In the shorter term, it will continue to fluctuate.”