The government has been told to apologise to Equitable Life policyholders and establish a compensation fund for them, after an investigation into the scandal found it failed to properly regulate the insurer.
Equitable Life got into trouble after it promised guaranteed pension income to customers based on interest rates in the 1970s and 1980s. However, during the 1990s when interest rates fell and inflation rose, the insurer found it was unable to honour policies, leaving more than a million customers high and dry.
It finally collapsed in 2000, and has been subject to several investigations ever since. In 2004, Lord Penrose concluded his review and blamed the management for the disaster. However, as the firm ultmately went bust, no compensation has ever been paid out.
The latest investigation, carried out by the Parliamentary Ombudsman, Ann Abraham, looked at the role of the Treasury, Financial Services Authority and other government departments to see what role they played.
In her report, entitled 'Equitable Life: a decade of regulatory failure', Abraham found these departments failed to prudently regulate the insurance company for more than a decade. She has recommended that a redress scheme be established within two years to compensate current and former policyholders. In addition, the government has been told to make an apology for its role in the misdeed.
This could be policyholders' last chance to receive any compensation; previous reports have pointed the finger of blame at the regulators but never to the extent that compensation was forthcoming.
Despite the victory for policyholders, it will ultimately be the public purse – funded by taxpayers – that pays for the compensation. In light of this, the Ombudsman says she will not force the hand of the government, and has called for further discussions to decide on the right next step. Policyholders will find out their fate by the autumn.
The Ombudsman says: “The regulators at the time said that they would deliver regulation in a proactive and vigorous way. That singularly failed to happen in the case of Equitable Life.”
She also compared the debacle to earlier cases such as Vehicle & General in the 1970s, and the more recent collapse of Northern Rock.
The Conservative Party has welcomed the report, but warns that policyholders should not expect to receive compensation for all their losses.
Shadow chancellor George Osborne adds: “Policyholders cannot expect to receive payments for the full losses suffered and any payment scheme must be consistent with sound public finances.”
“It is up to the government now to admit its responsibility, issue the apology that the Ombudsman demands and create the payment scheme. If it doesn’t, we will.”
In 2002, the reformed Equitable Life dropped its £2.6 billion legalaction against former auditors Ernst & Young, and settled with 15former directors for £3.3 billion.
It is estimated that more than 30,000 affected Equitable Life policyholders have died since the company collapsed, and 15 more pass way every day.
Experts warn that calculating compensation will be "fiendishly complicated".
Tom McPhail, head of pensions research at Hargreaves Lansdowns, says: "Equitable Life investors need to take a realistic view of the possible timing and amount of any future compensation payment for their own personal circumstances. This needs to be balanced against the costs and benefits of reinvesting their remaining funds elsewhere in order to achieve the best possible growth on their investments."