The government has confirmed a £1.5bn compensation package for policyholders of Equitable Life, with the most generous payouts reserved for thousands of elderly with-profits pension investors.
Chancellor George Osborne said it was “time to right the wrong to many, many thousands of people” who were “innocent victims of a terrible failure of regulation”, as he announced details of the The Equitable Life Payments Scheme.
The £1.5bn figure was well below the £4bn-£5bn hoped for by some policyholders. But Mr Osborne described it as a “fair amount” which took into account the interests of policyholders as well as taxpayers.
Equitable Life, Britain’s oldest mutual insurer, nearly collapsed after the House of Lords ruled in 2000 that it should be forced to honour tens of thousands of unprofitable policies sold in the 1980s, a decision which left it with a £1.5bn liability. The insurer closed to new business and sold its assets to Halifax in 2001, resulting in a long running campaign by policyholders for compensation.
Under the payments scheme £620m of the total would be used to cover the full cost of “relative” losses suffered by the 37,000 with-profits annuitants. This group of policyholders, called the “trapped” with-profits annuitants (WPAs), have been hit hardest by the problems at the society, as unlike other members they do not have the option to move their investment elsewhere. They have seen the value of the retirement income provided by their annuities more than half in some cases, while they also tend to be the oldest policyholders, with more than half of the losses suffered by people aged 75 or over.
With-profits annuitants will receive their compensation through regular annual payments for the rest of their life, effectively replacing the income they have lost.
“It is important that the position of those who have been hardest hit by their losses is recognised,” said the government.
“Policyholders with With Profits Annuities (WPAs) were particularly vulnerable to reductions in the value of their policies because they were unable to move their funds elsewhere, or to mitigate the impact of their losses through employment”.
The government has allocated £1bn as part of the Spending Review, to cover the first three years payments to WPAs. Tax-free free lump payments will be made to all other policyholders.
The government hopes to make the first payments by the middle of next year with an Independent Commission advising on the allocation of funding to policyholders other than WPAs, with “those whose need is greatest” paid first.