The Government announced today that it will make £1.5 billion available for the Equitable Life Payments Scheme, £1 billion of which will be paid out upfront in the first three years of the Spending Review. This is more than four times the final figure that Sir John Chadwick’s methodology produced.
The Equitable Life Payments Scheme must deliver fairness to taxpayers as well as policyholders - particularly in light of the challenging economic circumstances. As the Parliamentary Ombudsman has said, “it is appropriate to consider the potential impact on the public purse of any payment of compensation in this case”.
This figure is based on the relative losses suffered by policyholders, which amount to £4.3 billion. This is the difference between what Equitable Life policyholders who invested from the end of 1992 onwards received from their policies, and what they would have received if they had invested elsewhere. The figure encompasses all of the Parliamentary Ombudsman’s findings of maladministration - which the Government fully accepts.
The Government had to decide what proportion of this figure it is fair to ask taxpayers to pay. When affordability is taken into consideration, it is important that the position of those who have been hardest hit by their losses is recognised. It is widely acknowledged that “trapped” or With Profits Annuitants (WPAs) were particularly vulnerable to their losses, because they were unable to move their funds elsewhere or to mitigate the impact of their losses through employment. They are also generally the eldest policyholders.
In light of these factors, the Government decided that a fair balance between the interests of policyholders and taxpayers would be achieved by:
• Covering the full cost of relative losses to policyholders with WPA policies – approximately £620 million in total. This will be paid through regular payments.
• Allocating as part of the Spending Review £1 billion, to cover the first three years’ payments to WPA policyholders and payments to all other policyholders.
WPAs will be paid through regular annual payments for their lifetime, effectively replacing the income stream they have lost. This will benefit approximately 37,000 trapped annuitants who have on average suffered around £16,500 of losses. More than half of these losses have been suffered by those aged 75 and over.
Financial Secretary to the Treasury, Mark Hoban MP said:
“The Government has always been committed to making fair and transparent payments to Equitable Life policyholders, through an independently designed payment scheme, for their relative loss as a result of regulatory failure. The previous Government spent ten years trying to find a solution to the Equitable Life scandal. We resolved the situation in just five months.
“We shall be paying in full the category of policyholders who suffered most from their losses. For other policyholders, we shall be providing a level of funding for the payment scheme that strikes a fair balance between the interests of policyholders and those of taxpayers in the current difficult financial circumstances. We need to continue the rapid progress that we have made in just five months so we can meet our aspiration to make the first payments by the middle of next year.”
The Commission will provide further advice on how to allocate the rest of the payments in January, so that the Government can continue working towards making the first payments by the middle of next year.
Notes for Editors
1. In July 2008, the Parliamentary Ombudsman published her report, which identified maladministration on the part of various public bodies and recommended a compensation scheme be set up.
2. In January 2009, the previous Government accepted some of the Parliamentary Ombudsman’s findings and rejected others. It rejected the compensation recommendation deciding instead to set up an ex-gratia payments scheme. Sir John Chadwick was appointed to advise the Government on relative loss. In October 2009, the Administrative Court made the Government accept some more of the Parliamentary Ombudsman’s findings, following a Judicial Review challenge by Equitable Members Action Group (EMAG).
3. In May 2010, the Coalition Government pledged to “implement the Parliamentary and Health Ombudsman’s recommendation to make fair and transparent payments to Equitable Life policy holders, through an independent payment scheme, for their relative loss as a consequence of regulatory failure”.
4. On 22 July 2010, Sir John’s final report was published. His actuaries estimated that his methodology calculated losses due to maladministration at between £4-500 million. Refined calculations now put this figure at £340 million, compared to the circa £5 billion quoted by EMAG. The Financial Secretary to the Treasury, Mark Hoban, stated that he would consider Sir John’s report and provide a response. He invited representations from interested parties and established an Independent Commission to advise Government on the fair allocation of funds amongst policyholders.
5. This issue affects approximately 1.5million policyholders.
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