Compensation fund confirmed for Equitable Life policyholders

The figure is over four times higher than the payout that would have resulted from Sir John Chadwick's proposals published in July 2010.

Sir John Chadwick, a former Lord Justice of the Court of Appeal, was commissioned by the previous Government to advise on a payment scheme for policyholders.

But Parliamentary Ombudsman Ann Abraham criticised his final report as "an unsafe and unsound basis on which to proceed" because it ignored or misrepresented central parts of her 2008 report on the regulatory failures behind Equitable Life's near-collapse. The Coalition Government now says it accepts all the Parliamentary Ombudsman's findings in their entirety.

The £1.5 billion fund was confirmed on 20th October as part of the Government's spending review. The figure is based on a "relative loss" of £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 Treasury press release explained.

£1.5 billion is, however, less than a third of the Government's relative loss figure. "In light of the pressures on the public purse, we have decided that it would not be fair to taxpayers to provide more than this amount to policyholders," the Treasury stated.

Payments will be targeted primarily at those people whose retirement funds were invested in with-profits annuities. The Government sees these policyholders as particularly vulnerable because they could not move their money elsewhere and, being retired, could not mitigate their loss by working. They will have their relative losses paid in full at a total cost of about £620 million.

"WPAs "[With-Profits Annuitants] will be paid through regular annual payments for their lifetime, effectively replacing the income stream they have lost," the Treasury said. "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 added: 

“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.”