Summary and Background
3.The Act authorises the Treasury to incur expenditure in order to make payments to persons adversely affected by Government maladministration in the regulation of the Equitable Life Assurance Society (‘Equitable Life’). The purpose of the legislation is to enable the implementation of an Equitable Life payments scheme (the ‘payments scheme’).
4.Equitable Life is a mutual insurance company owned by its policyholder members. At its height, it had 1.5 million policyholders. From the 1950s until 1988 Equitable Life sold significant volumes of policies that included a guaranteed annuity rate. These policies provided a fixed rate at which policyholders were entitled to purchase an annuity on maturation of the policy.
5.In the 1990s interest rates and inflation made it more expensive for Equitable Life to pay out on its policies that included a guaranteed annuity rate. In order to try and manage these costs, it implemented a policy of offering differential terminal bonus rates. In July 2000 the court ruled that this policy was unlawful (Equitable Life Assurance Society v Hyman [2002] 1 AC 408). Equitable Life ran into financial difficulties when it was unable to meet £1.5 billion in liabilities which the court’s decision established that it owed. In an attempt to secure a fresh injection of capital, Equitable Life put itself up for sale. When no buyer could be found, it announced its closure to new business on 8 December 2000.
6.In July 2008, the Parliamentary Ombudsman published a report, Equitable Life: a decade of regulatory failure.(1) The report said that there was evidence of “serial regulatory failure” on the part of the Government in relation to its regulation of Equitable Life in the period before 1 December 2001. The report called on the Government to apologise to policyholders and to set up a compensation scheme.
7.The Government accepted some of the Ombudsman’s findings of maladministration and of injustice resulting from the maladministration. Although it did not accept that it would be appropriate to provide compensation in the way suggested by the Parliamentary Ombudsman, it agreed that some payments would be justified, to the extent that some policyholders had suffered a disproportionate impact as a result of the maladministration.
8.In light of this, in January 2009 the Government asked Sir John Chadwick, a former Court of Appeal Judge, to advise the Treasury on issues relating to the determination of relative losses suffered by Equitable Life policyholders and the impact of those losses.
9.On 11 May 2010 the new Conservative-Liberal Democrat Government published its Coalition Agreement, setting out its early priorities.(2) This Agreement contained a pledge 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.” The purpose of this Act is to enable the Government to fulfil this pledge.
10.Sir John Chadwick’s final advice on the financial losses sustained by policyholders was published on 22 July 2010.(3) The Government announced that it would consider the advice over the summer and provide a response in October as part of its Spending Review, along with a decision as to the amount of funding that should be allocated to the scheme. Interested parties were invited to make representations to the Treasury.
11.Also on 22 July 2010, the Government announced the establishment of the Independent Commission on Equitable Life Payments. The Commission is comprised of Brian Pomeroy, John Tattersall and John Howard. The role of the Commission is to:
	recommend how best to allocate fairly funds provided for the payments scheme in the first three years of the Spending Review to those persons found to have suffered relative losses as a result of accepted Government maladministration, excepting with-profits annuitants and their estates; and
	advise on any groups or classes of persons that should be paid as a priority with regard to the timing of payments, again excepting with-profits annuitants and their estates.
12.The Commission is expected to submit its report at the end of January 2011.
13.On 20 October 2010, the Government announced that the relative losses suffered by policyholders amount to £4.3 billion. This is considered by the Government to be the difference between what policyholders who invested from September 1992 onwards received from their policies, and what they would have received if they had invested elsewhere. It is in line with the Parliamentary Ombudsman’s findings, all of which the Government now accepts.
14.In light of the Parliamentary Ombudsman’s recommendation that it “is appropriate to consider the potential impact on the public purse of any payment of compensation”, and the pressures on the public purse, the Government decided that £1.5 billion should be made available for the payments scheme, £1 billion of which should be paid over the first three years of the Spending Review period.
15.The Government also recognised the issues facing with-profits annuitants. They are a group of policyholders who are “trapped” in their policies, in receipt of a declining income in their retirement and generally the eldest. In view 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 losses to holders of with-profits annuity policies – approximately £620 million. This is intended to be paid through regular payments; and
	allocating £1 billion as part of the Spending Review, to cover the first three years’ payments to with-profits annuity policyholders and lump sum payments to all other policyholders.