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Equitable Life

Volume 527: debated on Wednesday 4 May 2011

It is good to see you in your place, Mr Meale. I thank Mr Speaker for allowing me to participate in this very short debate on a subject about which the Minister has corresponded with all Members, and which has been a problem since 1992, the very beginning of my time in this place. It has been a problem all those years, and no Government have addressed it as my constituents deserve, a fact on which I will concentrate in my speech.

Guidance has been given to Members. The Government first gave it to us in a round robin letter from the Minister on 15 November, and an update was given on 26 January this year indicating that things were moving apace and that solutions and a process had been found. I am after an update from him and the Treasury on where we are at and when the first payment will be made to those who seek and deserve compensation.

There is absolutely no doubt that there was foot-dragging during the 13 years when we were in government. I participated in debates on the other side of this Chamber and was critical of the Government of the day. I also remember occasions when the Minister was on this side of the Chamber, making all sorts of promises to the public that were most effective at the time. That is what I will concentrate on.

The place to look in order to understand a party’s position on any given subject is its manifesto. The Liberal Democrat manifesto referred to

“Meeting the Government’s obligations towards Equitable Life policyholders who have suffered loss. We will set up a swift, simple, transparent and fair payment scheme.”

The Conservative manifesto said:

“We must not let the mis-selling of financial products put people off saving. We will implement the 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.”

That was in the Conservative party manifesto for last year’s general election. Having read those, I would have thought that measures would be in place by now. We are a year into the coalition Government, and I understand that not a single payment has been made. Perhaps the Minister will update us on when it can be expected.

The Conservative manifesto says “mis-selling”. It is a somewhat unfortunate choice of phrase, as many pensioners feel that they were mis-sold an election promise by the Conservatives. That is a fairly serious accusation. I get letters in my mailbag almost weekly—34 of my constituents write to me regularly on the subject—and I am sure that that is repeated across the land and that every Member of Parliament is being written to by those most affected by the mis-selling of that fund.

More recently, the hon. Member for Southend West (Mr Amess) said in the Chamber:

“I know that the Treasury team are working extremely hard to try to balance the books, given the terrible legacy that we were left, but I must tell the Deputy Leader of the House that I am worried about the promises that were made before the general election. Some of my elderly constituents feel that we have not honoured them.”—[Official Report, 5 April 2011; Vol. 526, c. 987.]

That is a Conservative speaking. There is concern across the House about what this Government are doing, and it must be considered.

What are the problems, and how are the Government and the Treasury addressing them? Although they made that promise, they almost immediately excluded some 10,000 elderly people from the compensation scheme because they took out policies before the September 1992 cut-off date, which seems unfair. Those trapped policyholders arguably suffered the same maladministration as the others. We were told that they would be paid 100% compensation, but they will not receive anything. That should, indeed must, be addressed.

I must concede one thing—I have already done so publicly in this place, during the last debate on the subject. Investing in anything involves taking a gamble. People must understand that even a pension scheme, which could be described as a gold-type investment, can never be expected always to go one way. It is always possible to lose money. I have seen that at first hand. At the same time, we are talking about investments made when the Government of the day—and particularly one Minister, Eric Forth—said that they did not want any form of regulation whatsoever governing the finance sector. If we trace back the history, that is where the problem was first created. There should have been regulation. The whole fund was tied up in a system that had no regulatory body to examine what was going on.

It is simply wrong for the Treasury to have revised the amount of money that will be available from the public purse for the payment scheme. It promised total payment—that is what was said and understood. That is what was in the correspondence I received. I was challenged at the hustings during the run-up to the last election, and that was what was read to me as the policy of this Government. They made that clear to those constituents of mine who were concerned about the question.

Even to suggest that the money is not being paid as intended due to this country’s financial situation is absolute nonsense. Anyone could see that the global financial crisis would affect Government thinking and that the Opposition of the day were being foolhardy in making the promises they made. It almost indicated—to some of my constituents, at any rate—that there was no chance that the Tories would form an Administration. That is part of the reason why they were in a position to make such promises, which still have yet to be met.

The Minister said in a written answer:

“The Government have accepted all the parliamentary ombudsman’s recommendations in full. The Government’s ambition is to start making payments in the middle of this year.”—[Official Report, 31 March 2011; Vol. 526, c. 472W.]

Can the Minister indicate or commit to a date when that will start to happen? Who will first receive the moneys outstanding?

There is no doubt whatever that, just as with previous Governments, there has been delay after delay. It is immensely frustrating, particularly for those very elderly people who have been deprived of the pension they expected from the company. The matter has been addressed by ombudsmen and all sorts of courts, yet even today no money has been paid. I am looking for an update from the Minister, and I expect to hear something this afternoon.

I do not know that I necessarily thank the hon. Member for Central Ayrshire (Mr Donohoe) for how he has introduced this debate. For 13 years, the Labour Government prevaricated about doing anything about Equitable Life. To be blunt, many policyholders believed that it was the Labour Government’s policy to wait long enough that they would not have to pay out to so many people. He has stood up and criticised what we as a Government are trying to do to put that right, yet his party lived through probably the most profligate times that any Government ever lived through and did absolutely nothing about the problems with Equitable Life.

I sat on a European inquiry on this issue, because Equitable Life sold policies not only in this country but in the Republic of Ireland and Germany. The problem was that it was mis-selling—it mis-sold the product by saying that these were with profits insurance policies when, of course, the profits it predicted were never going to be met. Every time we inquire into the matter, we find that all the people who used to manage Equitable Life have mysteriously disappeared and that the new bunch of people running it had no knowledge of what was happening before. We never seem to be able to pin down exactly who was to blame among all the people who were valuing those policies.

The whole issue now rests on the question whether the policies were mis-sold and whether the company acted outside the legislation. I say to the hon. Gentleman that the previous Government had plenty of time to look for and find a way of compensating those who had lost money. Why did they refuse to accept the ombudsman’s report? Why did they go to virtually every court they could find to avoid paying any compensation?

I should like the hon. Gentleman to address one issue. What was in his party’s manifesto and why does he think that this Government have acted under the auspices of that particular entry in the manifesto?

The manifesto referred to compensating people who had policies with Equitable Life and lost money, and what we are now introducing is a package of measures to compensate them. Whether we can compensate them 100% or not is a difficult question, especially in the financial circumstances that we inherited from the previous Government. I made the point at the beginning of my speech that the hon. Gentleman’s party had the opportunity, when tax receipts were flowing into the Treasury and when there was plenty more money sloshing around in the economy, to make those payments. That was a much less painful time than now, when we have to take into account the financial situation in which we find ourselves. The Minister will explain exactly what we are doing.

I agree with the hon. Gentleman that people want to know exactly when they will receive compensation. I hope that we will hear about that from the Minister. Many of us would like to see as much compensation as possible. In fact, we would like to see greater compensation, but we have to realise that the funds are competing against everything else for which the Government have to find money, at a time when we have inherited such incredible debts. I am sorry to say it, but I find it almost unbelievable that the hon. Gentleman can stand up and accuse this Government of not honouring their pledges when, as I have said, the previous Government had plenty of time to do something about the issue. What we have done is to put together a package of measures that will find ways of compensating people.

This is about when and on what date the policies were sold. Some of those issues are sensitive and I imagine that people who bought policies before 1992 are concerned, because they were also mis-sold policies. The issue has been painful for many of my constituents and many others throughout the country because of the money they have lost, but the one thing we have failed to talk about in this debate is that we have to be absolutely certain that this will never happen again. Lessons must be learnt, because this has caused so much suffering for people who were putting money away for their retirement. Do not forget that all Governments—Conservative Governments in particular—always want people to save for their retirement in order to look after themselves. In this case, people lost money, which is to be regretted.

I am happy to have spoken in the debate and will be interested to hear what the Minister has to say. The coalition Government have introduced a package of measures that will give people compensation after 13 years of a Labour Government who failed.

Before I call the Minister, I apologise to you, Mr Donohoe, because I presumed you had given permission to the last speaker to speak. I tell the hon. Member for Tiverton and Honiton (Neil Parish) that it was wrong of me to bring you in. Having said that, at least in the latter part of your speech, you joined Mr Donohoe in hoping that we will get clarity on this issue.

I congratulate the hon. Member for Central Ayrshire (Mr Donohoe) on securing this debate. It is the first time for some time that we have had the opportunity to discuss Equitable Life, and I am grateful for the opportunity to update Members on the progress that we have made on resolving the issue.

The hon. Gentleman was right to highlight that some time has elapsed since these problems first arose. A number of reports that established that maladministration had taken place had been published, but the previous Government failed to act on them. When the ombudsman published her report in July 2008, we immediately accepted her recommendations and her findings of maladministration. We were clear that compensation should be paid for relative loss, but we also accepted the second leg of that recommendation, which was that it had to be subject to the constraints of the public purse. We have been clear throughout. If the hon. Gentleman looks at the speeches that I have made in this Chamber and in the main Chamber on Opposition day motions, he will see that we have been explicit about the two legs of the ombudsman’s recommendations. As my hon. Friend the Member for Tiverton and Honiton (Neil Parish) has said, if the issue had been resolved earlier, perhaps policyholders would have been in a better position than they are now.

I remind the hon. Member for Central Ayrshire that, while we accepted the ombudsman’s findings on the day on which they were published, Labour Ministers waited until the January of the following year before accepting only some of her recommendations, and they were challenged on that in court.

The hon. Gentleman asked when we are going to make payments and claimed that there had been a series of delays. However, I made it clear in the House last July, when I made an oral statement on the day on which we published Sir John Chadwick’s work, that we would start to make payments before the end of the middle of this year—that is, before the end of next month—and it remains our intention to do so. I am not sure where these mythical delays have emerged from, because over the course of the past nine months it has been clear when we expected to start to make payments.

Will the Minister be specific and say what the payments will be and when they will start to be made?

As I have said, we will start to make payments before the end of next month. I will address the structure of the payments and the next formal step in the process later in my speech.

We have been clear from the date on which the coalition was formed that we want to end the plight of policyholders. Indeed, one of our first pledges—it is in our coalition agreement—was to implement the ombudsman’s recommendation to make fair and transparent payments to Equitable Life policyholders for their relative loss as a consequence of regulatory failure. We have kept that promise. In the year since we came into government, we have made significant progress towards achieving that ambition. Last July, we introduced the Equitable Life (Payments) Act 2010, which gave the Treasury the authority to incur expenditure when making the payments. I am grateful to both Government and Opposition Members for supporting the 2010 Act and for allowing it to receive Royal Assent to an accelerated timetable. That has enabled us to press forward with our preparations for making payments as soon as possible.

We published Sir John Chadwick’s advice on the financial losses sustained by policyholders, as well as the calculations of the actuaries, Towers Watson, of the relative loss figure. At that time, I invited all interested parties to make representations to the Treasury so that they could be considered as part of the preparations for the spending review. We considered the full range of those representations, including those from individual policyholders and lobby groups, such as the Equitable Members Action Group and Equitable Life Trapped Annuitants, and from Equitable Life itself. After final refinements of the calculations by Towers Watson, we quantified the relative loss at £4.1 billion. That is based on the Government’s full acceptance of the ombudsman’s findings of maladministration. That is more than 10 times the figure arrived at through Sir John Chadwick’s methodology, which was based on the previous Government’s limited acceptance of the ombudsman’s findings. In last October’s spending review, we announced that approximately £1.5 billion would be made available for payments to policyholders through the scheme. That is perhaps not as much as we would have liked but, as the ombudsman herself has acknowledged, the impact of the scheme on the public purse has to be taken into account.

It is also important to note that, even in the midst of last year’s understandably constrained spending review, we still found a way to cover the losses of the with-profits or trapped annuitants in full. That was achieved by paying their losses through annual payments that reflected the structure of their policy. Those policyholders were particularly vulnerable to their losses because they were unable to move their funds elsewhere or mitigate the impact of their losses through employment. They were also generally the oldest policyholders.

The hon. Member for Central Ayrshire raised his concerns about the exclusion of those with-profits annuitants who purchased their policy before September 1992 from the scheme. He is not the first to do so, but this is an important opportunity to restate what I have said in correspondence to a number of hon. Members and what I said in the Committee that considered the 2010 Act. In her report, the ombudsman recommended that the aim of the scheme should be

“to put those people who suffered a relative loss back into the position that they would have been in had maladministration not occurred”.

With-profits annuitants who bought their policies before September 1992 did so before maladministration could have affected their investment decision. The first returns that the ombudsman found were affected by maladministration were those of 1991, which would not have influenced policyholders’ decisions until September 1992. Once a with-profits annuitant had purchased their policy, they did not have the option to move it elsewhere. Therefore, the correct question is not what these policyholders would have received if they had invested in a different company or had transferred their policies at some date after September 1992, but how their Equitable Life policy would have performed if maladministration had not occurred. Calculations by Towers Watson show that, if there had been no maladministration, those policies would not have performed better than they actually did, so no loss has been suffered.

For pre-September 1992 with-profits annuitants, the reduction in the levels of annuity payments is largely due to a combination of circumstances, such as poor investment market performance and the fact that early annuity payments were artificially high due to the structure of the product and over-bonusing. I understand that this is a complex issue, and I have happily engaged in correspondence and discussions with hon. Members on it. However, I hope that my explanation about the situation facing with-profits annuitants clarifies our position.

I want to move on to the principles that have guided our decisions on Equitable Life. At all times we have sought to ensure that our choices have been both fair and transparent. In that vein, we set up an independent commission to advise on the distribution of funds to people with policies other than with-profits annuities. The commission reported in January and we accepted the principles it recommended: that we should introduce a pro rata allocation of funding in proportion to the size of relative losses suffered; that we will take a single policyholder view wherever that is fair and practicable to offset relative gains against relative losses for individuals with more than one policy; and that we should announce a minimum amount in the region of £10 beneath which payments should not be made. The reason behind that decision is that administering payments below that amount would be disproportionate to the administrative costs of making them in the first place. Subject to practical constraints, payments to the very oldest policyholders and the estates of deceased policyholders should be made an absolute priority. I want to make that clear to hon. Members today.

We are working on translating those principles into a quick and efficient payment scheme. That work is nearly complete and, as promised during the debates on the 2010 Act, I will be placing a scheme design document before Parliament imminently. In that document, hon. Members will find details on how the new payment scheme will work, including information on who will receive payments, how those payments will be calculated and how they will be made.

We have appointed National Savings and Investments as the scheme delivery partner to oversee that process. I am confident that its experience in processing large numbers of payments makes it the best choice for this important and complicated role. To reduce the complexity of the scheme, we announced in the spending review that payments will be both tax-free and should not affect eligibility for tax credits. That is both fair and sensible, and I know that hon. Members here today will welcome it. A statutory instrument introduced under the 2010 Act to put that into effect is currently before Parliament, and it will be debated shortly.

I want to make one final point to set policyholders’ minds at rest. Policyholders do not need to do anything to claim their payments. Those operating the scheme will contact them in the first instance. A website and call centre will be up and running for the duration of the scheme to guide policyholders and address any queries they may have.

Will the Minister tell me for how long the scheme will be up and running and whether payments will be made over a three-year cycle?

The hon. Gentleman has raised an important point. We need to distinguish between two groups. The first is the eligible with-profits annuitants. Payments will be made to them over the lifetime of their policy. That has enabled us to extend the cost of this beyond the spending review and therefore to spend more on resolving the problem than would otherwise have been the case. Other policyholders who have suffered losses and are eligible for compensation will receive a single payment at some point over the next three years, with priority being given to the oldest policyholders and the estates of deceased policyholders. That is to ensure the cost of the scheme is manageable and that the scheme is deliverable in the period.

We have spent a lot of time making sure that the administration and delivery of the scheme works as effectively and as quickly as possible. However, I do not want to give any false promises to people. We said that we would start to make payments before the end of next month. It is a three-year scheme for people, apart from for those who are with-profits annuitants. For with-profits annuitants, payments will be made over their lifetimes, which is the right way to maximise the amount of money available to policyholders given the economic situation that we inherited.

I look forward to hon. Members’ comments on the scheme design document, which aims to be as simple and clear as possible both for policyholders and for those who take a more detailed interest in the technical details of the scheme design. The scheme holds out a prospect that policyholders will receive compensation, and it brings to an end a long-running saga that has not reflected well on how such issues are handled. Of course, as my hon. Friend the Member for Tiverton and Honiton has rightly said, we need to ensure that people have confidence to save for the future. That is why, as part of our reform of financial regulation, which focuses principally on the lessons to be learned from the financial crisis, we are introducing a dedicated financial conduct regulator—the Financial Conduct Authority—which will be responsible for all aspects of the regulation of financial conduct. That will help to strengthen consumer confidence in this area, and we hope will ensure that a problem on the scale of Equitable Life does not happen again.