Considered in Grand Committee
My Lords, as noble Lords will be aware, this Government established the Equitable Life payment scheme in 2010 to make payments totalling up to £1.5 billion to as many as 1 million former Equitable Life policyholders who suffered financial losses as a result of government maladministration that occurred in the regulation of Equitable Life. Since the establishment of the scheme, the Government have received representations suggesting that a specific group of elderly policyholders who bought their with-profits annuity from Equitable Life before 1 September 1992 should be included within the scheme.
The Government remain of the view that there is no basis for their inclusion in the scheme. The reasons for the exclusion of this group of policyholders are well documented and have been subject to debate in Parliament. In short, the Equitable Life payment scheme is based on the understanding that those investing with Equitable Life relied on regulatory returns that were subject to government maladministration. As such, they had lost the opportunity to make a fully informed decision and if they had had this opportunity, they might have invested elsewhere. The first returns that would have been different if maladministration had not occurred were those of 1991, which would not have influenced policyholders’ decisions until September 1992. Therefore, investment decisions made before this time are not included in the scheme.
However, it is clear that this particular group of policyholders are under financial pressure in their later years, as they have not received the income they hoped for from the Equitable Life annuity that they bought more than 20 years ago. In this year’s Budget, the Chancellor announced that the Government will make an ex-gratia payment of £5,000 to those individuals who bought an Equitable Life with-profits annuity before 1 September 1992 and were aged over 60 on 20 March 2013. An additional £5,000 will be available to those policyholders who meet the above criteria and are in receipt of pension credit.
The draft regulations before the Committee today confirm the rules surrounding these payments. Policyholders will not be required to prove their eligibility for these payments; instead policyholder information held by the Prudential, which makes regular annuity payments to all Equitable Life with-profits annuitants, will be used to identify those eligible for a payment. Eligible individuals will receive one payment of £5,000—£10,000 if they are in receipt of pension credit—regardless of the number of policies they hold. I can also confirm that should an annuitant pass away after the Budget announcement on 20 March this year but before receiving their payment, the payment will be made to their estate. The rules are available in full on the Government’s website.
The Government recognise the need to issue these payments to elderly individuals as soon as possible. The Treasury has been considering all the possible options for delivering these payments quickly and efficiently. I am pleased to confirm that it now plans to make these payments within the current financial year, rather than in 2014-15 as previously envisaged. It is currently planned that in the coming months letters will be dispatched to all eligible policyholders to inform them of the Government’s plans to make these payments. A few months after that takes place, the payments will be issued to all living pre-1992 WPA policyholders. Payments to estates, and the £5,000 additional payment made to those overseas policyholders in respect of their receiving a specified equivalent to pension credit, will be made later this financial year.
The letter sent to all eligible policyholders will also advise that they check their eligibility for pension credit. Individuals will have until 1 November this year to do that, and to apply for pension credit if necessary. Policyholder information will then be securely shared with the Department for Work and Pensions to identify those eligible policyholders in receipt of pension credit. The payments due to them will be increased from £5,000 to £10,000 accordingly before they are dispatched. More information on the delivery of these payments will be announced in due course. Finally, I draw the Committee’s attention to a correction slip issued today that makes minor corrections to the numbering of the regulations. I commend the regulations to the Committee.
My Lords, I thank the Minister for his introduction to these regulations. They take us back to the saga of Equitable Life, which spawned a range of inquiries and reviews, including those by the FSA, the Treasury Select Committee, the actuarial profession, the Treasury, the ombudsman—twice—and the Public Administration Committee. I do not propose to pick over those in detail this afternoon. As we have heard, they culminated in the Equitable Life (Payments) Act, which came before your Lordships’ House in 2010 as a money Bill. The Act, which we supported, introduced a payment scheme to be operated by an independent commission. It would seem that the scheme is well under way and is open until April 2014, although annuitants will clearly continue to be paid thereafter.
One bone of contention with the proposed scheme was the overall amount of money allocated, although the Parliamentary Ombudsman recommended the need to reflect a public interest consideration and the impact on the public purse. Another bone of contention was the starting date of the scheme which, as we have heard, applied to policyholders who invested from September 1992. In justifying not including earlier investment, the then Minister—the noble Lord, Lord Sassoon—stated:
“The first issue here is that they took out policies before any maladministration could have affected their decisions”—
that reflects what the Minister said earlier today. He continued:
“That is the first and principal reason why they have not been included in the Government’s proposed payment scheme … Sir John Chadwick and Towers Watson”—
“… concluded that the pre-1992 WPAs received more from Equitable Life than they would have if the society had been properly regulated”.—[Official Report, 24/11/10; cols. 1157-58.]
As it paid out more in the earlier years but less in later years than it would have had there been no maladministration, “no compensation is due”. We are told that the Government remain of this view. That is what the Minister reiterated earlier. Can he confirm that and tell us whether any updated assessment was undertaken to verify the balance of the over and underpayments in that analysis? Does it still fall in a way that validates the view then expressed?
Budget 2013 announced that there will be an ex-gratia payment of £5,000 for policyholders who bought their Equitable Life with-profits annuity before 1 September 1992 and who are living at the date of the announcement, which was 12 March 2013. A further £5,000 will be available to those policyholders who are in receipt of pension credit. The Red Book scored that as a cost of £45 million in 2014-15. From what the Minister said, presumably that now has to score in an earlier year.
The regulations have slightly recast that so that it applies only to those alive and aged over 60 on 20 March 2013. It is understood that that is because the quickest way to effect payment is under the Age-Related Payments Regulations, and they can be used only for those over 60. I am led to believe that that precludes only a handful of annuitants from benefiting, but perhaps the Minister can tell us how many.
As for who will receive payment, can the Minister confirm whether multiple payments of £5,000 can be made? If I heard correctly from what he said, it is only one plus an additional £5,000 for those on pension credit. The Explanatory Memorandum states:
“Article 2 provides for a qualifying Equitable Life annuitant to be entitled to a payment of £5000 in respect of each relevant with-profits annuity policy (as defined in the regulations)”,
so perhaps we need to go back to the regulations. Perhaps mine was a cursory reading, but I took from it that if you have more than one with-profits policy, you will get more than one payment of £5,000. Will the Minister clarify that for us?
The additional amount of £5,000 is payable if an annuitant is in receipt of a benefit similar to pension credit within the EU. That raises the question of how many recipients of the ex-gratia payment are resident overseas. Presumably, Prudential has that information. Can the Minister let us know?
The payments are to be made free of tax and without benefit consequences. Of the expected 10,000 policyholders to be affected, how many would have income below the tax threshold, how many would pay tax at the basic rate and how many, if any, at the higher and additional rates?
Finally, perhaps the Minister can put this in a broader context for us. Many millions of our fellow citizens are undergoing financial pressure at the current time which is not of their making. Of course, pensioners are often least able to deal with the consequences of reducing income because it is more difficult, if not impossible for them to access the labour market. My question is a composite one. Why £5,000; why this particular group of beneficiaries among all those suffering financial hardship; and what was the process which led to this decision?
My Lords, I am extremely grateful to the noble Lord for the speed with which he joined this debate from the Chamber and for his typically forensic questions. He asked me whether the reality validates the view we originally took on under and overpayments on Equitable Life. I believe that it does. If I am wrong, I will write to him, but I think that it does. He asked when the payments would score. I believe that they will score when they were made, so earlier.
The noble Lord asked one or two detailed numerical questions. How many would be precluded by being under-60 at the relevant point? I understand that there are 19, so it is literally a handful. He asked about how many are resident overseas. There are 223 overseas policyholders, 125 of whom are within the EU. He asked about the incomes of the people involved—how many would be paying tax at the various rates. We simply do not have information about the incomes of those pre-1992 with-profits annuitants.
The noble Lord asked whether there would be multiple payments. No, there will not be multiple payments. There will be one payment per policyholder even if they have more than one policy. He then asked the wider question of why £5,000 and why this group. These are simply matters of judgment. Should it be five rather than four rather than six? The view taken by my colleagues in the Treasury was that £5,000 had a sense of justice about it, and that it was felt broadly right and was affordable.
Why this potential group? As the noble Lord knows, this group has been part of the debate about Equitable Life all the way through—about where do you draw the line between payment and non-payment. After a very long period of discussion it was simply thought that these groups were Equitable Life policyholders who had not got the sort of benefit that many other Equitable Life policyholders had got, notwithstanding the fact that they were not subject to maladministration in the same way, and that it was a question of fairness to them. That was the telling argument which decided us on this course.
I hope that I have answered all the noble Lord’s questions. On that basis, I commend the regulations to the Committee.
I am grateful for the very full answers that the noble Lord has given, but perhaps I may come back on this issue of only one payment. I hear very clearly what the Minister says. Either I am misreading the Explanatory Note, or it is something that we will have to settle outside our discussions today, but it would be good to be clear on that.
On the issue of who we are supporting here, it is quite possible that the people who are getting these ex-gratia payments are higher-rate taxpayers as well as people who do not pay tax at all. Obviously, having a tax-free ex-gratia payment is of particular value to such people. The overall cost, which is, I think, £45 million, is not in these days a small sum. This is why my last question is about all the demands and all the challenges that we have, particularly some of the benefit changes. Why spend £45 million on this group, including some who are higher-rate taxpayers who are going to do very well out of a tax-free ex-gratia amount? I think that I have made the point, and I am grateful for the noble Lord’s explanations.
I do not think that there is any doubt that one individual will get a maximum of one payment. I am sorry if the note is not very clear but I think that that is correct. Should these payments be tax free? One of the considerations—bearing in mind that these are not insubstantial payments, but they are not vast payments—was that, given that we do not know the current incomes of the people, having a common payment to this group of elderly policyholders seemed to us to be the easiest, simplest, and fairest outcome.