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The Financial Secretary to the Treasury (Mr Mark Hoban)
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.
Mr Donohoe
Will the Minister be specific and say what the payments will be and when they will start to be made?
Mr Hoban
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.
Mr Donohoe
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?
Mr Hoban
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.