The Exchequer Secretary to the Treasury (Damian Hinds)
This is an extremely important subject, and I congratulate my hon. Friend the Member for Harrow East (Bob Blackman) on securing the debate and bringing it to the Floor of the House today. His tireless work and that of other colleagues has been of great importance to many of our constituents. There are many human stories, and we have heard a number of them today from colleagues across the House. I am grateful to have the opportunity both to set out what this Government have done to address this long-standing issue and to set the record straight on some of the background.
Equitable Life has been a very sorry tale, and we all share sympathy for those affected by it. As the motion notes, this Government have taken action to resolve the long-standing issue, which is something that previous Governments failed to do, as noted by my hon. Friends the Members for Eddisbury (Antoinette Sandbach) and for North Devon (Peter Heaton-Jones).
Although Equitable Life remains a going concern and continues to trade, its problems in the 1990s and at the turn of the century caused a great many of its policyholders to suffer financial and emotional distress. Many different factors contributed to the losses suffered by policyholders. The ombudsman’s 2008 report established the part played by the then Government.
When we came to government, we committed to implement the ombudsman’s recommendation that the Government should make payments to Equitable Life policyholders in recognition of the part that was played by the Government at the time. We took swift action, introducing the Equitable Life (Payments) Bill in 2010, with payments starting to be made to policyholders in June 2011, six months after the Bill received Royal Assent.
Mr Charles Walker
My hon. Friend knows that the thrust of this afternoon’s debate is a request for additional money to be made available on top of the money that has already been earmarked for compensation to Equitable Life policyholders. Will the Government be able to find additional money?
Damian Hinds
I will have to disappoint my hon. Friend, because the public finances remain in a very difficult state. Although the economy and our public finances have improved compared with where they were, money is still extremely tight.
We established a set of rules for the payments, based on the Government’s full acceptance of the parliamentary ombudsman’s findings. The scheme was based on the assumption that all policyholders considered the incorrect regulatory returns when making their investment and would have decided not to invest in Equitable Life had those returns been correct. Obviously, those are quite conservative assumptions. The Government used the ombudsman’s findings to calculate the resulting individual loss by assessing the Equitable Life returns against those of comparator companies. That led to an assessment of the loss from Government maladministration of £4.1 billion.
Despite the constraints facing the public purse, the 2010 spending review announced that up to £1.5 billion would be made available for payment to eligible policyholders. Out of that sum, following consultation, we decided to pay the with-profits, or trapped, annuitants in full. As a result, this group of policyholders will receive an annual payment for life, and the actuarial assessment of those payments is that the Government will be making payments to this group well into the next decade and probably beyond.
The total cost of those payments is assessed to be around £625 million—though that is dependent on how long policyholders live. Importantly, the £100 million contingency fund, to which my hon. Friend the Member for Harrow East referred, is an accounting provision to provide a safety net in case the annuitants live longer than the central forecast. The remaining £775 million of available funding was distributed pro-rata to other policyholders on the advice of an independent commission, and that resulted in a figure of 22.4 pence in the pound of their relative loss.
Of course I know that that was deeply disappointing to many, but these were difficult decisions that were taken in the light of the position of the public finances. As I said just now in reply to my hon. Friend the Member for Broxbourne (Mr Walker), public finances remain in a very difficult position, and we have to take decisions in the interests of overall fairness to all taxpayers.
Damian Hinds
I hope that the hon. Lady will forgive me, but I will make some progress, as time is short.
Margaret Ferrier
With the Government preparing to usher in the successor to the Trident nuclear weapon system, which is estimated to cost £167 billion, I call into question the Cabinet’s priorities. If the Government can find money for that, they can find money to pay Equitable Life policyholders.
Damian Hinds
The hon. Lady’s definition of “on that very point” has a degree of elastic in it.
The motion notes that the ombudsman recommended in her report that policyholders should be put back in the position that they would have been in, had Government maladministration not occurred. What the ombudsman went on to say just after this recommendation, however, is that it was appropriate also to take into account the impact on the public purse when considering the funding of payments.
Damian Hinds
If my hon. Friend will forgive me, I must make progress. I know there is another debate to follow and I am time-limited.
The ombudsman has written to the all-party parliamentary group on the funding and said that the Government’s decisions on affordability and eligibility cannot be said to be incompatible with her report.
As announced in the summer Budget, and following more than four years of operation, the scheme closed to new claims on 31 December. As part of that closure, we did find a way to double the payments received by investors who had previously received the 22.4% of their losses, but who were also in receipt of pension credit. These further payments started just before Christmas and will be completed shortly.
There have been many representations regarding the group of policyholders known as the pre-92 annuitants. Although they were not included in the payment scheme for well-established reasons that have been debated in this House, the Government recognised that they were not receiving the income they expected from their annuities. Although that is not due to Government maladministration, in late 2013, those policyholders received a payment of £5,000, or £10,000 for those in receipt of pension credit.
The Government have also received representations about the fact that, as the economy improves, further funding should be made available to the payment scheme. The improvements our economy has made since 2010 are greatly to be welcomed and show that the Government’s long-term economic plan is working, but the plan is not complete and we have some way to go to fully restore the public finances. Based on latest outturn data, the deficit was £89.1 billion last year. That is why we have no plans to reopen the payment scheme after more than four years of operation. So apart from the ongoing payments to annuitants, which will continue for many years to come, our focus now is to complete the orderly wind-down of the scheme by summer this year.
We do not yet know what the final picture will be, but we expect that by the summer, close to 950,000 policyholders will have been paid around £1.1 billion by the scheme. That is a considerable achievement, given the issues that the payment scheme faced in tracing policyholders, as mentioned by the hon. Member for Salford and Eccles (Rebecca Long Bailey), who speaks for the Opposition, and exceeds the expectations set out in the National Audit Office report of 2013, to which she referred.
I will respond briefly to a couple of points made during the debate. My hon. Friend the Member for Harrow East asked for a progress report on payments. As I said, we will know the final position on that by the summer and a report will then be published. We do not yet know the final position on the cash figures, but we expect the difference at the end to be lower than the £39 million that my hon. Friend referred to. The £100 million that I mentioned earlier, the contingency on the actuarial projections, is in a different category.
My hon. Friend the Member for Bexhill and Battle (Huw Merriman) asked for clarity, as did my hon. Friend the Member for Broxbourne in an intervention, on whether more money would be forthcoming. I wish I could say that was the case, but because of the condition of the public finances, that is not possible. My hon. Friend the Member for Bexhill and Battle also asked about the Scottish Widows benchmark. This is a complicated issue, but the core concept in the scheme was the concept of relative loss, which has to take a view of the investment’s performance, compared with similar investments available elsewhere. The Scottish Widows fund that he referred to was not available to invest in, I understand, before 1995, whereas the Prudential investment was.
The hon. Member for Salford and Eccles asked whether the Treasury had taken all reasonable steps to trace policyholders. There was national advertising and various other tracing methods, including through the Department for Work and Pensions, and also a data list that came from EMAG with members’ details to help trace them. In terms of the spend on administering the scheme, our forecast outturn is within about 3% of the original budget.
The hon. Member for Great Grimsby (Melanie Onn) alluded to the contrast with savers in the Icelandic banks. Of course, that was a very different situation, where ex gratia payments were made to UK depositors in those banks. That was done as a result of a decision by the previous Government to guarantee all qualifying deposits when there was a danger of not having financial stability in the UK. However, the Financial Services Compensation Scheme was loaned the money to facilitate those payments, in the expectation that the money paid to UK depositors would come back from those banks eventually.
A number of hon. Members have raised the issue of general confidence in financial institutions and encouragement to save. That is very important to the Government, who have helped more than 5 million people to save for retirement for the first time, or to save more, through automatic enrolment. Individuals now also have the freedom to access their pension from the age of 55 if they wish.
The Government have also acted strongly on reforming financial regulation to ensure that it is fit for purpose in future. The Financial Services Act 2012 dismantled the failed tripartite system and created a new architecture and approach for financial regulation. I am confident that our actions have provided a robust framework for the authorities to work within.
I reiterate my thanks to my hon. Friend the Member for Harrow East and other colleagues for securing the debate, which has given us another opportunity to discuss these important issues. I also recognise the hard work the all-party group has done.
I appreciate that many policyholders are not receiving the income they expected, but by paying more than £1 billion to more than 900,000 policyholders, we have taken action to resolve the Government’s part in the Equitable Life issue. We have been able to pay in full the losses of the most trapped policyholders and to double the payments to vulnerable non-annuitant policyholders, as well as providing a one-off payment to the pre-1992 annuitants, who, though unaffected by the maladministration, were recognised by the Government to be suffering as a result of their declining annuity income. In doing that, we have balanced the needs of policyholders against the need to reduce the deficit and repair the public finances.