Equitable Life (Payments) Bill

Lord McKenzie of Luton Excerpts

Wednesday 24th November 2010 Lords Chamber

[Lord McKenzie of Luton]

My Lords, this short debate has inevitably ranged wider than the provisions of the Bill. As we have heard, the Bill is an enabling measure which authorises payments to be made where persons have been adversely affected by maladministration in the regulation of the Equitable Life Assurance Society before 2001. It also enables provision to be made for disregarding such payments for tax, tax credit and certain other payments. The Bill does not spell out the detail of any compensation scheme or how the provisions of Clause 1(3) are to be implemented. As far as one can tell, no parliamentary approval for the scheme is necessary, although I believe Ministers in another place have committed to finding a way for Parliament to hold the Government to account when the independent commission produces its final proposals. Can the Minister say whether such a way has now been determined and whether it will apply to your Lordships’ House as well as to the other place?

As my noble and learned friend Lord Davidson of Glen Clova made clear, we do not oppose the Bill and consider that we should play our part in bringing resolution to this protracted issue. However, because it is a money Bill, we are constrained from making detailed amendment.

There are many strands to the Equitable Life saga. It is the UK’s oldest insurer but was brought down by what might have seemed the innocuous development some 60 years ago of guaranteed annuity rates on with-profit pension plans. As the noble Lord, Lord Kirkwood, remarked, who today would contemplate such a prospect? However, these were different times. Lower returns on gilts and increasing longevity emphasised that the Equitable Life business model was not sustainable. Its attempts to cover the costs by paying lower final bonuses to with-profit policyholders fell foul of the courts and eventually it was forced to stop writing new business in December 2000.

The impact that this had on its investment policy and returns and the consequent range of decisions inflicted on policyholders fuelled the campaigns for compensation led by the Equitable Members Action Group and the Equitable Life Trapped Annuitants. Matters were not made easier by these issues straddling two regulatory regimes and Governments of the Conservative, Labour and now coalition variety. A lot of water has flowed under the bridge since the failings of Equitable Life became apparent. The matter has spawned a range of inquiries and reviews, including by the FSA, the Treasury Select Committee, the actuarial profession, the Treasury, the ombudsman twice and the Public Administration Committee. As well as reviewing the predicament caused by Equitable Life, these variously ranged over the regulatory regimes, the Government Actuary’s Department, the actuarial profession, the governance of mutual life offices and the accounting for with-profits business by life insurers.

We can therefore support the Government in seeking to bring this matter to a close, notwithstanding that their approach is different from that which we adopted. We have heard from the Minister that it is to be done on the basis of accepting all the ombudsman’s findings and the setting-up of an independent commission to design a fair and transparent payment system.

We know that the CSR has provided an envelope for overall compensation of £1.5 billion. This has been argued to be consistent with the ombudsman’s findings, which acknowledged that a compensation scheme should consider the impact on the public purse. This is a principle with which we agree but, as my noble and learned friend inquired, can the Minister say a little more about how the judgment was made and how this particular figure was arrived at?

The Government have determined that all policyholders of with-profit annuities from the end of 1992 will have their losses covered in full. As we have heard, this figure is calculated to be £620 million. This implies that the balance of £880 million—but only £775 million within the CSR period—is allocated to cover other losses. As the starting point is the recognition of relative loss of £4.3 billion, this means that there is £880 million to cover the recognised loss of £3.7 billion—some 24 per cent. According to the document issued by the Independent Commission on Equitable Life Payments on 3 November, this amount is to cover almost 500,000 holders of individual policies and 600,000 group pension policies. Can the Minister confirm these figures?

Will he also say whether the calculation of relative loss is on a pre- or post-tax basis, a point probed by my noble friend Lady Drake, and what this means for any orders which might be made under Clause 1(3)? It was made clear in another place that payments under the compensation scheme would be free of tax. If relative loss is calculated on a gross-of-tax basis and the post-1992 with-profit annuitants are kept whole on this basis, will not the tax exemption go further than full reimbursement?

Incidentally, it is noted that Clause 1(3)(b) enables compensation payments to be disregarded for tax credit purposes—another point on which my noble friend touched. What is the intended position for pension credit, which is not specifically mentioned in the legislation, and how is this provided for within the Bill?

The Minister will be in no doubt that there are those—in EMAG in particular—who are far from happy with what is proposed. Their anger has been fuelled by raised expectations created by the pledge made by many MPs, overwhelmingly Tories and Lib Dems, in the run-up to the last election—in particular the commitment to support and vote for proper compensation for victims of the Equitable Life scandal and a scheme, independent of government, which was,

“swift, simple, transparent and fair”.

This pledge was effectively replicated in the coalition agreement. Does the Minister argue that what is proposed meets the terms of this pledge, or were those who now support what is on offer ill informed or ill advised? How does the Minister respond to the challenge from the Equitable Members Action Group that the £4.3-billion figure reflects a calculation based on accepting just some of the findings of the ombudsman, which are those that the previous Government accepted, and not the full findings which the coalition Government have adopted?

The Minister will be aware that a particular bone of contention, as we have just heard from the noble Lord, Lord Willoughby de Broke, is the start date for compensation. This is set at policies taken out from September 1992, notwithstanding that the ombudsman concluded that nobody would have sensibly invested in Equitable Life after 1 July 1991. Others have argued on moral grounds that a compensation scheme should even predate 1991. In the other place, the Government have seemingly relied upon a variety of arguments to justify the September 1992 date, including the arguments that: maladministration before that date would have led to overbonusing, a term I am not sure has entered the lexicon of the banking community; that records prior to this time are not readily available; and that policyholders would not have been aware of regulatory failure, had proper regulatory returns been made, before the autumn of 1992. It would be helpful if the Minister could be clear precisely on which of these grounds, or indeed any other, is the basis for the chosen start date. Should the ombudsman at any point in future review the compensation scheme and determine on one basis or another that it is not consistent with her findings and recommendations, will the Government seek to adjust the funding envelope?

The challenge of calculating and devising a compensation scheme is daunting, which is why we in government appointed Sir John Chadwick. His approach was based on different terms of reference, but the concept of looking at classes of policyholders rather than seeking to unpick the investment decisions of millions of separate transactions is sensibly being adopted by the commission. The concept of relative losses has been accepted, as has the methodology. But perhaps the Minister might just comment on the assertions from EMAG that the calculation is in error in that non-contractual exit costs have been deducted from the comparator, thus reducing the difference, on the basis that it would not have been necessary to quit a comparator entity.

In Committee in another place, the Minister indicated that a lot of effort was going into producing a,

“means by which policyholders can raise concerns about the incorrect application of scheme rules to individual cases”.—[Official Report, Commons, 10/11/10; col. 331.]

That implies an opportunity to challenge the calculation, but not the rules of the scheme itself. My noble and learned friend inquired about this, but does the Minister have any further news on how this might operate?

The noble Lord's ministerial colleague has received representations from the Guernsey Financial Services Commission about Equitable Life policies written by its Guernsey branch. This seeks assurances of equality of treatment with UK resident policyholders and policyholders resident in other jurisdictions. What is the Government's response to this and to what extent did the financing envelope reflect this potential obligation?

This has been a brief discussion. As we have already said, we will support the Bill. This has been a long and arduous journey for those who have lost out from regulatory failure, and I fear for some that the journey is not yet at an end. But the Government are entitled to be given credit for the determined manner in which they have taken this forward. We need to ensure that we have robust regulatory systems so that people have confidence to save. As my noble friend Lady Drake has noted, this is even more important with the onset of auto-enrolment. I look forward to hearing the Minister’s reply.

--- Later in debate ---

[Lord Sassoon]

My Lords, I am conscious of the time that we have got to. I can only repeat that, while I accept what the noble Lord reads out as factually correct, he omits to point out what I have said: it is nevertheless the fact that those pre-1992 annuitants could not have been affected by maladministration, which is the purpose of this compensation scheme. Although I entirely accept the analysis of what has happened to their income levels in recent years, the judgment is that, on balance, they were paid more in the early years than they should have been, and that exceeds the reduction in more recent years. It is a regrettable situation but not one that it would be proper to bring into the compensation scheme.

[Lord McKenzie of Luton]

My Lords, the Minister has been very full in his replies. Could he comment on one specific point? I think that he has confirmed that the comparator is on a gross-of-tax basis. Therefore, if WPAs who have been kept whole in addition get a tax exemption, does that not provide for that group more than its actual loss on that basis?

[Lord Sassoon]

I am conscious that I have not answered the question. Given the time, I will write with a clear analysis of the tax position and what it results in. I have not lost sight of the question and I will sweep up anything else that I have missed.

I reconfirm that the Government take the maladministration of Equitable Life very seriously. We have shown that resolving this issue is a real priority of the Government and have taken the necessary action to reach a fair and swift resolution. I fully sympathise with the plight of policyholders who have waited more than a decade for justice. It is time we brought their suffering to an end. I believe that ours is the appropriate course of action and that the Bill before the House today will help us achieve that.