Taxation of Equitable Life (Payments) Order 2011

Lord Sassoon Excerpts

Tuesday 7th June 2011 Grand Committee

Moved By

[Lord Sassoon]

That the Grand Committee do report to the House that it has considered the Taxation of Equitable Life (Payments) Order 2011.

Relevant document: 19th Report from the Joint Committee on Statutory Instruments.

[The Commercial Secretary to the Treasury (Lord Sassoon)]

My Lords, to set this order in context, it may be helpful if I provided a little background on the development of the Equitable Life payment scheme. The Government have pledged to implement the Parliamentary and Health Service 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 made considerable progress towards fulfilling that pledge.

We introduced the Equitable Life (Payments) Bill in July 2010, giving HM Treasury authority to incur expenditure when making these payments. We published Sir John Chadwick’s advice on the financial losses sustained by Equitable Life policyholders, invited representations on this advice, and carefully considered them in our deliberations in advance of the spending review. Following that consideration, and refinements to the calculations of Sir John’s actuaries, we quantified the relative loss at £4.1 billion, based on a full acceptance of the Parliamentary Ombudsman’s findings of maladministration. In determining the level of payments through the scheme, it was important, as the Parliamentary Ombudsman herself acknowledged, to take into account the impact on the public purse. Therefore, at the spending review we announced that approximately £1.5 billion would be paid out through the payment scheme.

It is also important to note that even in the context of a very tight spending review, we still found a way to cover all the losses of the with-profits or trapped annuitants. This is possible because we will be paying their losses through annual payments that reflect the structure of their policies. These 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 are also generally the oldest policyholders.

We also established the Independent Commission on Equitable Life Payments, chaired by Brian Pomeroy, to advise on the distribution of the remaining funding among other policyholders. The commission reported in January, and its recommendations formed the basis of the Equitable Life payment scheme design document that was published on 16 May. The document sets out the detail of how the scheme will work, including who will receive payments, how they will be calculated, and how they will be made. In that document, we set out our intention to make first payments through the scheme by the end of this month, and we are on track to meet this target.

Noble Lords may be pleased to hear that that this brings me to the order itself. When we introduced the Equitable Life (Payments) Bill last year, we took a power to provide for authorised payments made by the scheme to be free of tax, and to enable them to be disregarded for the purposes of assessing eligibility for certain means-tested state-funded support. At the spending review, the Financial Secretary to the Treasury announced that the payments would be tax free. There are strong reasons for this, which were raised in the representations following the publication of Sir John’s advice. One key issue is simplicity. It would be an extremely difficult task to decide the appropriate tax treatment of a payment that represents loss suffered on an investment over the past 10 years, during which many policyholders’ circumstances may have changed. It would also be very challenging to explain any such treatment and associated reporting requirements to those in receipt of payments. This approach would also be extremely time-consuming. In light of our commitment to bringing the Equitable Life issue to a conclusion as quickly as possible, it is just not tenable.

Secondly, we have taken serious consideration of fairness. Of a total loss of £4.1 billion, £1.5 billion will be made available to the scheme, based on our careful assessment of what funding would strike a fair balance between fairness to policyholders and fairness to the taxpayer. Adding a tax liability to payments on top of this discount would disrupt this balance.

Let me take the Committee through the order. Articles 2 to 4 provide for authorised payments to be disregarded for the purposes of capital gains tax, corporation tax and income tax. All direct payments from the scheme to identified payees, as set out in the Equitable Life Payments Scheme design document, are authorised payments under the scheme. Where Equitable Life has only one set of data and no records of the individual members of a group pension scheme, the scheme will use the trustee of the group pension scheme as a paying agent. Onward payments from these trustees to their pension scheme members are also authorised payments.

Article 5 provides for inheritance tax. It ensures that a person’s right to, or interest in, an authorised payment will be disregarded in calculating the value of that person’s estate on death for the purposes of inheritance tax; and that such rights or interests are similarly disregarded in calculating the value of relevant property subject to a 10-year anniversary charge for inheritance tax, where an authorised payment is made on or after such anniversary. This means that no estate will have to be reopened in order for inheritance tax to be charged on payments received after death. But payments received before death will not be ring-fenced to give them ongoing relief from inheritance tax. Such ring-fencing is not practicable.

Article 6 provides that in calculating investment income for the purposes of entitlement to tax credits an authorised payment shall be disregarded. Section 9 of the scheme design document that we published last month sets out in detail how the tax relief set out in the order will work in relation to the scheme.

I hope that all present will support the making of this order today. Following today’s debate, the order is scheduled for debate in the other place tomorrow. This should ensure that the order is made before the end of the month, giving certainty and reassurance to those who will receive the first payments. The order reflects the Government’s principles of fairness, transparency and simplicity in our response to the Equitable Life saga, and I beg to move.

[Lord Newby]

My Lords, I thank the Minister for that clear description of the background and of the order. The whole Equitable Life saga is one of the least-savoury examples of public policymaking in recent years, and it was a great relief that the Government were able to grasp the nettle and reach a settlement so quickly last year. Therefore speed, which was so lacking for so long, needs now to be of the essence in getting payments made. The Minister explained that the payments will be exempt of tax because to have made them liable to tax could have been time consuming. One can think of other cases in which the payment of compensation has taken years because of the time-consuming procedures that were put in place. The pneumoconiosis saga among the miners is a classic example of necessary detailed calculations and assessment taking years, during which time inevitably a significant number of those eligible for the payments died. Given that we are talking here about pensioners, time is of the essence.

I have one question for the Minister. Once the order is passed, the Government hope to begin making payments by the end of this month. Do they have any assessment of how long it is likely to take for the whole process to be completed? That is of huge importance to the individual policyholders. It is great knowing that you are going to get some compensation, but you need certainty. It would therefore be very good if the Government could give some certainty in the timetable so that even those who will not receive payment in the first tranche will have some broad idea of when they will receive it.

[Lord Tunnicliffe]

My Lords, I, too, thank the Minister for his concise overview of the position and for introducing the order. We support the action that the Government have taken on this whole issue, and we accept that, although we may have different views about the approaches taken, speed is of the essence and the order should go through. We know that during the passage of the primary legislation there was some debate on the quantum, but ultimately Governments are in the business of making decisions and we recognise the decision to set the payment scheme at £1.5 billion.

In the original debate there was some concern about the allocation to the group of with-profits annuitants. The general principle that they should be protected against the comparison at 100 per cent was consensual. However, as my noble friend Lord McKenzie said in the debate:

“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?”.—[Official Report, 24/11/10; col. 1152.]

I accept the case that has been made for simplicity but, in terms of the balance between the two pots, are the Government comfortable that this has not created an anomaly between the with-profits group and the non-with-profits group?

I join the noble Lord in seeking further information on the progress of payments but, aside from that question and perhaps the matter of an enhanced progress report, we support the order.

[Lord Sassoon]

My Lords, first, I thank my noble friend Lord Newby and the noble Lord, Lord Tunnicliffe, for their helpful contributions to this short debate and for supporting the order. The making of the order is a crucial step towards making the first payments at the end of the month.

I shall address the questions that have been raised by my noble friend Lord Newby, followed up by the noble Lord, Lord Tunnicliffe, about how the timetable will unfold. As I said, the first payments will commence by the end of this month. It is then expected that payments to all traceable accumulating with-profits groups and conventional with-profits policyholders will be made over the first three years of the scheme. Payments to with-profits annuity policyholders for past losses will be spread over the first five years of the scheme, while annual payments for future losses will commence in year one and continue for the lifetime of the policyholders. All individual policyholders can expect to hear from the scheme in the first year—that is, by June 2012. As I think I said, for certain classes of policyholder closure of the process will be within three years; for others, five years; and for one class, as I identified, over their lifetime. I hope that that makes the position clear in respect of the several different classes of policyholder.

In response to the question of the noble Lord, Lord Tunnicliffe, on why tax relief is being granted on payments to with-profit annuitants who will have received 100 per cent of their losses covered by the scheme, losses for with-profit annuitants have been calculated on a gross basis. As I have just said, unlike other policyholders, those annuitants will receive their payments over time and we will not be paying any interest on those payments between the date of the calculation—December 2009—and the date of receipt. Disregarding the payments for tax will offset the effect of that payment schedule and the absence of any interest. It is important to note that these payments are in respect of losses that go back over nearly two decades and it would be an incredibly complex and burdensome task to work out what the tax positions for individuals would have been at the relevant time. As has been recognised, the scheme needs to be simple and not unduly complex. In recognition of that, we have decided to make the payments tax free. In the round, we do not believe that this will result in overpayment for with-profits annuitants, given the offset that I have identified.

Briefly, as regards reporting on the progress of the scheme—an issue that was briefly touched on by the noble Lord, Lord Tunnicliffe—progress will be tracked and evaluated throughout the lifetime of the scheme, and I envisage that a number of reports will be produced, including in relation to the management of contracts, operations and risks. I am happy to give reassurance that the Government will give Parliament regular updates on the progress of the scheme.

We have come a long way in the past year to redressing the losses that Equitable Life policyholders have suffered over the past decade. Following the coming into effect of the order, a communications strategy is in place so that all recipients will be informed that their payments are to be tax free, and that they do not have to report them for tax purposes. In addition, HMRC helplines, and the staff at payment scheme call centres will be provided with lines to take so as to answer any questions on the tax treatment of these payments. I am grateful for the Committee’s support.

Motion agreed.