Equitable Life (Payments) Bill
(13 years, 5 months ago)
Lords ChamberRead Hansard Text Read Debate Ministerial Extracts
The Commercial Secretary to the Treasury (Lord Sassoon)
My Lords, the Government take very seriously the injustice that Equitable Life policyholders have faced. In our programme for government we 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. The importance that the Government place on Equitable Life is clearly reflected in our actions and our desire to achieve a swift resolution for policyholders. Today’s Bill is an important step towards delivering this ambition.
Since coming to power in May we have made more progress on this issue than the previous Administration achieved during their entire tenure in office. We have done this by publishing Sir John Chadwick’s report on losses suffered by policyholders and their impact; by commissioning the first bottom-up estimates of losses suffered by policyholders and publishing them in full; by establishing the Independent Commission on Equitable Life Payments; by announcing our intention to start making payments by the middle of next year; and by announcing that around £1.5 billion of public funds would be allocated to the payments scheme. While it is important to note just how far we have come, I am well aware that there is still some way to go.
The Government accept that the relative losses suffered by policyholders amount to some £4.3 billion. This is the difference between what policyholders who invested from September 1992 onwards received from their policies and what they would have received if they had invested elsewhere. It includes all the Parliamentary Ombudsman’s findings of maladministration, which the Government accept in their entirety. At the spending review, my right honourable friend the Chancellor of the Exchequer announced that around £1.5 billion of funding would be allocated to the scheme. This is more than four times the £340 million figure recommended by Sir John Chadwick.
A number of parties have raised the plight of with-profits annuitants—WPAs. They are trapped with policies that are providing a declining income for their retirement. As a Government, we have recognised their circumstances and decided to cover the full cost of their losses. This amounts to approximately £620 million. WPAs will be paid their losses through regular instalments for their lifetime.
Taking into account the pressures on the public purse, Her Majesty’s Treasury could allocate only £1 billion over the first three years of the spending review. This will cover the first three years’ payments to WPAs and lump sum payments to all other policyholders, and to the estates of the deceased, which will also be paid during this period. The remaining amount of approximately £500 million will be used to provide ongoing regular payments to WPAs.
There has been some disappointment from policyholder groups about the amount that we have allocated to this scheme. However, there are many competing priorities for the limited funds that we have at our disposal. We must also remember that the Parliamentary Ombudsman herself stated that,
“the public interest is a relevant consideration and that it is appropriate to consider the potential impact on the public purse of any payment of compensation in this case”.
I know that independence of the payments scheme was a key concern for many parties, and I can assure this House that it is also an important issue for the Government. In July, the Government established the Independent Commission on Equitable Life Payments. The commission has been asked to advise on how best to allocate fairly funds provided for the scheme to all policyholders, with the exception of WPAs and their estates. The commission is in consultation with interested parties. This will help us to ensure that the views of policyholders are heard, and will help to inform the commission’s advice. The Government are keen that the commission should conclude these discussions as quickly as possible and have asked it to submit its report by the end of January.
Regardless of the final design of the scheme, the Bill before the House today is essential to ensuring that payments can be made. The Bill authorises the Treasury to incur expenditure and to make payments to those adversely affected by the Government’s maladministration in their regulation of the Equitable Life Assurance Society. The Bill also allows the Treasury to make provision for these payments to be disregarded for tax and tax credits. My right honourable friend the Chancellor of the Exchequer announced in another place that we will use this power so that payments will be made free of tax to all policyholders.
The Government have also discussed the issue of means-tested benefits with the Department for Work and Pensions. Those discussions have led to the decision that lump sum payments will be treated as capital for the purposes of assessing eligibility for means-tested benefits. This is fair because in normal circumstances this money would have become part of policyholders’ capital whenever it was received. Capital limits do not immediately cut off eligibility for benefits; they work on a sliding scale, gradually reducing support for individuals with larger assets. However, for WPAs the payments will be treated as income for the purposes of means-tested benefit. This is also fair as it reflects the structure of the policy that they bought and which gave them a regular income stream.
The Government have decided that National Savings and Investments—NS&I—is the preferred option for delivering this scheme. As part of its normal functions, NS&I already makes millions of payments to customers every month. It has the necessary processes and infrastructure in place successfully to deliver a scheme of the size and scope that we have proposed. The Bill will grant NS&I the power to administer the scheme and ensure that payments can be made as soon as possible. As I have said, it is our ambition to start making payments in the middle of next year.
I am sure that we all want a swift end to this matter, and the Equitable Life (Payments) Bill is a key milestone on the road to resolving these long-standing issues. It is a clear sign of the Government’s commitment to those who have suffered losses due to the maladministration in the regulation of Equitable Life. Policyholders have waited for more than a decade for justice. Passing this important piece of legislation is essential to achieving it. I beg to move.
Lord Davidson of Glen Clova
My Lords, perhaps I may say immediately that we do not oppose the Bill and, indeed, we support the Government in seeking to bring a resolution to an issue that has been the subject of eight inquiries. I pay particular tribute to the inquiry conducted by the right honourable Lord Penrose which resulted in his magisterial analysis of the history of Equitable Life and the factors contributory to its failure. One recollects that Lord Penrose concluded that the Equitable was largely the author of its own misfortune—substantially through management failures.
The Government have announced a compensation scheme of around £1.5 billion against the losses of policyholders, calculated at some £4.3 billion—thereby compensating some 35 per cent of the losses. The underlying rationale for this compensation is in respect of regulatory failure. Compensation, we are told, has been discounted to strike a fair balance between the interests of policyholders and taxpayers. The Minister has confirmed the Government’s commitment to,
“fair and transparent payments to … policyholders”.
To enable such transparency, will the Minister indicate what discount has been made to reflect the taxpayers’ interest? I ask this because it is not clear what proportion of the overall loss is attributed to regulatory failure. Plainly, on the arithmetic, it is more than 35 per cent; but what is the actual proportion? Is it 40 per cent, 50 per cent, or more? Again, I ask this in the light of Lord Penrose’s conclusion that the principal source of the losses was failure within Equitable Life. Surely, transparency requires that we know the extent to which taxpayers have been protected, vis-à-vis the policyholders’ interests. The relevant money sum would give at least a guide.
Furthermore, and again to enable transparency and a better understanding of how fairness to taxpayers was considered, will the Minister reveal how the discount on the overall loss was calculated? To put it another way, what factors were considered and what weight were they given in the process of calculating the discount?
One of the features of the Government’s balancing exercise is their decision to cover the full costs of losses to holders of the with-profits annuity policies—the WPAs. What is the estimate of the number of such policyholders? It would obviously be useful to understand why other policyholders are unlikely to have the full cost of their losses met. What factors have been taken into account in that decision? Is there a view on what average compensation such policyholders, the non-WPAs, might hope to receive? Given that the ombudsman linked a policyholder’s losses to reliance—I repeat, reliance—on regulatory return data, will there be an obligation on non-WPA policyholders to prove reliance on such data? Alternatively, will reliance simply be presumed? If a policyholder is dissatisfied with the judgment of their entitlement to compensation, will there be an appeals procedure or will the policyholder perhaps have to rely on judicial review remedies? Given the ambition to put in place a fair compensation scheme, it would be interesting, not least to the non-WPAs, whose losses will not be fully covered, to understand better what will guide the content of such a scheme. Perhaps I may put it this way: how has “fairness” been determined in dividing the compensation moneys so that £880 million is earmarked for the non-WPAs?
I appreciate that the independent commission has been put in place to advise on the allocation of payments, but the Government have presumably developed principles, at this stage at least, that they would wish to apply in determining fair allocation. Will the Minister indicate what those principles are? For example, is it a general principle that those suffering from government maladministration can look for compensation? More particularly in the context of the Equitable situation, are there any guiding principles as to which, if any, groups other than the WPAs may receive special treatment? It is of course plain that the very elderly will be especially anxious to hear how they may be treated, but what about, for example, the Equitable “late joiners” who joined the Equitable scheme in 1999 and thereafter? Some clarity on this would be helpful.
I should say that my questions are intended to encourage clarity and are not aimed at criticising the terms of the Bill. We are glad that the Government have moved forward to bring a resolution to this vexed issue. We hope that it will prove successful in operation and we will support this short paving Bill.
Lord Kirkwood of Kirkhope
My Lords, I am very pleased to contribute to this important Second Reading debate. It is a tall order to expect a two-clause Bill to bring closure to this saga. It has been going on for a long time and I have not been studying it to the extent that other colleagues have, but it is a complete and total tragedy from beginning to end. It has ruined the retirement prospects of thousands and thousands of our citizens and it must never be allowed to happen again. A sum of £1.5 billion may not sound like a lot if you are suffering reduced compensation but it is a lot to the taxpayers in the circumstances in which we find ourselves.
I apologise for going into what are really Committee stage questions. However, this is a money Bill and we have no option but to put detailed questions at this point. I concur with many of the questions that have already been raised and look forward to hearing the answers. If the Minister cannot deal with them all, perhaps he will write to us.
I should like an assurance that the Government are comfortable that they have got this matter covered. By today’s standards, anyone trying to offer a guaranteed annuity rate would be completely misguided and accused of misjudgment. As I understand it, they would not get across the door before they were brought to book by regulators. The tragedy was partly brought about by the fact that the Equitable Life situation straddled two different sets of regulatory authority: the whole system before 2000, which was the SIB regime, and then the FSA regime. I think that some of the problems were caused by the fact that there was a fault line between those two regimes. Although I support the Bill and think that it will go a long way towards achieving closure, I think that the British public would like an assurance that, if this is not closure, we can be absolutely certain that these circumstances will not arise again.
The length of time that this has taken to sort out is unconscionable. It is pointless allocating blame but it has covered two previous Administrations. The second ombudsman report, which was produced in July 2008, pointed out—I did not realise this until I went back to it—that five of her findings in fact which she complained about were before 1997 and five were after. We are all in the dock together, as it were. It has taken an unconscionable time and that suggests that we now have a duty to get on and sort this out.
I commend the coalition Government for dealing with this as expeditiously as I think they have. I hope that the Minister is absolutely confident that he can deliver a start payment date as early next year as he can reasonably manage. NS&I is a very sensible vehicle for payment. It is tried and tested; people trust it; it knows what it is doing and all it needs is the money. If he can sign a cheque as soon as it comes across his desk, that would be very welcome.
There is still no agreement about the losses which were suffered and the proportionality of the blame. I think I am right in understanding that this is an ex gratia payment—merely an ex gratia payment—so the Government can control what they do with the money. Clearly, there is a discrepancy, as the Minister acknowledged, in the difference between £1.5 thousand million and £4.3 thousand million. That is quite a gap to try to bridge. As I said earlier, I do not think that £1.5 thousand million from the taxpayers’ purse is an insignificant amount of money. Getting that paid will be the best thing we can do to start to make amends for some of these issues.
It seems to me that the Equitable Members Action Group still has some pertinent questions. I do not understand some of them as they are so technical and quite a long way above my pay grade. Perhaps the Minister can give an assurance that this is a paving Bill—a perfectly adequate description of it—but that it is not the end of the story. I hope he will continue to have an open-door policy for members of the action group who are still deeply affected by this and who still might, if they spend some face time together, get a better resolution, given the decisions that have been taken by the Government to date. If he can undertake that this is not the end of the ongoing discussions—it may be wrong to call it negotiations—and that they should certainly be carried forward, that would be extremely useful.
Obviously, the Treasury needs two things to pay this money which it does not have at the moment and which it gets through this Bill: one is the power to pay the money and the other is the resource itself. I notice that there is no figure in the Bill, unless I have missed it. Therefore, when the Bill gets Royal Assent, the Treasury will have the power to pay the money, which will not be restricted necessarily, at law, to £1.5 thousand million. Therefore my question is: if over the two CSR periods that this money will be spent, which is quite a considerable time in any political calendar, circumstances change substantially in terms of bond yields and other things that have a bearing on some of these contingent and other losses, what scope is there in the Bill for looking again at £1.5 thousand million by way of compensation? It appears to me that there is some scope for thinking about that, should circumstances change over the period of the payments that are envisaged in the Bill.
There is a subsidiary question to that. Once the Treasury has this power, under the appropriation rules it can spend £1.5 million—not billion, million—each year without further parliamentary recourse, normal standards being accepted. Even I know that £1.5 million might not go very far towards bridging a gap between £1.5 billion and £4.3 billion, but what scope is there for flexibility in the future? If, for example, in the fullness of time, the independent commission—Mr Pomeroy and his colleagues, who have a responsibility to look only at allocation, which is a big enough task; if they can complete it by January they will be doing quite well—came back to Ministers looking for a little extra flexibility to the extent that the appropriation rules would accommodate it, would that be considered as a way of increasing the flexibility available to Ministers?
The final point I want to make is on capital thresholds. I understand the Minister’s ruthless logic about how capital thresholds will be applied to some of those who receive compensation. Many of them will be very elderly households. The Minister knows as well as I do that capital threshold has been static for years—I think that it is still £16,000. If the independent commission does its work in January and these people get some money later in the year, this money will be top-sliced for many of them. That will add insult to injury. Although I immediately concede the Minister’s strict logic in saying he will apply capital thresholds in dispersing this money, I would just ask him to think about that very carefully again and not to make a final decision until he has looked at the impact and consequences for some of the elderly households who will receive this money.
Having said all that, I welcome the Bill. It has been done in good time, and not before time. However, in the haste to get some of this money into the domestic accounts of individuals who have suffered the loss, I hope we do not grab at things like capital thresholds too quickly and end up prejudicing some of the entitlements from these richly deserved ex gratia payments. I hope the negotiations will continue to see if further refinements can be made to deal with some of the outstanding questions legitimately being raised by the Equitable Members Action Group. On that basis, I am very happy to support this Second Reading.
Baroness Drake
My Lords, I should declare that I am a trustee of pension schemes with some members who have AVC savings in Equitable Life.
One has to enter the discussion on this Bill by acknowledging the extent of the anxiety and hardship that all too many Equitable Life policyholders have experienced. I recognise that the Bill is an important step in resolving the Equitable Life affair, which is to be welcomed. However, as has been said, the Bill gives the Treasury power to make payments without the full detail of the compensation scheme currently having been published. This raises some matters of concern on which I seek clarification.
The Government have confirmed a definition for relative loss suffered by policyholders, an approach that encompasses all the Parliamentary Ombudsman’s findings of maladministration, which the Government fully accept. I note that that decision by the Government leads to the taxpayer carrying liability for a form of compensation, which may well set for the future a moral precedent, expectation, or indicative principles of some significance. It would be useful if the Minister could clarify the point made by the noble Lord, Lord Kirkwood, about whether these payments are in fact ex gratia in status. I had understood that they were not. The actual amount of public funding for the compensation payment scheme is to be constrained by considerations of the public purse, in line with the view of the ombudsman. Such a consideration would always be relevant, whatever the state of the economy at a particular time. The state of the public finances may influence the weight that is given to this consideration, but not the principle of consideration itself.
The Government have determined that the total funding for the Equitable Life payment results in a figure of £1.4 billion and a £0.1 billion contingency for longevity risk. The distribution of that aggregate figure in allocated payments has been determined in part by the Government with £620 million to cover the total relative loss suffered by with-profits annuitants, £775 million to be distributed between approximately 500,000 holders of individual policies, and £600,000 in GPPs. As to further distribution to these latter policyholders, the independent commission set up by the Government is looking to determine and apply a set of principles for the fair allocation of funds. Those principles will also underpin any prioritisation of payments.
Therefore, two key sets of judgments or decisions are being made here that are important not least for the expectation principles that they may state morally, if not legally, for the future: what adjustments to make to the £4.3 billion relative loss figure for public purse considerations; and what principles of fairness to apply to the allocation of funding and the priority of payments to policyholders who are not with-profits annuitants.
If we take the first matter, it is not clear, as my noble and learned friend Lord Davidson said, how the relative loss figure has been abated for public purse considerations. What were the considerations that led to that £1.5 billion figure being announced in the spending review? How have the Government decided to ameliorate their liability? Little or no adjustment has been made to the compensation for with-profits annuitants as the Government propose to cover their total relative loss because of the irreversible nature of the purchase transaction and the size of the losses. It is the funding allocated to the other categories of policyholders where the extent of the adjustment to the public purse is greatest and the reasoning least transparent. These issues are very important. How matters were determined in this instance could well influence the reasoning of others when borrowing in future. It is important to understand whether the process followed by the Government is based on safe and sound principles. I noted that the Parliamentary Ombudsman said in the Public Administration Select Committee on 14 October:
“My view was that compensation for relative loss was the appropriate remedy. Then I did something unusual, which is to say, ‘That's a very large sum of money, and I absolutely understand that considerations of the public purse can legitimately come into play’”,
thereby confirming her statement that we are in new territory.
As to the second matter, principles of fairness identified by the independent commission may also set an expectation. Will the Government reflect on this before accepting any recommendation, not least to ensure that there are no untenable contradictions as to the hierarchy of priority between this compensation scheme and others that may exist, including pension saving compensation schemes? Hierarchies of priority have proved contentious in the past, not least in respect of pension savings.
Clause 1(3) confers on the Treasury the power to make provision for the payments to be disregarded for the purposes of tax, entitlements to tax credits and the liability to make payment in respect of provision for goods and services. On 10 November, the Financial Secretary to the Treasury, in his response to a question in Committee, confirmed that payments should not be treated as income for tax purposes, so providing a benefit for policyholders. If that is the case, will the Minister say whether the loss to the with-profits annuitants is calculated on a gross basis, whether the reference to disregarding payments for the purposes of tax credits would be extended to entitlements to pension credits and savings credits, and whether any payments can be disregarded in respect of liability or payment for social care?
I have also been reflecting on non with-profits annuitants. Is there an issue to be addressed in distinguishing between the holders of indexed and level annuities when assessing relative loss?
I recognise that the Government are keen to start making payments as soon as possible. Speed is obviously important, particularly given the age of many with-profits annuitants. The independent commission is looking at whether the timing of any payments could be prioritised, but will the Government also consider making interim payments soonest to those who need them most? Notwithstanding the aspiration around the timetable, does the Minister remain confident that the report from the independent commission will be received by the end of January 2011 and that payments will commence by the end of the first half of 2011? It would also be welcome if the Minister could confirm that a review body will definitely be accessible to policyholders who wish to challenge payments, with the review body having the power to overturn calculations.
I recognise that the Government’s weighing of the public purse with the compensation for injustice is a difficult issue. Citizens look to the Government to protect them against injustices experienced as a result of regulatory maladministration or inadequacy. Equally, the Government have a duty to taxpayers to have regard for the liability and responsibilities which they require the taxpayer to accept and the competing demand for public resources—a difficult balance. There have been significant controversial compensation cases over the past few years, as instanced both by Equitable Life and by the creation of the financial assistance scheme that was set up to compensate pension scheme members whose employers became insolvent prior to April 2004. It is probably appropriate for me to say that I am on the Pension Protection Fund board, which of course administers the financial assistance scheme.
It is important that people are not put off saving, and off pension saving in particular. I share the concerns of the noble Lord, Lord Kirkwood, who said that we must avoid such a tragedy happening again. How confident are the Government that their approach to regulation will ensure that such a tragedy does not happen in the future? With the advent of auto-enrolment in 2012, we will see millions more people saving and a significant increase in the level of saving going into private pension provision. Much of that saving will go into contract-based pension products. We will also see a corresponding growth in the annuity market. It is important that the regulatory system for long-term saving is robust and fit for purpose. There is a need to create an environment in which the need for compensation in the future becomes negligible.
The policy of auto-enrolment strikes a deal between the Government and the citizen that the latter will take greater responsibility for saving for their retirement. In return, the citizen deserves a regulatory system and a standard of governance and behaviour in the financial and insurance industry that support them in taking on this responsibility. I know that the Government are set on a programme of reform for financial regulation and the creation of a new consumer protection and markets authority.
The noble Lord, Lord Kirkwood, referred to conflicts between regulators. There are currently two regulatory regimes in the area of pension saving—the Pensions Regulator and the body or arrangements that will replace the Financial Services Authority. I will not go into the detail of who covers what, but there is an issue to be looked at here because there is unquestionably regulatory overlap, particularly as the future will provide a combination of contract-based and trust-based saving.
In implementing these reforms, will the Minister give the assurance that giving savers confidence in insurance and long-term saving in the future will be at the forefront of government policy and action?
Lord Willoughby de Broke
My Lords, I declare an interest as a trapped annuitant of Equitable Life, but I am one of the lucky ones who comes within the post-1991 provisions. According to the Bill and the Explanatory Notes, I will be compensated. I congratulate the Minister on dressing up a bare half loaf as a full and scented loaf of bread because a number of pensioners fall outwith the provisions of the Bill, in particular the trapped annuitants who are in the same position as those of us who are going to be compensated, but who took out their pensions before the end of 1991. I should like to speak up for those people.
These people are suffering in the same way as the post-1991 trapped annuitants, but they will not be compensated. It is worse for them because they are older and have no real means of support other than their pension payments, which have been greatly reduced. But for what I believe are spurious financial reasons, they have been excluded from the provisions of this Bill. I say that they are spurious because I read the debate in the other place in which Mr Mark Hoban set out the provisions of the Bill. The substance of his argument was that because of Equitable Life’s maladministration, the earlier pensioners were so-called “over-bonused” in the years before 1991. They had received more money than they should have and therefore they did not need any money after 1991. I do not think that stacks up either factually or morally.
It was not their fault that they were over-bonused, it was yet more poor regulation and mismanagement by the board of Equitable Life. Surely it cannot be right that because of so-called over-bonusing for a few years, these people are to be denied any compensation at all. At that point they had no way of knowing that they were being over-bonused, so are the Government really saying that because they were kept in the dark, they should not be entitled to any justice? I cannot believe that that is the Government’s intention. As I have said, they are just as disadvantaged as all the other trapped annuitants of Equitable Life. Moreover, they are older and therefore in more need. It is only right that they should be properly compensated.
Their pensions, as is the case for pensions such as my own, lost value and were significantly reduced after 2002 when the whole horror show became public following the case here in the House of Lords. Like the post-1991 annuitants, they were trapped as well. They were effectively in a house on fire with no escape. The post-1991 trapped annuitants are being offered an escape, but the pre-1991 people are not. I cannot believe that that is what the Government want.
The noble Lord, Lord Kirkwood, was absolutely right to point out that the pre-1991 annuitants did what successive Governments urged them to do. They took out pensions for their retirement so as not to be a burden and to enjoy a reasonable old age. However, they are now left with virtually nothing, with no chance of any compensation whatever. In his opening remarks the Minister quoted what the coalition Government said in May this year:
“We [will] implement the Parliamentary Ombudsman’s recommendation to make fair and transparent payments to Equitable Life policy holders, through an independent payment scheme, for their relative loss as a consequence of regulatory failure”.
But the ombudsman’s recommendation was that all policyholders should be restored to the position they would have been in had no maladministration occurred. That is patently not the case for the pre-1991 policyholders. I should say also that it is not the case either for the unlucky 1 million policyholders who are also, I believe, being unjustly treated: those who have not yet vested. Under the provisions of the Bill, they will receive only around 15 per cent of the compensation that they would otherwise have been entitled to. They will not be getting just a hair cut, but a crew cut, because a cut of 85 per cent is really savage. Of course, as the ombudsman said, public expenditure should be considered but it should be proportionate. Why not take the kind of percentage that government departments are being asked to implement—namely, 19 to 20 per cent—which would be fair? Eighty-five per cent is not at all equitable.
Can the Minister explain a little more fully why the Government first accepted £4,500 million as the amount due to the Equitable Life policyholders in compensation but have now reduced that to £1,500 million? The Chancellor has just tossed £7,000 million to the Irish Government to bail out their failing banks; surely pensions in this country deserve just as much as the bailing out of BIFFO’s banks in Ireland. There must be enough money to spare if we are sending £7 billion over there.
Equitable Life was nothing but a giant Ponzi scheme that slipped under the radar of three successive well-paid regulators. I hope the Government will listen to what the noble Lord, Lord Kirkwood, said about continuing some form of discussion with the Equitable Life Members Action Group to see if they can do a little better than this. I do not believe at the moment that all the pensioners who have suffered from misregulation have been properly compensated. This is not the justice envisaged by the ombudsman.
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.
Lord Sassoon
My Lords, first, I thank noble Lords for their valuable contribution to this afternoon’s debate. It is clear that there is a depth of support for ending the plight of Equitable Life policyholders and that we all agree that this saga has gone on for far too long. I am particularly grateful to the noble and learned Lord, Lord Davidson of Glen Clova, and the noble Lord, Lord McKenzie of Luton, for making it clear at the outset that the Opposition support the Bill.
The matter of Equitable Life is very complex and continues to affect directly the lives of a very large number of people, both in Britain and abroad. There is a pressing need to get on and reach a resolution swiftly, as policyholders have already waited 10 years for the Government to address this long-standing issue. Many of those people are elderly, as we have been reminded, and should not have to wait a day longer than necessary for justice. I shall not repeat the steps that we have already taken since coming into office, but I am grateful to my noble friend Lord Kirkwood of Kirkhope for recognising the steps that the coalition Government have taken.
I am getting somewhat experienced in doing Second Readings and other readings in this House. A great number of technical questions were asked today in relation to the length of the debate. Noble Lords will perhaps forgive me if I inevitably have to leave a number of points on the table, but I will write to sweep up the points that I cannot answer now. I note that the Benches behind the opposition Front Bench are commendably empty of one or two of the usual suspects who tend to come in during my closing remarks, but I will deal with as much as I can.
First, I want to take the opportunity to recognise those who have continually fought in the interests of policyholders, going back to 2000. That point was first mentioned by my noble friend Lord Kirkwood of Kirkhope. Particular mention must go not only to the Parliamentary Ombudsman but to the Equitable Members Action Group and the Equitable Life Trapped Annuitants, who have been referred to already. The Government have held meetings with these parties on numerous occasions and I commend them for their commitment to this cause. Their views have helped us to shape our understanding of the issue and given us an insight into the views of the broader group of policyholders. Their insights have of course proven invaluable. We need to get this right. The best way to achieve that is to interact with the people directly affected and to gain a clear understanding of their position.
There has, of course, been disappointment from those policy action groups about the amount that we have made available for the scheme, but we have had to strike a difficult balance between the valid, deserving cause of policyholders and the wider interests of British taxpayers. It is important to remind the groups that the Parliamentary Ombudsman herself stated that it was appropriate to consider the potential impact on the public purse of any payment. I know, as has been recognised today, that there are many important conversations to be had about how the scheme will operate. It would be preferable to have had all those conversations before turning our attention to the Bill but, in the context of needing to get on and conclude this episode, we wanted to make sure that the process was not unnecessarily extended.
I shall address some other, specific points that came up. The noble and learned Lord, Lord Davidson of Glen Clova, and the noble Lords, Lord Willoughby de Broke and Lord McKenzie of Luton, in different ways, raised the question of the quantum of the pot and the size of the cut for non-WPAs. I can confirm that it is, on average, around 66 per cent. One question was how this compares with a spending review where the departmental cuts were, on average, around 20 per cent. First, the spending review was not a linear exercise; there were different cuts in different areas. Secondly, it has been a difficult balance between fairness to policyholders and fairness to the taxpayers. It is important that we have still managed to cover the costs of payments to the WPAs who purchased their policies after 1 September 1992. I will come back to that cut-off point in a moment, but it is important to recognise that we have covered those payments in full, because we believe that that is the hardest-hit group. It is also important that non-WPAs are still getting more than twice what they would have received with a scheme based on the loss figures produced by Sir John Chadwick’s methodology.
We accept that the relative loss figure is around £4.3 billion. At the end of the day, it has essentially been a matter of judgment as to what the appropriate number should be. Approximately £225 million of the initial £1 billion is for WPAs and their estates, leaving approximately £775 million for the lump-sum payments to non-WPAs. Based on the current Towers Watson estimate of WPA losses, that leaves approximately £395 million for the rest of the WPA losses from 2014-15 onwards.
There were questions from the noble and learned Lord, Lord Davidson, and the noble Baroness, Lady Drake, about an appeals process. There will indeed be means by which policyholders can raise concerns about any incorrect application of the scheme rules to individual cases. Full details of that will be included in the document setting out the scheme design, but I can say today that it will certainly include a process whereby, if a policyholder believes that the rules of the scheme have been incorrectly applied to his or her data, he or she will be able to raise a query with the delivery body stating the nature of the concern. The query will be pursued by the delivery body and, if there is merit in the challenge and the challenge is upheld, a recalculation will take place.
If the challenge is not agreed by the delivery body, the policyholder will have the option of taking the case to the review panel. The panel will consider the case in full and will be able to make a fresh decision based on the facts of the case. If a complainant’s case is upheld, again, a recalculation will be carried out. The review panel will be independent of the original decision-making process and will be suitably qualified to consider the complaint in full according to public law principles, although it is too early at this stage to state who might be on the panel.
On the question of why we are covering the cost of post-1992 WPA losses in full, throughout this process the policyholder groups have made it clear that, due to the nature of their policies, WPAs have been one of the hardest-hit groups. They were particularly vulnerable to losses because they were unable to move their funds elsewhere or to mitigate the impact of their losses through employment. They are also generally the oldest policyholders. In answer to the specific question from the noble and learned Lord, Lord Davidson, approximately 37,000 WPAs will be paid under the scheme.
The noble and learned Lord also asked about the role of reliance. Given the time that has elapsed and the almost impossibility of policyholders proving what they would have done in a counterfactual situation, faced with properly regulated returns, a truly reliance-based approach is impossible in this case. I have explained the approach that we have taken.
On the question of how fairness has been worked out within the compensation pot and the principles that applied, the independent commission is now considering the split of the pot. It has made an interim report and its final report will be published by the end of January. The noble Lord, Lord McKenzie, asked about public scrutiny of the commission’s report. At the time we publish the document, I anticipate that my honourable friend the Financial Secretary will want to make a Statement in another place. Before we get to that, there is a further round of consultation by the commission. Therefore, I believe not only that is there a full consultation process but that there will be appropriate opportunity for Parliament to consider the results of the commission’s work. The commission’s report will of course be made available to both Houses of Parliament.
My noble friend Lord Kirkwood of Kirkhope asked about the scheme paying out. I confirm that it is our ambition to make the first payments in the middle of 2011. This is a complicated scheme, and we must get the details right. We believe that starting to make the payments in the middle of next year is an ambitious but achievable target.
My noble friend also asked whether we might in any circumstances be able to pay out more than £1.5 billion. I should make it clear that £1.5 billion is the figure that we judged the British taxpayer can afford to pay, so I cannot hold out any hope of us finding more money at a future date. This process has dragged on too long already, and we need finality.
On capital thresholds and the way in which benefits operate, capital limits do not immediately cut off eligibility for benefits because they work on a sliding scale, gradually reducing support for individuals with larger assets. It is unlikely that many recipients who would otherwise have been eligible for means-tested benefits will receive large enough payments to affect their eligibility dramatically.
In answer to a couple of questions from the noble Baroness, Lady Drake, we have no plans to make interim payments. Again, they would introduce more complexity and could delay the set-up of the overall scheme. We want to focus on getting the main scheme up and running as quickly as possible.
There was a question about consistency with similar payment schemes. The independent commission will consider aspects of fairness that it deems appropriate and the Government will take its advice very seriously. However, it is important to remember that the specific features of the Equitable Life payment scheme make it very different from some other pension schemes, so there is no broad read-across.
There were a couple of questions, including from the noble Baroness, on the gross/net issue. The calculations for the WPA payments are being made on a gross basis. The noble Baroness asked a broad question about long-term savings, which links back to my noble friend’s question about different regulatory regimes. I think that in some ways she answered my noble friend’s question when she pointed out that we had been through one very significant change in the insurance regulatory regime a number of years ago and are about to go through another fundamental change to the overall regulatory set-up. Of course, there is never a no-failure regime in financial regulation, but the landscape will change significantly. In that context, we take the sustainable and healthy long-term savings market in the UK extremely seriously.
I am conscious that one very important question was asked by the noble Lord, Lord Willoughby de Broke, and was touched on by the noble Lord, Lord McKenzie of Luton. That is the question of the pre-1992 with-profit annuitants. The first issue here is that they took out policies before any maladministration could have affected their decisions. That is the first and principal reason why they have not been included in the Government’s proposed payment scheme. WPAs were affected by Equitable Life being run badly, in part as a result of the Government’s maladministration. Sir John Chadwick and Towers Watson looked into what these WPAs would have received had there been no maladministration. They concluded that the pre-1992 WPAs received more from Equitable Life than they would have if the society had been properly regulated. That is because Equitable Life paid out more to them in the early years than it would have done if there had been no maladministration. Even though it paid out less than it should have done in later years, the former overpayment outweighs the latter, so it is the Government’s view that no compensation is due to that category of annuitants.
Lord Willoughby de Broke
My Lords, I direct the noble Lord’s attention to paragraph 15 of the Explanatory Notes, which says:
“They are a group of policyholders who are ‘trapped’ in their policies, in receipt of a declining income in their retirement and generally the eldest”.
That is the absolute definition of the pre-1992 annuitants. Their income has gone down very significantly since 2002 and it was not, as I said, their fault that they did not know that there was maladministration. It is grossly inequitable that they are left out of this arrangement altogether and just abandoned to twist in the wind by the Government.
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.