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 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.