Why are Equitable Life policyholders clamouring for compensation?

The mutual life insurer was plunged into turmoil in 2000 after it lost a case in the House of Lords. For years it had creamed off some of the best pensions business - judges, lawyers - by promising high returns with low charges. But it promised more than it could deliver.

Tens of thousands of customers had been attracted to its with-profit pension policies with guaranteed annuity rates of up to 12 per cent. By the end of the 1990s it realised it could not afford to honour these. Equitable launched court proceedings to enable it to force policyholders to accept bonus cuts. It won the first stage of its battle only to lose in the Court of Appeal and then the House of Lords.

The decision left the insurer with a £1.5 billion liability that it could not afford to pay, forcing it to close its with-profits fund to new business and slash bonuses for all its policyholders. More than a million in the UK and several thousand in Ireland and Germany saw the value of their policies fall by up to 50 per cent. To add insult to injury, Equitable charged high exit penalties on customers who wanted to quit.

What has this got to do with the government?

The Parliamentary Ombudsman's report is expected to condemn the government for failing to regulate the insurer correctly. The Treasury, the Financial Services Authority and the Government’s Actuary’s department are all expected to be accused of “maladministration” at the expense of consumers. Campaigners hope that the report recommends the government compensates Equitable customers who have lost a large chunk of their pensions and savings.

Who may be eligible for compensation?

Campaigners argue that compensation should go to everyone whose policies were in force when bonuses were cut by 16 per cent in 2001 – meaning even if policyholders have left Equitable Life, they may still be compensated.

Is compensation guaranteed?

The government is under no obligation to pay out compensation if it is recommended by the Parliamentary Ombudsman. It has already ignored a recommendation by the European Parliament to pay compensation.

It is estimated that it could a refund package could cost up to £4 billion of taxpayer’s money. As the Government has already bailed out Northern Rock and had to find £2.7 billion to compensate those left worse off by the abolition of the 10p tax rate, the Treasury will want to avoid another huge expense.

What is in store for Equitable?

The life assurer has sold off most of its operations, transferring its fixed pensions to Canada Life in 2007 and all of its remaining with-profits annuity polices to Prudential in 2008. It is currently looking for a buyer for the rest of the business.

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