Dr. Vincent Cable (Twickenham): I am grateful for the opportunity to introduce this debate on Equitable Life. Today's debate is the third on the subject, but I make no apologies for returning to it. The company has about 800,000 policyholders, many of whom have suffered severe lossand many of them are my constituents. I return to the subject not simply to rehearse the old arguments but because there are good reasons to believe that the society's position is deteriorating badly and that the future of the society may be in doubt. I am not financially qualified to judge whether that is the case, but those who read the financial pages of the national newspapers will know that there is a great deal of speculation about the society's basic solvency.
I welcome the fact that the Financial Secretary to the Treasury is here. When she had her well deserved promotion a few months ago, she took this portfolio with her. I do not know whether that was an act of gallantry on her part, or whether her colleagues believed that she was the only person who understood financial services matters, but I am glad that we have a Minister here who understands what Equitable Life is about.
Because we have debated the subject before, I do not need to rehearse its history. Much of the information is available in the report of the Select Committee on the Treasury and the Baird report as it applies to the work of the Financial Services Authority. It will be useful to start by chronicling the key episode that led to the crisis three years agothe House of Lords ruling and the realisation that the society had liabilities to its guaranteed annuity holders of £1.5 billion for which it had put aside only £50 million, later raised to £200 million. The society was hopelessly ill-prepared.
It quickly became apparent that it was not simply a stroke of bad luck but that it involved an extreme degree of negligence and mismanagement. Much of the subsequent debate, including today's debate, revolved around who was responsible. The current management rather graphically summed up the problem a few days ago, when the chief executive said that Equitable Life was a high-risk company operating in a high-risk manner but that no one seemed to have noticed. It certainly was not noticed by the management, who led it into that crisis. Nor was it noticed by the auditors Ernst and Young, who cheerfully signed off accounts that bore a passing resemblance to Alice in Wonderland.
The reason for returning to the subject is that the position has deteriorated. That is partly because financial markets generally have deteriorated. There has been a fall at the stock exchange, and all those who have investments in money purchase schemes or endowments will be painfully aware of the cuts in terminal bonuses. However, the position in Equitable Life is significantly worse than in other societies. Its with-profits fund has lost about half its value. It is not only that people have lost their bonuses; they are locked into the society through exit penalties.
Within the last few weeks, we have heard several indications that the position is even worse than was hitherto realised. The first major indication, which came at the time of the interim statement, was the big cut in the payments made to about 50,000 of the society's annuitants. That is especially significant because annuitants, unlike other policyholders, cannot leave. They are trapped in the society. They face a situation in which they will lose up to 30 per cent. of their pensions, and many of them are pensioners in their 70s. A pensioner who received £500 a month on an Equitable annuity may in future take home only £375, which shows what a big cut there could be in people's income.
On top of that, there has been growing speculation about the basic solvency of the company. I talked to the management of the present company after the changes in December 2000 when it was closed to new entrants and the current rescue operation was under way. I was told that insolvency was hard to achieve in an insurance company, unlike in manufacturing companies. It is rather difficult to get into a position where one's liabilities are fundamentally greater than one's assets, because insurance companies have the optionin this case, the company has already taken itof cutting bonus payments more or less indefinitely. In addition, they can resort to the measures that Equitable Life has already taken, such as moving most of their assets from equities into securities.
None the less, it was argued explicitly in The Sunday Times a few weeks ago, although Equitable Life subsequently disowned the article, that the company had breached its capital adequacy ratios as set down by the FSAthe 4 per cent. margin over solvencyat least once. The society has denied that, but it acknowledges that its insolvency margin is "uncomfortably thin". That is a matter of concern in itself but it is compounded by the fact that a great deal of risk still hangs over the company. Risk on liabilities results from the fact that there are manyabout 800,000, but that number could riseclaims on the company from mis-selling. There are also risks on the asset side, partly because the company still has equities, but also because of what might happen this afternoon when the Chancellor speaks.
Most of us expect that the Chancellor will tell us that the Budget position is nothing like as healthy as it was and that there will be substantial additional Government borrowing. If the Government borrow heavily in the gilts market, bond yields are likely to rise and gilt prices will fall. The portfolio that Equitable Life has assumed, now heavily laden with bonds, will deteriorate in value, which will pile an asset risk on the
We benefit from having recent comments from the Financial Services Authority as to what administration might mean in the case of Equitable Life, and they are pretty grim. To some extent the territory is uncharted, but it could be exceedingly messy. There is enormous uncertainty about it, but there could be large legal fees. The prospect is very grim for policyholders. At least theoretically, they are protected by an insurance policy protection scheme run by the industry, but that is pretty minimal and would strip away most, if not all, of the bonuses that they have acquired. Annuitants would find that they were no longer paid. Life cover would cease. Savings contracts would be terminated. Those people with savings in Equitable Life would almost certainly lose most of them. That is clearly a fate to be avoided.
I now come to the two questions of what should be done and who is responsible for the mess. Is it possible, even at this late stage, to contemplate rescuing Equitable Lifethat is, heading off the risk of insolvency. When, 18 months ago, I raised the possibility of a lifeboat operation to rescue Equitable Life, the industry and, I think, Ministers contemptuously dismissed it as something that was beyond consideration. I think that the situation is now sufficiently serious for serious people in the City to consider that option, although I do not know whether they will do it. However, we should think about the issues involved in that and whether it should be openly advocated.
The reasons why there is a wider interest in saving Equitable Life and not treating the case as that of an unfortunate company without implications for others are as follows. The industry's reputation has been terribly damaged by Equitable Life. It was the oldest and most venerated company in the industry. Many people put their money into Equitable Life, not as a high-risk, speculative investment, but because it was considered fundamentally sound. Those people have been terribly disappointed, and people's confidence in investment products, particularly pensions, has generally been undermined by Equitable Life.
Richard Ottaway (Croydon, South): The hon. Gentleman has spent the last 10 minutes talking about the grim outlook. I draw his attention to matters that relate to the Government and to how they can get involved. The industry was regulated, the Department of Trade and Industry and the Treasury were involved, and there was guidance from the Treasury saying that the Equitable was conducting itself acceptably. Despite that, however, in three days the House of Lords reached the conclusion that its practice was not acceptable. If the Government, as a regulatory authority, take such a stance, surely they have some degree of responsibility in the matter.
Dr. Cable : I am coming to that point. The purpose of the Penrose inquiry is to investigate such matters, but the hon. Gentleman's key point must be right. In the period up to 1999, when it was clear that inflation rates
From the industry point of view, there is clearly an interest in preventing Equitable Life from going bust. There is probably also an interest from the Government's standpoint. I believe that we shall get the response to the Pickering report in a few days' time. The Government's pension policy hinges on millions of people being able to provide for themselves. From experiences in our constituencies, we know that hundreds of thousands of people are losing their defined benefit final salary schemes. In many cases, their only option is to go for a money purchase scheme like the Equitable Life products, which have been terribly undermined. Any coherent attempt by the Government to plan a savings strategy for the future has to confront the loss of confidence that the episode under discussion has entailed.
When I first raised the issue of a lifeboat operation, the City and insurance industry response was, "Why should we bail out one of our competitors?" Equitable Life is of course no longer a competitor, because it is not taking new policyholders. There was also concern that there were large black holes in the company. Most of those have been identified, however, if not finally plugged. Also, there have been precedents. Some 15 years ago, a company called Iala was bought by the insurance industry as a way of heading off an insolvency situation.
I am not necessarily suggesting that the Government bail out the company. Having chastised the Secretary of State for Trade and Industry for finding £660 million for British Energy, I am not about to suggest that the Financial Secretary do the same thing for the insurance industry. None the less, I think that the Government have a responsibility to orchestrate an attempt by the industry to provide what would probably be very limited amounts of lines of credit or guarantees, in order to prevent the insolvency ratios from being breached. I hope that the Minister will respond a bit more constructively than she has in the past.
I now come to the issue of the responsibility of the Treasury and other Departments in this matter. The hon. Member for Croydon, South (Richard Ottaway) has made the point that, prima facie, during the long periods in which the economic basis of annuities was being undermined by lower inflation, the regulator failed in its dutyit did not recognise that a risk arose from guaranteed annuities and it allowed the company to continue to sell unguaranteed annuities without giving a clear warning about the risk that that entailed for the company.
Mrs. Annette L. Brooke (Mid-Dorset and North Poole): Does my hon. Friend agree that the reasons for the delays to date should be clearly published and that, for the future, deadlines and milestones should be
Dr. Cable : My colleague makes a good point. It is unfortunate that deadlines and milestones were not included when the inquiry was established. I understand that Lord Penrose is still deeply immersed in his work. He has been given 500,000 pages to read by Equitable Life. I have no doubt that he is a speed reader, but people who have talked to him believe that he might well take at least another year to complete the work. That is hopeless from the point of view of the policyholders. What is emerging is an epic PhD thesis, not a snappy investigation into the fundamental causes of the problem, as far as the Government are concerned.
Will the Minister clarify where Penrose is leading? When the inquiry was launched she received credit for producing a rabbit from a hat, but it is becoming a nightmare. It is not producing results within any reasonable time frame. It is not even independentalthough it is being conducted in an independent way, when material comes back to the Minister, she is not obliged to publish it. Will she at least give us some indication that an interim report will be published as soon as possible?
The other agency involved in the matter is the Financial Services Authority. Its record as a regulator has already been exhumed by the Baird report. I was intrigued by a reference to it in a recent press statement, which said:
What is meant by the FSA backing Equitable Life? Presumably it is not backing it with money, so what backing is it giving? It is a regulator and has ongoing responsibility. What is it doing in that role?
My last point concerns the parliamentary ombudsman. Her function is not the direct responsibility of the Minister, but it provides hope to many constituents. What is happening? Some 250 cases have been referred to her office, probably by all of us here. One of them has been being investigated as a test case for the best part of a year and we are not yet close to seeing a resolution to that inquiry.
I am in correspondence with the Minister about whether the ombudsman's inquiries are being retarded or undermined by the delays in the Penrose inquiry. However, we seem to be at cross-purposes: the Minister asserts, rightly, that the investigation now being undertaken by the ombudsman into a case relating to mismanagement in the period 19992000 is not being impededit is not clear why it is delayed, but it is not due to the delay in Penrose. My point is more fundamental. The ombudsman cannot pursue the many cases before her without understanding the whole pre-1999 period, and it is clear that the delays to the Penrose report are seriously obstructing investigations.
Richard Ottaway : Let me take up the excellent point made by my hon. Friend the Member for Cities of London and Westminster (Mr. Field). Is not the important point that the ombudsman reports to Parliament, while Penrose reports to the Government? If the reports that we have heard are true, it would be utterly inappropriate for the ombudsman to hold back from reporting to Parliament while she waited for a report to be made to the Government.
Dr. Cable : Well, it would certainly be very unfortunate for those of our constituents who are waiting for her report. Perhaps the best way of answering the hon. Gentleman is simply to quote what the previous ombudsman said a few weeks ago. He was very explicit:
To conclude, I want to draw further on the former ombudsman's statement, because it raises issues for which the Minister is accountable and for which she will have to answer. Before he retired, Sir Michael Buckley was under attack for not acting more expeditiously on the cases that we are discussing. In a press notice, he was quoted as saying:
It is clear that he meant the Treasury and the Minister when he referred to "the authorities". I hope that the Minister will give an effective response to that strong rebuke, because the ombudsman acts on our behalf and that of our constituents.
Mr. Mark Lazarowicz (Edinburgh, North and Leith): I congratulate the hon. Member for Twickenham (Dr. Cable) on securing the debate. The subject is of deep concern to many constituents who have contacted me over the past year.
I must declare an interest, although it is fairly marginal. I have a term life policy with Equitable Life that has only a couple of years left to run. The irony is that I probably would not have had to declare it a year ago, when the issue was the with-profits fund. Now, however, the problem extends from the fund's viability and the interests of fund policyholders to the viability of the whole company. I now have an at least theoretical interest in the issue, which demonstrates how the problem has grown from one that could have been managed, albeit with difficulty, to one with much wider ramifications. The extension of the problem demonstrates the seriousness of the situation and the need for action even at what might be described as the eleventh hour.
I shall make only a brief contribution. I agree with most of the comments made by the hon. Member for Twickenham. The failure of the regulatory agencies to take action at an early stage has created a crisis. If the governmental and non-governmental bodies that have a role in regulating the financial services industry had taken a more proactive role earlier in the crisis, it would have been easier to manage; now it will be much harder.
I endorse the view that although a rescue package of some sort may now be much harder to put together, there is a strong case for such a package and for the agencies involved, including the Government, to take an active role in putting it together. That rescue package, or lifeboat, is needed now. We cannot simply wait for the conclusion of the Penrose inquiry. I agree with the hon. Member for Twickenham that it may take several months for that inquiry to come to a conclusion. In the meantime, the possibility of insolvency becomes greater, and not only will policyholders lose out but there will be a knock-on effect on the pensions and savings industry as a whole. The entire culture that encourages people to save and invest in their pensions will be seriously jeopardised. The hundreds of thousands of people who work in the financial services industry will also be affected. Many of them live in my constituency, where the industry is the biggest private sector employer.
For all those reasons, I ask the Minister to assure us that the Government will take a proactive role in resolving the crisis, even at this late stage, and to encourage the establishment of some form of rescue package, as the hon. Member for Twickenham suggested.
Mr. Mark Field (Cities of London and Westminster): I congratulate the hon. Member for Twickenham (Dr. Cable) on securing this important debate, the third that we have had on the matter. Next to me sits my hon. Friend the Member for Christchurch (Mr. Chope), who introduced a debate on the subject this year. I fear that we shall need to debate the matter again in the months and years ahead.
Pensions are a highly technical matter, but the problems surrounding Equitable Life and other pension schemes are human. The hon. Member for Edinburgh, North and Leith (Mr. Lazarowicz) rightly pointed out that a significant number of jobs are at stake in his constituency. My constituency contains the City of
Like the hon. Member for Twickenham, I was especially concerned by recent announcements. We seem to have reached a crossroads. The fact that existing rather than simply future pensioners find that there are cuts of 30 per cent. in their annuities shows that we have reached a fateful point in the history of Equitable Life. It comes as no surprise that the business pages of last weekend's newspapers talked about the stampede to the exit in Equitable Life. I shall return to the issue of confidence in a moment.
Last June, shortly after my election, I wrote an article in the national press, saying that the real fear was that the crisis in Equitable Life might be the first of many similar high-profile crises in the sector. Some issues may be specific to Equitable Life, but I fear that they may not be quite as unusual as we have been led to believe. The problem has all the ingredients for a major collapse in confidence in the savings industry.
The sorry tale of what happened in Equitable Life has been well documented, but I know that my hon. Friend the Member for Eddisbury (Mr. O'Brien) will go into some detail later, but before the Financial Services Authority took over responsibility for insurance industry regulation in January 1999, those duties rested with the Treasury and, before that time, with the DTI.
During the crucial period to the end of 1998, Equitable Life advertised and sold annuities without adequate reserves and without informing new savers of the vast pre-existing liabilities. That continued after January 1999, under the auspices, by that stage, of the FSA, until December 2000, when the House of Lords decided that Equitable was obliged to honour its guaranteed annuities in full. I have great sympathy with the Financial Secretary given the situation in which she and the Government find themselves, but they cannot wash their hands of responsibility for the fate of many of those with-profits policyholders who are now trapped.
The way forward is to end the obfuscation and delay that have been integral to the developments of the past 16 months, since the launch of the Penrose inquiry. The Treasury must now be open and honest about its role in the Equitable crisis. I have submitted many of the 253 outstanding ombudsman inquiry notifications, all of which have been stayed since August last year and the launch of the inquiry. I hope that the Financial Secretary will be able to suggest a timetable today. Her protestations in the national newspapers earlier in the year, when she said that Lord Penrose's investigations should be conducted in the due course of time, will fail to inspire confidence, and that will have an effect well beyond the issue of Equitable Life. That is one of the main concerns: the problems in the pensions industry as a whole are crucial to the way in which we proceed. The issue goes beyond the issues that relate specifically to Equitable.
Several of my constituents who are with-profits annuitants put their case succinctly. First, the Government have forced pensioners to take out annuities by the age of 75, which is yet another reason why the Conservatives are keen to end the strict rule. Secondly, Equitable Life annuitants were unaware, in taking out their policies before December 1998, that there was any potential problem. Thirdly, to save the company, those very annuitants, who are often relying on relatively small incomes to enable them to live happily in retirement, voted for the compromise agreement a year or so ago, thus depriving themselves of any right to sue for mis-selling. Yet those same annuitants are now unable to transfer to another provider, and their income is therefore reduced dramaticallyperhaps even terminally. Many of them are worried sick. Realistically, they will be unable to build another pot of capital for their retirement. The sheer uncertainty over what is to come in the months and years ahead is the killer.
There is clearly a crisis of confidence in the entire pensions industry. I do not necessarily blame the present Government more than others for that, although, if I dare talk in such terms, £5 billion raids in 1997 clearly did not help. However, the issue should be beyond party politics. What message will the Government now put out to young folk who might want to save for the future? Most people of my generation, and the Financial Secretary'sshe is at least two or three years younger than I amtake the view that there is little point in buying shares, given the depressed stock market, or investing at this stage in any sort of pension. In London the property market is overheated, and that is where most young and middle-aged folk are putting much of their money. There is a real reason for the Government to try to restore confidence.
The Government must grasp the nettle and take responsibility in relation to Equitable. There is little doubt that they will have to pick up the pieces in the end anyway, so why not do so now instead of delaying? The hon. Member for Twickenham rightly used as an analogy the secondary banking crisis in 1974, which required the Treasury to lead the way with a lifeboat-type rescue. My fear is that failure to act now will do great damage to the whole pensions and insurance sector, and that that damage could take a decade or more to rectify. There is little doubt that the Financial Services Authority lacks the authority shown by the Bank of England, for example, in its work almost three decades ago during the secondary banking crisis to which I referred. The Government now need to act in the national interest, because the problem extends well beyond the business of insurance and pensions, to ensure that we get the matter right.
Annabelle Ewing (Perth): I, too, congratulate the hon. Member for Twickenham (Dr. Cable) on securing this important debate. The number of hon. Members attending the debate shows the importance that we attach to the debacle that is the Equitable Life saga. I want to declare an interest, although I am not entirely sure whether I am any longer required to do so, because I did have an Equitable Life pension plan, but I recently transferred its dwindling value to another pension fund.
Many of my constituents, however, remain policyholders with Equitable Life. Their bonuses have been eliminated, their policies have been substantially reduced in value and they are facing an extremely uncertain retirement. The key fact that my constituents want to know is whether there was a regulatory failure. If there was, that would constitute a failure by the Government, because the DTI was the previous regulator, followed by the Treasury, and now the regulator is the FSA. Furthermore, if there was a regulatory failure, are my constituents entitled to compensation as a result?
My constituents are also extremely unhappy about the way in which the investigation is being carried out. As the hon. Member for Twickenham mentioned, the inquiry by the parliamentary ombudsman into the complaints that have been raised has been put on hold pending the outcome of the inquiry set up by Lord Penrose. My constituents are dismayed by the continuing delay in the reporting of that inquiry, and I hope that the Minister will shed some light this morning on what on earth is happening. Will the Minister give us a ballpark estimate of when we may expect the inquiry to report? I understand that the report will be submitted to the Treasury, but will she also say whether the full report will be made public? Equitable Life policyholders have a direct interest in knowing whether they will be able to see and consider the report, when they have had to wait for so many years for any action to be taken.
I should also like to comment on the remit of the parliamentary ombudsman. I do not want to revisit history and cover the background to the decision regarding the period from January 1999 to December 2000, but I understand that there have recently been calls for the Government to consider whether the remit is too narrowly drawn, in the light of the regulatory history of Equitable Life.
I should also like to say something about the role of the prudential regulator. A regulator is not subject to some sort of best efforts standard. A regulator in the financial services industry is subject to various legal requirements. Have those legal requirements been met? It is not totally clear on what basis Equitable Life has been authorised, in terms of how the EC law regime applies to it. Either it falls within direct EC single-market financial services directives or it falls within the general EC treaty regime. In either case there are implications for the United Kingdom Government as regulator. Will the Minister tell us her understanding of the implications for Equitable Life of EC financial services law? I suspect that that angle has been overlooked, and therein lie potential remedies for policyholders who feel that the Government, as prime regulator, have not properly protected their interests.
As to recent developments, I wonder how long Equitable Life will be allowed to continue to trade when it is failing to meet the solvency requirements that are legally incumbent upon it. Presumably, the fact that it can continue to trade although it is not currently meeting some solvency requirements means that it has a transitional exceptional derogation from the general rules. However, by definition, a transitional exceptional derogation cannot go on ad infinitum. What will the Financial Services Authority be required to do should Equitable Life continue to be in breach of the solvency rules applicable to it in the medium to longer term?
The situation is getting worse daily and is deeply damaging to the reputation of UK-authorised financial institutions, including, as the hon. Member for Edinburgh, North and Leith (Mr. Lazarowicz) said, the excellent Scottish-based institutions in major cities in Scotland. It is in no one's interests for this debacle to drag on and on and for the Government to allow it do so. I hope that the Minister will reply to the questions that I and other hon. Members have asked in the debate because our constituents want answers to those questions.
With respect to Government policy, I wonder how the Government handling of this matter squares with their stated objective of encouraging people to plan for their retirement. Is there not a danger that the longer the situation drags on, the less attractive it will be to take out a pension? That cannot be in the Government's interests as it would defeat their approach to pensions policy.
Mr. Christopher Chope (Christchurch): It is a pleasure to follow the hon. Member for Perth (Annabelle Ewing). I hope that the Minister will give an unequivocal answer to her key question: when the Penrose report is eventually published, will it be published in full? If the Government were to give such an assurance, it would allay some of the concerns of a public who are increasingly sceptical on the issue. A subsidiary point about an interim report was made by the hon. Member for Twickenham (Dr. Cable), whom I congratulate on raising the matter again. Penrose has taken a lot longer than the Minister expected. I remind her that last year she said:
That refers to 2002. We now know that the report will be much delayedbeyond this yearand I hope that in light of the Minister's earlier hopes she will say that it would be sensible and prudent to have an interim report from Lord Penrose. That would enable people who are waiting for the outcome of the report to know the present position.
I want to comment on the ombudsman's report because it was a great relief that the ombudsman, having initially decided that he was not going to start an investigation until after Penrose, relented in October 2001 and said that he would start an investigation into the two years 1999 and 2000. We are much concerned by the delay in the publication of that report and hon. Members have had correspondence with the ombudsman about the reasons for that delay. On 24 October I received a letter from the deputy parliamentary ombudsman stating that the investigative fieldworkthe examination of papers, interviews with officials and so onhad been completed but he still had to analyse the information obtained to establish precisely what took place, as opposed to what should have taken place, and then translate the result into findings for the ombudsman's report. He said that the change of ombudsman from Sir Michael Buckley to Ann Abraham might cause some delay. I wrote to Ann
I drew the ombudsman's attention to another matterthe more than anecdotal evidence that Treasury and other officials had blocked the inquiry's progress. I felt that Members should know the response of the deputy parliamentary ombudsman to those allegations, but he wrote:
That is hardly the rejection of the rumours that might have been expected from the deputy parliamentary ombudsman. Are the rumours wholly unfounded? We are worried that the Treasury never wanted the ombudsman to start an investigation parallel with Penrose and has blocked the progress of the inquiry.
Another important issue is the role of the Select Committee on the Treasury, which has an important part to play. An inquiry was started, but then stalled to wait for the outcome of Lord Penrose's report. I tabled early-day motion 1053, which was signed by well over 100 colleagues from all political parties. Published on 21 March 2002, it drew attention to fears that Penrose would take much longer and that the report would drag on into next year. I argued that that was why the Treasury Committee, with its considerable powers, should immediately resume its investigation into regulatory failure.
We now know that Lord Penrose will not report in 2002 and that the Treasury Committee Chairman is worried about it, so I hope that that Committee will immediately resume its investigation into this matter. It has tremendous power to call witnesses and it should not sit back, waiting another year before Penrose produces the report. The Minister will doubtless encourage the Treasury Committee to reopen its inquiry and will co-operate with it in respect of any decisions that it takes.
Dr. Richard Taylor (Wyre Forest): Like other hon. Members, I am grateful to the hon. Member for Twickenham (Dr. Cable) for giving us a chance to debate this subject. From the figures, each hon. Member can expect about one per 1,000 of their constituents to be affected; certainly, we have all received several letters. I am also glad that the hon. Member for Cities of London and Westminster (Mr. Field) said that the subject was complicated. To a mere retired doctor, it is almost unfathomable. I have therefore come to listen and learn, to ask questions and to stress those that have already been asked by constituents who are annuitantsthe elderly, the desperate and the hopeless who have hardly dared write to me because they cannot see a way through.
I want particularly to refer to a retired chartered accountant whom I know well. He has been a respected member of his profession, and has been involved in looking after people's financial affairs and giving them advice. He chose Equitable Life as it was the market leader at the time. His gross pension, which is his main income, has dropped from £14,547 by £3,000. Other people have lost similar amounts. The problem is huge, and the ordinary person is short of weapons to fight it.
Please do not think that I am criticising the parliamentary ombudsman, Mr. Deputy Speaker, but the cases that I have tried to refer to him, which have covered several different issues, often fall outside his remit because of certain restrictions. In this case, he is allowed to examine only cases that fall between 1 January 1999 and 8 December 2000.
Enough has been said about the Penrose report, so I shall wait to hear the Minister's comments on it. There was some confusion in a recent House of Lords Question Time about that report and its influence on the ombudsman.
I shall ask a few specific questions, some of which have been asked before but need re-emphasis. What redress has the ordinary annuitant against the company and the Financial Services Authority, which, in the words of one of my constituents, must have been asleep at the wheel? Are such annuitants like the unfortunate employees of a large engineering firm in my constituency that recently went into receivership? The members of the pension fund will find themselves right at the bottom of the list of those who receive payment if the company is wound up. Small points that rankle tremendously are the bonuses that the executives received earlier this year and the generous pay-off for the finance director, who recently resigned.
Norman Lamb (North Norfolk): I add my congratulations to my hon. Friend the Member for Twickenham (Dr. Cable) on securing the debate. He presented a clear and lucid analysis of the key issues that have caused so much concern to so many people.
Mr. Deputy Speaker (Mr. John McWilliam): Order. I doubt very much that more than one or two Members of Parliament would, because of their dealings with Equitable Life, have to declare an interest in it.
Norman Lamb : Thank you, Mr. Deputy Speaker. I was going on to say that in a sense I have suffered the same dilemma as many others over the past two years. I have been one of the fortunate ones, however, in that I do not have all my eggs in one basket. The scale of my loss has not been as great as for many others. However, as the hon. Member for Wyre Forest (Dr. Taylor) pointed out, those who put all their eggs in that one basket face disaster. We must keep in the forefront of our minds the extent of the distress and hardship that has been caused to so many people as the scandal has unfolded.
Anxiety is now being increased by speculation about insolvency. The company continues to stress that it remains solvent and that at present it does not appear likely to become insolvent. However, that could change. If the with-profits fund shrinks further, the company's room for manoeuvre could disappear and we would then be in uncharted waters. There is great uncertainty as to how the liquidation of a life company the size of Equitable Life would work, and there is no reason to believe that insolvency would in any sense lead to stability.
The case of the life company Oak Life may be instructive. It had just 5,000 policyholders, compared with Equitable Life's 800,000. It went into liquidation in 1993. Almost 10 years later the liquidation continues, and 600 policyholders have still not received their policies. When their compensation eventually arrives, it will be based on policy values frozen way back in 1993. That is a deeply unattractive scenario.
Perhaps the most immediate and serious problem would be for those annuitants currently in receipt of payments. The liquidators could stop all payments until it could be determined who was entitled to what share of the assets. That would spell disaster for many pensioners who rely absolutely on such payments.
Clearly, if Equitable's board decides at some stage to go into administration, the consequences would also be deeply damaging for policyholders. There would obviously be competing claims on the fund, and the administrator would have to be careful to avoid paying out too much to, for example, annuitants. The costs of administration would be vast. The company estimated them at some £100 million, which inevitably would come out of policyholders' funds.
I am conscious that there are several current and potential legal actions; for example, actions by Equitable Life against former directors and against its former auditors, Ernst and Young. Both routes appear to have considerable merit, given the clear warning bells ringing loudly in the late 1990s. As my hon. Friend the Member for Twickenham said in a debate in October last year, there is a massive question mark over the clean bill of health given to the company by Ernst and Young in 1999 after so much discussion in the City during the previous financial year.
Indeed, the storm clouds had been gathering for a considerable time. There was a growing body of evidence that the whole structure was unsustainable. Interest rates had been falling, and it was clear that the assumptions on which the guaranteed annuities were based were unsustainable. In 1994, Michael Heseltinenow Lord Heseltinewhen President of the Board of Trade and Secretary of State for Trade and Industry, was responsible for the actions, or inaction, of the regulators, who failed to notice from annual returns the differential final bonus policy for guaranteed annuities, which was concealed from policyholders and led directly to the present mess. The potential culpability goes back a long way.
Then there are the 2,500 complaints submitted to the financial services ombudsman, mainly from former policyholders who withdrew before the introduction of the compromise scheme earlier this year. Those complaints allege mis-selling. If the ombudsman finds Equitable Life liable for mis-selling in the lead test cases that he is investigating, he must award full compensationnot partial compensation as part of any compromise dealfor the loss suffered. The consequences of that for the other affected groupthose who remain with Equitable Life, including those receiving payments from annuities in retirementcould be very serious. As we have heard, those annuitants have already lost about 30 per cent. of their income. That is the awful reality for everyone caught up in this mess. If one group benefits, another loses out massively.
That brings me to the role of the regulatorinitially the Department of Trade and Industry, then the Financial Services Authorityand what the Government are doing in the face of the crisis. One is left with a sense of staggering inertia and complacency. The Baird report on the role of the FSA was flawed from the start because it lacked independence. Even so, its criticism of the FSA, together with concerns about its role as regards split capital trusts, hardly provides reassurance about its ability to regulate the industry in future.
The analysis of the earlier period before the FSA took over from the DTI was left to the Penrose inquiry. It had been hoped that the report would be ready for publication this summertwo or three months agobut nothing has emerged and nothing is expected until
I join other hon. Members in pressing the Minister on the confusion surrounding the parliamentary ombudsman's investigation. In March 2002, the then parliamentary ombudsman, Michael Buckley, stated in a letter to Members:
I appreciate that the core remit of the parliamentary ombudsman's investigation might not be delayed by the Penrose inquiry, but it is unacceptable that other matters that are properly to be considered by the ombudsman will be stayed for possibly more than another year. The Minister has indicated that she does not believe that the investigation by the parliamentary ombudsman has been delayed owing to the Penrose inquiry. We need clarity as to the precise situation, and I should be grateful if she would explain what further steps she proposes to take to expedite matters.
Finally, I want to raise concerns about the state of the insurance and pensions industry in general. Although Equitable may be the worst example, many companies have out-of-date management structures, inadequate computer systems and a reliance on actuarial assessments that have not been independently assessed. Does the Minister share those concerns about the state of the industry in general and the confidence, or lack of it, that that inspires in many ordinary people who simply want to protect their position for their future retirement? Does she consider that a broader inquiry into the industry is needed, given the extent to which people rely on the companies for security in old age? I believe that that is absolutely essential to re-establish confidence in the industry.
I congratulate the hon. Member for Twickenham (Dr. Cable) on securing this exceptionally timely and important debate. It builds on previous debates, but as these matters, of desperate concern to all our constituents, have deteriorated, I am glad that the hon. Gentleman could secure this debate now.
We have heard a good selection of speeches and points today from Members on both sides of the Chamber, reflecting the deep anxiety of constituents across the United Kingdom. This debate is timely not only because our constituents have rightly appealed to us in their time of concern, but because it is right and fair to pay proper tribute to the Equitable action groups
There is no need to take the House's time by rehearsing the background facts. All hon. Members are very familiar with the consequences of the affair, and the misery visited on policyholders and affected people in all our constituencies. It is right, however, to start by saying that for almost all Equitable members, policy values and annuities have been cut by about one third and that the society's solvency is today in doubt. Annuitants are especially hard hit because, under Equitable's internal rules, common across the industry, they cannot transfer to another pension provider. Other policyholders can transfer, but at the cost of a significant exit fee.
Who is responsible? In my view, the old board and its advising actuaries were reckless and misguided. I understand that legal action against the former directors is being considered but unless they were well insured, there may be nothing worthwhile to gain there. It can be claimed that, over many years, the accounts gave no indication of the scale of the contingent liabilities. The current board has instigated legal action against the accountants, but that will no doubt be contested over a very long periodfar too long for the suffering Equitable policyholders. As the hon. Member for Wyre Forest (Dr. Taylor) just mentioned, Mr. Bellringer's departure on Monday with an extraordinarily large and insensitive pay-off after only six months in the job of finance director hardly inspires confidence.
I turn to the responsibility of the regulators. Until 1999, the prudential supervision of the Equitable was exercised directly by the DTI and the Treasury. They are open to a charge of maladministration. First, they allowed the society to sell unguaranteed policies without ring-fencing the funding of GAR policies and without disclosing that those prior guaranteed policies existed and represented huge contingent liabilities.
Secondly, as evidenced by the letter issued by Martin Roberts, director of insurance at the Treasury on 18 December 1998, which was on its website until July 2000, those Departments endorsed the society's attempt to redress the balance to cover the under-reserved costs of GAR policies by paying differential bonuses. That was later ruled illegal by the House of Lords. Thirdly, they allowed the society to trade with totally inadequate reserves and to claim throughout that it was selling a low-risk product coupled with prudent management and the benefits of mutuality. All Members of this House must feel that the shades of Maxwell come to mind. The issue of negligence must be examined urgently. That is not currently being properly investigatedcertainly not with the necessary urgency.
The Government have not only encouraged saving in personal pension schemes, but required those schemes to be converted into annuities from which there was and is no escape. Yet the Government are now standing by while pensioners have their current and future incomes slashed.
Since 1999 regulation has been in the hands of the FSA. One might have thought that when the scale of the collapse became apparent, the Government would have mobilised resources from the industry to underwrite the Equitable for a period to stem the flow of funds and to rebuild reserves in an orderly way. After all, if the society becomes insolvent, the industry will meet the cost of whatever compensation is awarded, and the damage to the savings industry and the Government's plans will be enormous. That is the sort of response that the Bank of England and, notably, the present Governor, no less, employed successfully during the secondary banking crisis in 1974 under Denis Healey's Chancellorship. At the very least, the Government should now devise and publish a contingency plan in the event that Equitable becomes insolvent, and I urge the Minister to give a clear answer on that today.
Mr. John McFall (Dumbarton): For the record, the Select Committee has acted unanimously on every decision that it has taken on this matter. We accepted that Lord Penrose was inquiring into the matter, but two weeks ago I raised the matter in the Committee and we decided to write to the Treasury, the FSA, Lord Penrose and others to assess the situation. We shall then look at the matter again and take it forward.
Mr. Stephen O'Brien : I am most grateful to the Chairman of the Treasury Committee and I am sure that all those with a concern in the matter heard what he had to say. We wish him well in his determinations following the responses, or absence of satisfactory responses, that he receives. Given the importance of the Select Committee's work and its powers to command evidence and people to appear before it, it has a real opportunity to advance the cause if that is the right course to take.
I return to what needs to be done. Policyholders and annuitants believe, rightly, that they have been victims of mis-selling and are looking for redress, either through industry support or compensation, especially from the regulators, or both. So far, it is right and fair to say that no one has exercised any leadership to deal with the situation. Given the flight of funds, coupled with today's more litigious environment, the opportunity may already have been lost to mobilise support, a point that has been mentioned by the hon. Member for Twickenham and others. Today we have the added difficulty, compared with 1974, of the fact that an increasing proportion of the relevant parts of the industry is in non-UK domestic ownership. We want mobilisation of that support, if it is still possible, in restoring Equitable to an even keel and salvaging confidence in the UK savings industry generally. If that is not done, it is likely to prove a big mistake because any other solution would be messy, long drawn out and costly.
What is certainly needed is a proper inquiry into the actions of the regulators, but there has been little progress, especially by the Government. The FSA set up an internal audit of its activities after it took over responsibility in 1999. The resulting Baird report was highly critical of the FSA's inactivity but acknowledged that most of the damage had already been done before it came on the scene. The die had been cast.
Looking at other necessary key action, I and other hon. Members wanted the matter to be examined by the parliamentary ombudsman. After considerable, admirable and persistent effort by colleagues in the former shadow Treasury teammy hon. Friends the Members for Croydon, South (Richard Ottaway), for Christchurch (Mr. Chope) and for Hertsmere (Mr. Clappison)I am delighted that their efforts, coupled with those of many other hon. Members on the Opposition Benches and 253 MP referrals from throughout the House, persuaded the parliamentary ombudsman to undertake an inquiry into the limited area covered by the Baird report. The then parliamentary ombudsman refused to look more widely at charges of maladministration by earlier regulatorsthe DTI and the Treasuryon the grounds that that would be a wasteful duplication of effort, pending the outcome of Lord Penrose's inquiry. That is a depressingly subordinate position to take. It effectively relegates the interests of Parliament and Equitable policyholders to those of the Government. Lord Penrose has been appointed, and given terms of reference, by the Government. He reports to Treasury Ministers, whose Department is one of the regulators under scrutiny. Who has the incentive to internalise this matter? Surely not the regulators for the relevant applicable time: the Treasury and the Department of Trade and Industry.
Lord Penrose has no powers to compel witnesses to attend or give evidence. His report may or may not be published, in part or in full, and the Government are free to accept or reject his recommendations. His inquiry will take, we all believe, at least another year and perhaps years. We can all urge speed as much as we like and the Minister's refrain will be, "The inquiry is independent. It's up to Lord Penrose." That is not good enough. Today's victims need the Penrose inquiry quickly. At the very least, they need the interim report that has been properly called for during the debate.
The new parliamentary ombudsmanshe has just taken up her role and I wish her wellis an Officer of the House and reports to Parliament, independent of Government. Her remit is narrow: the inquiry is into allegations of maladministration and is intended to pinpoint responsibility. Parliament can ensure that her report is published and that she receives co-operation from witnesses. Of course, there will be some overlap with the Penrose inquiry, but there is no reason why the Government's wide-ranging inquiry should take precedence over, and necessarily compromise, Parliament's own inquiry. The new ombudsman has fresh eyes and has an opportunity to accelerate her inquiry, to extend it back to the period before 1999 and to publish before Lord Penrose. I urge her to do that and to have the matter at the top of her in-tray.
The Financial Secretary to the Treasury (Ruth Kelly) : I add my congratulations to the hon. Member for Twickenham (Dr. Cable) on securing this important debate. I know of his long-standing interest in these issues on behalf of his constituents and I congratulate him on that.
I will attempt to give as many answers as I can to the individual points that have been raised. First, I should like to express my personal sympathies for those policyholders at Equitable Life who have been affected by difficulties in the society and, in particular, for the 50,000 men and women who have worked hard to save for their retirement and who put their faith in Equitable Life and recently received news that their with-profit annuities would also be the subject of cuts. As a Member of Parliament, I am certainly not alone in receiving many letters on this subjectthat is aside from being the Minister with responsibility for this area. I understand the concerns, and even anger, of policyholders at the current state of affairs. I add my congratulations to the action groups on their sterling efforts to draw attention to the issues.
As many hon. Members have recognised, the difficulties at Equitable Life stem at least in part from the guaranteed annuity rates that it, along with other life insurers, offered to with-profit policyholders between the late 1950s and 1988. As the hon. Member for North Norfolk (Norman Lamb) lucidly pointed out, the problems arising from those guarantees began to have a material effect in the early 1990s, when, for the first time, movements in interest rates meant that the guaranteed annuity rates were higher than the rates available in the market. In response, Equitable cut the terminal bonuses given to those members who opted for higher annuity rates. In effect, in order to achieve what it saw as fairness between all its members, Equitable gave those members who opted for a guaranteed rate annuity a smaller pot with which to purchase an annuity. Those members who opted for an annuity at the lower, open-market rate had a larger pot. The result of that policy was that savers with similar funds received the same income regardless of whether they had purchased a guarantee.
The society agreed to take to court a test case, in which policyholders argued that the guarantee entitled them to both a terminal bonus at the same level as other members and an annuity at the guaranteed rate. In July 2000, the House of Lords finally ruled in favour of their claim, and in doing so ruled against both the society's
The financial consequence of that decision exposed the society to unquantified costs for which it had not made provision. The Equitable put itself up for sale, but it was unable to find a buyer and closed to new business in December 2000. A compromise between policyholders was agreed earlier this year. Non-GAR policyholders agreed not to sue over mis-selling in return for GAR policyholders'giving up their guarantees. However, policyholders who had already left can still sue the society, and the Equitable faces considerable claims for compensation. The society is a mutual and has no source of funds other than its policyholders. As the hon. Member for Twickenham has outlined, companies of that kind are currently operating in very difficult market conditions.
I now want to address the points that have been raised about trust in the pensions industry and the possibility of a lifeboat being organised. This Government have done more than any other Government to try to put in place a framework to establish a basis for trust in the financial services industry. On coming to power in the late 1990s, the Government established the inquiry into the mis-selling of pensions, which has refunded £11 billion to policyholders. We set up the Financial Services Authority, which brought together nine separate sectoral regulators. For the first time, it includes a single ombudsman scheme and a single financial services compensation scheme, which is easy for people to use in gaining compensation in the event of insolvency. We are currently working on proposals to extend advice on financial services products to the mass market. We will be developing those proposals and plan to encourage people to save for their pensions, but Members will have to wait for the details in the pensions Green Paper later this year.
On the specific subject of a lifeboat, I understand the point made by the hon. Member for Twickenham on the general situation in the life insurance and pensions industry. In his view, a lifeboat would be desirable, but the key point is that the financial services compensation scheme already provides for 90 per cent. of policy values to be paid out in the event of the insolvency of a life insurance company. There is the possibility of the industry choosing to come together before a life insurance company reaches insolvency in order to take advantage of those provisions and provide a lifeboat, if it deems it to be appropriate in a given situation.
Ruth Kelly : No. Compensation is 100 per cent. of the first small amount and 90 per cent. of any subsequent amount up to whatever total is required. The industry could come together and decide that a lifeboat was needed. In fact, the Equitable and other life insurance companies are closely monitored by the FSA, particularly in these difficult times. The hon. Member for Twickenham asked what the FSA was doing to help; it is working extremely closely with the Equitable to help it to quantify any liabilities that it has for mis-selling and decide on future courses of action. If the FSA thought
Mr. Mark Field : May I reiterate my concern that the FSA does not have the authority within the City to take lifeboat action, if lifeboat action were deemed to be the right thing to do? The Bank of England, and therefore the Government, needs to take a more important role in the matter. The FSA's role, and its credibility within the City, is insufficient to take action of that sort.
Ruth Kelly : I might have agreed with the hon. Gentleman if he were referring to the period before the full independence of the FSA. However, the fact of the matter is that the FSA is the only authority with a detailed knowledge of the solvency position of the Equitable, and it is monitoring events intimately. Other than the industry itself, which can take its own view, it is the only authority in a position to come up with and proactively pursue such a course of action if it thought it advisable. At present, the FSA believes that Equitable Life is a solvent going concern; I hope that that view will remain.
I turn now to Penrose and the ombudsman. We understand the concerns of policyholders, hon. Members and the general public about the state of affairs at Equitable, which was why we set up the independent inquiry. Lord Penrose's terms of reference are:
Lord Penrose said that he would produce his findings as quickly as possible and that they would be consistent with a thorough and authoritative account of the events of Equitable Life. He assures us that that is still the case. I look forward to reading the results of his inquiry. The idea of imposing an artificial deadline for the first time would be counter-productive.
Ruth Kelly : I am glad that the hon. Gentleman asked me that question. It is my presumption and that of Lord Penrose that the report will be published in full. However, I must point out to hon. Members that we cannot break the law if certain legal confidentiality restrictions emerge when the final version of the report is shown to our lawyers. I presume that it will be published in full. It will be made clear to people whether that is the case. They can decide whether the report is fully independent or whether some passages have been removed.
The ombudsman is also entirely independent of the Government. It is for her to decide which of the complaints that are referred to her within her jurisdiction she wishes to investigate. The Treasury and the FSA are co-operating fully with the ombudsman. We have not received any complaint that we are not so operating. It has been suggested that her investigation has been delayed until after Lord Penrose has reported. That is not the case. Indeed, the ombudsman made that clear in a press notice on 29 October, which stated that the current investigation's