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24 Jun 2009 : Column 269WH—continued
I said earlier that I would highlight some of the many cases that have been brought to my attention by my constituents, and I am sure that we could all raise such cases. The majority of the public, who have had no contact with or money invested in Equitable Life, would be forgiven for thinking that only those who had considerable investment in the company have lost out over recent years. The reality is different, as the examples will show. I have protected the names of my constituents by using initials.
Mrs. H of north Leeds told me that her modest £200 a month income was reduced overnight to less than £100 a month, although it is now back up to about £120. She is 83 and was completely dependent on that £200 a month. When it was reduced by more than half, she found it hard to cope financially. It was only the help of her ex-husband that kept her going. She still struggles every month because of the continued shortfall in her income.
At the other end of the scale, Mr. A is a retired solicitor who started investing in a pension policy with Equitable Life in his mid-30s. Given the record of the company and the projections for growth over succeeding years, that would have given him a fund large enough to pay a substantial income from the annuity that he would have started aged 65. He is now 61. Not only has he seen no growth in his fund over the past few years, but the annuity he was guaranteed is no longer possible. He lost out twice: first, when his investment failed to reach its promised level and, secondly, when he discovered that the guaranteed annuity rate had been abolished. The fund was far lower than he had planned.
Mr. A provided the following example. Say he had invested a total of £100,000 in 1997. According to Equitable Life’s plan, that sum should have grown to about £133,000 by 2000. However, because the society had frozen all investments by that time, his fund would have remained at £100,000.
In order to halt the reduction in the value of his investment, Mr. A decided to move the fund to another company and paid a penalty of £20,000 for the privilege. That is a high penalty, but is sadly not uncommon in the industry. In 1997 he had an investment of £100,000, which he could have reasonably believed would have helped to provide part of an annuity that would have guaranteed him a good pension income. Three years later, he had only £80,000 to invest—a loss of £53,000 compared with what he might have expected, or a reduction of just under 40 per cent. in the value of his fund.
Dr. C is a retired consultant who lost more than £25,000 after investing £100,000 in Equitable Life. He spread his investments carefully, so although he is angry at his loss, he has not been left destitute. However, he blames the regulatory regime that allowed this to happen in the first place.
Miss Julie Kirkbride (Bromsgrove) (Con): The hon. Gentleman is right to say that some people have experienced considerable loss and that others have had less of a loss. Nevertheless, people have still lost an important income on which they were relying for their old age. The terrible thing about Equitable Life is that in seeking to look after themselves in their old age, the 1.5 million policyholders were doing the right thing by themselves and for society, yet they have been very badly let down. That is why Parliament has to act.
Mr. Hamilton: The hon. Lady is right. Later in my remarks, I shall address the points that she has made.
Why is the regulator to blame? Surely investors must have understood that their investments could decrease as well as increase. How could Equitable Life have maintained a rate of return and a guaranteed annuity rate that was way beyond any competitor in the market? Those are the questions that Ann Abraham addressed in her initial report of July 2008, which took four years to complete. Her answers go to the heart of the anger expressed by investors through the Equitable Members Action Group, or EMAG.
At the core of the problem is the fact that Equitable Life simply could not meet the obligations that it had made for itself because it made no provision for guarantees against low interest rates on policies issued before 1988. It therefore declared bonuses out of all proportion to its profits and assets. Following the ruling of the House of Lords in July 2000, the society stopped taking new business in December of that year, which effectively spelt the end for Equitable. More than 1 million policyholders then found that they faced cuts in their bonuses and annuities, which caused a huge loss of income, on which many small investors had depended. After all, the average investment for the 500,000 individual policyholders was just £45,000, which, according to EMAG, even at its height yielded no more than £300 a month.
In July 2001, the new board of directors slashed policy values by 16 per cent.—about £4 billion—and proceeded to effect a compromise scheme to deal with the guaranteed annuity rate issue. However, Equitable Life’s problems were too deep-seated, so the scheme was not enough to enable it to ride out the stock market falls of 2001-02. In 2002, policy values were cut by another 10 per cent. and the society was forced to invest almost exclusively in fixed interest stocks. Almost none of its money was invested in equity shares, so it could not operate as a with-profit insurer and its policyholders did not benefit from the stock market’s substantial rise between 2003 to 2007.
As I am sure we all remember, in 2004, Lord Penrose carried out an investigation into Equitable Life. However, he had no power to apportion blame or recommend compensation. He highlighted the society’s unsustainable bonus policy and the
“practices of dubious actuarial merit”
that it used to discourage action by the regulators. He concluded:
“Principally, the Society was the author of its own misfortunes.”
However, crucially, he went on to say:
“but it may be appropriate to comment that the practices of the Society's management could not have been sustained over a material part of the 1990s had there been in place an appropriate regulatory structure adapted to the requirements of a changing industry that happened to manifest themselves in an extreme form in the case of Equitable Life.”
“the standards of scrutiny still impress me as complacent, lacking challenge, and hesitant in criticism and in following up on any criticism made.”
In its December 2008 report, one of the many recommendations of the Public Administration Committee stated:
“We strongly support the Ombudsman’s recommendation for the creation of a compensation scheme to pay for the loss that has been suffered by Equitable Life’s members as a result of maladministration. Where regulators have been shown to fail so thoroughly, compensation should be a duty, not a matter of choice.”
Although the Select Committee fully acknowledged the huge sums of money that might be involved and the need to strike a careful balance between the interests of the taxpayer and the policyholder, it went on to conclude:
“Not only did the regulators fail, but they failed over a prolonged period and at a fundamental level. The impact has been severe for many of those who were worst affected; it would be unacceptable for current financial pressure to override failings which took place seven or more years ago.”
Mr. Oliver Letwin (West Dorset) (Con): Like the right hon. Member for Berwick-upon-Tweed (Sir Alan Beith), I declare an interest in that my wife was an Equitable Life pension holder at the time. When the Penrose report came out and we debated that issue, I remember the reluctance of the ombudsman to take on the task. At that time, Ministers made it clear that they did not believe that there was administrative and regulatory failure. Does the hon. Gentleman agree that it is still a mystery why Ministers have rejected most of the ombudsman’s recommendations, given that the ombudsman was so clear that there was administrative and regulatory failure?
Mr. Hamilton: Yes, I certainly agree with the right hon. Gentleman. Again, I will go on to highlight that matter further on in my remarks—I am afraid that we are not quite at the end of them yet.
The Public Administration Committee also said:
“It would also be wrong for the Government to refuse compensation on the basis of Lord Penrose’s conclusion that Equitable Life was ‘principally...the author of its own misfortunes.’”
Paragraph 50 of the report begins:
“The decision to compensate must not, however, be the equivalent of signing a blank cheque on taxpayers’ behalf.”
“We also highlight the Ombudsman’s conclusion that not all policyholders suffered loss; this should not be a case of compensation for all.”
I am sure that many hon. Members will recall that, on 15 January this year, the then Treasury Minister, who is now the Secretary of State for Work and Pensions, delivered a fulsome apology in the House. She implied that there was a comprehensive acceptance of the Parliamentary ombudsman’s report and said that she would provide the services of a retired Lord Justice of Appeal, Sir John Chadwick, to deal with the technicalities of the recommendations.
Jo Swinson (East Dunbartonshire) (LD): Does the hon. Gentleman accept that, nearly a year on, the recommendations are not being dealt with? Indeed, I understand that Sir John Chadwick has refused to meet 140 members of the all-party group on justice for Equitable Life policyholders. Does he not think it is absolutely shocking that somebody whom the Government have appointed to deal with the recommendations will not even listen to a large group of MPs who have constituents with concerns?
Mr. Hamilton: Yes, I agree with the hon. Lady. I will address some of her points in a minute. I am not quite sure where I got to. The Secretary of State for Work and Pensions, who was the then Treasury Minister, delivered a fulsome apology—[Interruption.] It was a fulsome apology—these are the words of EMAG, in fact.
Susan Kramer (Richmond Park) (LD): I am grateful to the hon. Gentleman for giving way twice on the same point. Does he not agree that many Equitable Life policyholders felt great hope when they heard of the appointment of Sir John, but having seen his June publication—his proposals on the approach to be adopted—they are now shattered to find that he believes his terms of reference allow him to look only at a limited and narrow number of issues? Few people will therefore receive any compensation, and those who do are likely to receive a minimal amount.
Mr. Hamilton: I thank the hon. Lady for her comments. Again, I hope to address some of those points in a few minutes. I have some proposals that I hope the Minister will respond to positively. I live in hope—[Interruption.] One has to be an eternal optimist to be in this job.
It appeared that compensation was on the horizon for the victims of the Equitable Life scandal; but sadly, that was not the case. What was not said was that the Command Paper released later that day—15 January—was totally at odds with the tone of the statement. In the small print, the apology, the ex gratia payments scheme and the Treasury’s instruction to Sir John Chadwick were all restricted to those findings of the parliamentary ombudsman that the Treasury accepted. However, it rejected three out of four of the most expensive of the ombudsman’s recommendations.
Earlier this month, Sir John Chadwick published a document, “Equitable Life ex-gratia payment scheme”, with the subtitle, “My proposals as to the approach to be adopted and the issues to be addressed”. In the document, he repeats that the Government accept the ombudsman’s finding that the injustice suffered by policyholders should be looked at on an individual basis. He states that he is satisfied that his terms of reference do not require him to engage in any form of means-testing in relation to individual policyholders, but that they oblige him to disregard any of the ombudsman’s findings of maladministration and injustice, which are not accepted by the Government.
Surely, the fatal flaw in the Treasury’s proposals is that Sir John Chadwick cannot satisfy either the policyholders represented by EMAG, the parliamentary ombudsman, the Public Administration Committee or, indeed, what remains of Equitable Life itself unless he has a remit to address all the recommendations made in Ann Abraham’s original report of July 2008. That is why she published her further report last month, and that is one reason why I requested this debate in the first place.
EMAG tells me that, ultimately, the amount of compensation is a matter for Parliament, rather than the ombudsman or a court. EMAG states:
“Like Ann Abraham, we know that theoretically Parliament could decide upon compensation of any amount, from billions of pounds down to nothing. Indeed, we have suggested that Parliament
sets the total compensation amount and lets the Parliamentary Ombudsman’s proposed Tribunal get on with distributing it fairly and swiftly.”
Along with many countries in the western world, we have a growing problem of an ageing population that needs to be encouraged to make greater provision for its own retirement and old age. The state simply will not have sufficient resources to provide enough money in statutory pension payments. The problem will only become worse as the years pass and the proportion of younger people in work reduces in relation to those in retirement. It is already clear that my generation, now in our mid-50s, will have to work longer before retirement. However, unless we can save more and see our savings growing securely, there will be little confidence that there is any point in saving at all.
The Equitable Life scandal has severely reduced the confidence that the people of this country have in the principle of saving for retirement. If investing a large proportion of earnings results in it either disappearing or greatly reducing in value, the lack of trust in the system will remove any incentive to make personal provision from a lifetime’s earnings and lead to increased poverty in old age.
Bob Spink (Castle Point) (Ind): I declare an interest: like many MPs, I had an Equitable Life policy. We know that even with the ombudsman’s public and formal indictment of the Government, they will continue to prevaricate. Is it not time that Parliament, on a cross-party basis, took hold of the issue and forced it forward, as it did with the Gurkhas? Is that not what we should be doing now?
Mr. Hamilton: There is a reasonable spread of Members here from all parties. I would hope that perhaps Parliament could do that, under the leadership of our new Speaker. Let me finish my remarks, and perhaps the hon. Gentleman will want to come in, if he is able to.
In the end, of course, the state will have to foot the bill, thus increasing the cost to all of us through higher taxation. It is imperative that we are able to save, and able to save reliably, knowing that our money will not be wasted or disappear through incompetence.
It has been said that this scandal affected only the well-off and that ordinary people with relatively small savings were not involved. Let me remind hon. Members and the Government that EMAG told the Public Administration Committee that
“the majority of Equitable Life’s policyholders had modest sized pensions and were not ‘fat cats’ who ‘risked their money to get above average returns’. In particular, the average investment of the half million individual policyholders amounted to £45,000 each, which in today’s money would buy a pension paying around £75 per week.”
To conclude, I ask the Minister these questions. Will she amend Sir John Chadwick’s terms of reference to include all the recommendations of the parliamentary ombudsman’s report, “Equitable Life: a decade of regulatory failure”? Will she agree to implement the proposal put by EMAG that Parliament sets a total amount of compensation for individual policyholders affected by the collapse of Equitable Life, and then allows the proposed tribunal to get on with the job of distributing the money quickly and fairly? Will she accept that the delay caused so far has meant that many
policyholders, who suffered through no fault of their own, have either endured financial hardship or have died in the meantime? I believe that up to 15 people die each week.
Mr. Hamilton: Sorry—each day. That is even worse. I will say “each week,” because that is the statistic that I was given, but even that is unacceptable.
David Davis (Haltemprice and Howden) (Con): I am sorry to interrupt the hon. Gentleman’s conclusion, but he made a comment earlier that may not be true. He said that it will cost more if the Government take a long time to deal with the issue. The very fact that he just mentioned a death rate of 15 a day—thousands a year—may mean that this gets cheaper over time. Would he ask the Minister how much is being saved as a result of the mortality rate of Equitable Life policyholders, so that we can know what the incentive to the Treasury is to take a long time over this?
Mr. Hamilton: I give way to the hon. Gentleman.
Bob Spink: The Library note said 15 per day.
Mr. Hamilton: Per day—okay, I shall correct the record and say “per day,” if that is what the Library note says.
I thank the right hon. Member for Haltemprice and Howden for his remark, but my point was based on the fact that if few of us save for our retirement because we have no confidence that the system will yield sufficient return, it will cost the Treasury and the state considerably more. I was not referring to those who die each day.
Finally, does the Minister accept that the phrase “injustice unremedied” has real meaning to many people and that it is about time that hundreds of thousands of investors received real justice? If she were able to answer those questions positively, I believe that this injustice could be brought to an end rapidly and that the Government would receive credit for their resolution. If not, I fear that resentment and bitterness will continue, at huge cost to the individuals who have suffered and to the country as a whole.
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