Select Committee on Public Administration Second Report

1  Introduction

1. Equitable Life is the world's oldest mutually owned insurance company. It used to be known by its reputation as a leading provider of life insurance and pensions. For many years a substantial proportion of the policies that were sold entitled policyholders to purchase an annuity at their retirement which then guaranteed minimum payments for the rest of their lives. A decline in the profitability of Equitable Life's investments made this commitment increasingly difficult to fund. Its former management decided, amongst other things, to implement a "differential terminal bonus" policy as a way of reducing the costs of the guaranteed rate pensions.

2. The new bonus policy was challenged in court in 1999; critically, it was found to be unlawful by the House of Lords in July 2000. Faced with an estimated £1.5 billion shortfall in its reserves and unable to find a buyer, Equitable Life closed to new business on 8 December 2000, leading to major policy value cuts in July 2001 and subsequently. A number of investigations have since taken place, each with different remits, none of them overarching. The Parliamentary and Health Service Ombudsman ('the Ombudsman') initially rejected complaints of maladministration, but she began a second and far broader investigation into the prudential regulation of Equitable Life in July 2004.

3. The Ombudsman's report of this second investigation, Equitable Life: a decade of regulatory failure, was published in July 2008.[1] We are responsible for reviewing each special report of this kind and our inquiry has been centred around its key conclusions and recommendations. We have taken evidence from groups representing the interests of Equitable Life's members, former regulators (including the Chair of the Financial Services Authority at the relevant time), expert commentators and HM Treasury. We are grateful for their contribution to our consideration of what are challenging and complex issues about accountability and redress.

4. We had thought that the Government would publish its response to the Ombudsman's report on Equitable Life in time for us to consider it as part of our inquiry. We now understand that it will be available only very shortly before the House rises for Christmas. We have therefore decided to publish this Report as speedily as possible, so that debate on the Government's response—and possibly even the response itself—can be informed by our views. Whether we need to return to these issues in the New Year will depend on what the Government has to say—but if it gives us any cause for concern, we will not hesitate to do so.

5. There were more than 1,500,000 members of Equitable Life at the time it was forced to close to new business in December 2000. Over the last eight years many of those members and their families have suffered great anxiety as policy values were cut and pension payments reduced. We acknowledge the determination of all those individuals who have campaigned tirelessly to find out what went wrong and to seek recompense from those responsible. Many are no longer alive, and will be unable to benefit personally from any compensation. We share both a deep sense of frustration and continuing outrage that the situation has remained unresolved for so long.

1   Parliamentary Ombudsman, Fourth Report of Session 2007-08. HC 815 (henceforth 'Ombudsman's report') Back

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Prepared 15 December 2008