Equitable Life - Public Administration Committee Contents


A paper by the Parliamentary and Health Service Ombudsman


  1.  On 20 October 2010, the Government will announce as part of the Comprehensive Spending Review the amount which will be made available to fund an independent compensation scheme for Equitable Life policyholders.

  2.  The Public Administration Select Committee is taking evidence on recent developments related to Equitable Life in advance of that announcement. The purpose of this paper is to assist the Committee to understand my position regarding the delivery of fair and transparent compensation.


  3.  Equitable Life was founded in 1762 and is generally accepted to be the oldest surviving mutual life assurance company in the world. It closed to new business on 8 December 2000 with immediate effect. Since then, the values of the policies held by people who had saved or invested with Equitable Life have been subject to significant cuts and the pensions paid out by the company have been reduced on a number of occasions. These cuts and reductions were a reflection of the factors which had led the company to close.

  4.  The closure of the company prompted complaints to be made alleging that there had been significant failures in regulation which had played a part in the events which led to the company closing. Following a number of inquiries and reports, in July 2004 I launched an investigation into the actions of the public bodies responsible for the prudential regulation of the company during the period prior to 1 December 2001.


  5.  On 16 July 2008, I laid before Parliament the report containing the results of that investigation, entitled Equitable Life: a decade of regulatory failure. I made ten individual findings of maladministration and upheld a general complaint that the regulators failed for considerably longer than a decade properly to exercise their functions in respect of Equitable Life.

  6.  I determined that this "serial regulatory failure" had led to injustice to those policyholders who had complained to me. That injustice took the form of financial loss, lost opportunities to make informed savings and investment decisions, and a justifiable sense of outrage.

  7.  In line with my general practice, I made recommendations which aimed to provide an appropriate remedy to put right that injustice. Those recommendations were, first, that the Government should apologise for the maladministration which had occurred and, secondly, that the Government should establish and fund an independent compensation scheme with a view to paying compensation to those affected by the maladministration I had found had occurred.

  8.  I recommended that the aim of such a compensation scheme should be to restore anyone who had suffered a greater loss, relative to that which they would have suffered had they invested in a comparable scheme with another company, to the position they would have been in had they invested in that other company.

  9.  In making this recommendation for compensation to be paid for the relative losses which policyholders had suffered, I recognised that it raised issues concerning the public interest and the potential impact that acceptance of the recommendation to establish a compensation scheme might have on the public purse. I said that it would be appropriate to take this into account when deciding how to respond to that recommendation.

  10.  Decisions as to whether such a compensation scheme would be in the public interest and as to how public resources should be spent are matters for Parliament and Government and not for me. I therefore invited both Parliament and Government to consider further the issues that were raised by my report and by my recommendation.


  11.  In its January 2009 response to my report, the previous Government apologised to policyholders but rejected my recommendation that compensation for relative losses should be paid. Instead, it commissioned Sir John Chadwick to provide advice as to the development of a limited scheme to make ex gratia payments only to those most "disproportionately" affected by the Equitable Life affair.

  12.  In producing his advice, Sir John's Terms of Reference required him to follow the terms of the previous Government's response to my report. This involved the rejection, reinterpretation, or qualification of many of my findings of maladministration and injustice. In particular, he was to "disregard" those of my findings which the previous Government had not accepted.

  13.  Judicial review proceedings launched by the Equitable Members Action Group (EMAG) challenged the legality of the previous Government's response to my report. The Divisional Court held that the Government had had no cogent reasons for its rejection of some of my findings of maladministration. That response was thus unlawful.

  14.  As a result of this judgment, Sir John's terms of reference were amended. Those amended terms of reference were still predicated on a rejection of my recommendation for redress and Sir John was still required to proceed on the basis of that part of the Government's response which had not been ruled unlawful by the courts.

  15.  The previous Government's response to my report was also subject to consideration by the Committee's predecessor, which published two reports—Justice Delayed and Justice Denied?—that were critical of that response.


  16.  With the election of a new Government, the position changed. In paragraph 23 of The Coalition: our programme for Government, the new Government said, mirroring earlier manifesto commitments, that:

    We will implement the Parliamentary and Health Ombudsman's recommendation to make fair and transparent payments to Equitable Life policy holders, through an independent payment scheme, for their relative loss as a consequence of regulatory failure.

  17.  Legislation has been introduced to provide authority for the payment of compensation, and an independent commission has been appointed to advise on the design of a scheme to make compensation payments within a clear timetable.


  18.  The Chadwick Report commissioned by the previous Government was published in July 2010. This contained a provisional estimate of the relative losses which had occurred. These were calculated by Towers Watson, actuaries appointed by the Treasury to assist Sir John, as being in the range of £4 billion to £4.8 billion. This is broadly consistent with the amounts claimed by those who complained to me and which informed the representations I received while finalising my July 2008 report. On that basis it appears to me to be a credible estimate.

  19.  In line with his terms of reference, Sir John also gave advice on the proportion of those losses which he considered it would be appropriate to apportion to the regulators, the classes of policyholders which had suffered the greatest impact, and the factors which should be taken into account when determining whether "disproportionate impact" had been suffered.

  20.  In relation to the amount of compensation that should be made available to policyholders, Sir John recommended that compensation should be capped at the "absolute loss" which had been suffered. No such cap was suggested in my report.

  21.  He also advised that the amount of compensation should be reduced further to reflect his assessment—which differed from mine—of what policyholders would have done had no regulatory failure occurred. This approach resulted in advice that compensation of 25% of the absolute loss suffered by with-profits annuitants should be paid, with payments of 20% of their losses to be made to all other policyholders.

  22.  Analyses undertaken by Equitable Life and by the representatives of policyholders have estimated that the approach embodied in the Chadwick Report would lead to only 10% of relative losses being made good. They have also questioned many of the assumptions which Sir John made in coming to his advice.

  23.  In a statement to the House on 22 July 2010, the Financial Secretary to the Treasury explained that the Government would reflect on Sir John's advice and would listen to representations by interested parties while further work was done to produce a final estimate of the relative losses which had been suffered. That final estimate and the amount to be made available for compensation to remedy those losses will be announced on 20 October 2010 as part of the Comprehensive Spending Review.

  24.  I wrote to all Members of Parliament on 26 July 2010. I welcomed many of the next steps announced by the Government and the work being done to calculate the relative losses sustained by Equitable Life policyholders. However, I also explained that basing the design or funding of the compensation scheme on the proposals set out within the Chadwick Report would not enable fair or transparent compensation to be provided and could not constitute the implementation of my recommendation.


  25.  I recommended fair compensation to all Equitable Life policyholders to remedy the relative losses they have sustained, to be delivered by an independent scheme in a transparent, simple and speedy manner. As explained above, the new Government has said that it will implement that recommendation.

  26.  As I have already explained in my July 2010 letter to Members of Parliament, implementation of my recommendation cannot be secured through the adoption of the approach embodied within the Chadwick Report.

  27.  I will now explain my reasons for taking this view. My fundamental point is that the approach embodied within the Chadwick Report has been overtaken by events, given the commitment by the new Government to implement my recommendation in full.

  28.  Sir John, in fulfilling his Terms of Reference, was undertaking a task that was substantively different to what is necessary to implement my recommendation. In his own words, referring in paragraph 7.66 of his Report to my approach as contrasted with the basis on which he had proceeded, "we have reached different answers because we have addressed different questions".

  29.  The annex to this paper shows the differences which exist between the approaches embodied respectively within my report and the Chadwick Report.

  30.  In addition, the analysis which Sir John undertook was grounded in a view of my report which is inconsistent with what my report actually says. This can be illustrated by three key examples:

    — The Chadwick Report proceeds on the basis that I intended that individuals should only be eligible for compensation to the extent that they could show that they were covered by each of the individual findings of maladministration and injustice and had relied on an individual basis on the regulatory returns.

    My recommendation, however, was not qualified in any such way, and covered all those who had suffered relative loss.

    — The Chadwick Report suggests that I had recommended that a compensation scheme should be established which was based on the assessment of each individual transaction made by every Equitable Life policyholder, seeking to identify specific losses related to each financial transaction made.

    But I have never suggested that this would be appropriate or practical. It nevertheless became the founding basis for what Sir John described as my "report-based approach" to which he devoted a whole section of his advice.

    — The Chadwick Report contends that I had rejected the approach embodied by submissions made by EMAG and others as to how to design a compensation scheme.

    In fact, I left open the best way to design a compensation scheme—neither endorsing nor rejecting any of the various possible approaches—leaving the determination of this question as a matter for the independent commission to do openly and taking into account the views of stakeholders.

  31.  In summary, Sir John's Advice to Government misunderstands and misinterprets my report in a number of important respects; starts from a different place to my report as a result of the very different basis on which it was commissioned; proceeds on a different basis; takes a different view on what would have happened in the absence of regulatory failure; takes a narrower approach to redress; and a very different approach to the calculation of compensation. It is for these reasons that I consider the Chadwick proposals to be an unsafe and unsound basis on which to proceed.


  32.  My recommendation was that compensation should be paid to all Equitable Life policyholders for any relative loss they have sustained. I did not qualify that recommendation in any way beyond recognising that Parliament had to decide how to balance fairness to policyholders with the impact that paying compensation would have on the public purse.

  33.  Implementing my recommendation through the provision of fair compensation would require the following steps to be undertaken in an open and transparent manner:

    — First, determining relative losses—through the identification of an appropriate comparator or comparators against which to judge the relative performance of Equitable Life and by then measuring the "gap" between the performance of this comparator or comparators and the performance of Equitable Life in relation to the different classes of policy or annuity.

    A provisional estimate of £4 to £4.8 billion has been calculated by Towers Watson, the actuaries appointed by the Treasury to assist Sir John.

    — Secondly, deciding what compensation should be paid—by setting out what percentage of relative loss should be made good in order to balance fairness to policyholders with the effects of the provision of compensation on the public purse.

    This is under consideration as part of the Government's Comprehensive Spending Review.

    — Finally, paying each eligible policyholder—using whatever formula results from the above steps and the data which the Government now has about the affected policyholders.

    An independent commission has been appointed to recommend to Government how best to fairly allocate the funds provided following the Comprehensive Spending Review.


  34.  I very much welcome the new Government's acceptance of my findings of maladministration and injustice and its commitment to implement my recommendation to compensate Equitable Life policyholders for their relative loss as a consequence of serial regulatory failure. It is clear, however that the Chadwick proposals are not compatible with delivering that commitment.

  35.  I will be happy to assist the Committee in its consideration of these issues.


The Ombudsman's approach The Chadwick approach

Starting point
The Ombudsman's report. The former Government's response to the Ombudsman's report.
Basis All the findings of maladministration and injustice set out in the Ombudsman's report. Only those findings accepted by the former Government—some rejected, others qualified or reinterpreted, some ignored.
RedressThe Ombudsman's recommendation.
Compensation to all policyholders for the relative losses they have suffered—this would be fair and reasonable in the circumstances of the case and would address all of the different forms of injustice which had resulted from all of the many types of maladministration which had occurred.
Rejection of the Ombudsman's recommendation.
Limited ex gratia payments to be made only to those "disproportionately affected" by the maladministration which the former Government accepted had occurred.
Approach to compensation(1)  determine relative losses sustained
(2)  consider wider questions of affordability
(3)  pay all claims
(1)  determine relative losses sustained
(2)  cap loss figure at a lower figure for "absolute loss"
(3)  reduce capped figure to either 20 or 25% of loss (reflecting assumptions about what would have happened had no regulatory failure occurred)
(4)  consider wider questions of affordability
(5)  pay claims

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Prepared 15 October 2010