Equitable Life (Payments) Bill

My Lords, I should declare that I am a trustee of pension schemes with some members who have AVC savings in Equitable Life. One has to enter the discussion on this Bill by acknowledging the extent of the anxiety and hardship that all too many Equitable Life policyholders have experienced. I recognise that the Bill is an important step in resolving the Equitable Life affair, which is to be welcomed. However, as has been said, the Bill gives the Treasury power to make payments without the full detail of the compensation scheme currently having been published. This raises some matters of concern on which I seek clarification. The Government have confirmed a definition for relative loss suffered by policyholders, an approach that encompasses all the Parliamentary Ombudsman’s findings of maladministration, which the Government fully accept. I note that that decision by the Government leads to the taxpayer carrying liability for a form of compensation, which may well set for the future a moral precedent, expectation, or indicative principles of some significance. It would be useful if the Minister could clarify the point made by the noble Lord, Lord Kirkwood, about whether these payments are in fact ex gratia in status. I had understood that they were not. The actual amount of public funding for the compensation payment scheme is to be constrained by considerations of the public purse, in line with the view of the ombudsman. Such a consideration would always be relevant, whatever the state of the economy at a particular time. The state of the public finances may influence the weight that is given to this consideration, but not the principle of consideration itself. The Government have determined that the total funding for the Equitable Life payment results in a figure of £1.4 billion and a £0.1 billion contingency for longevity risk. The distribution of that aggregate figure in allocated payments has been determined in part by the Government with £620 million to cover the total relative loss suffered by with-profits annuitants, £775 million to be distributed between approximately 500,000 holders of individual policies, and £600,000 in GPPs. As to further distribution to these latter policyholders, the independent commission set up by the Government is looking to determine and apply a set of principles for the fair allocation of funds. Those principles will also underpin any prioritisation of payments. Therefore, two key sets of judgments or decisions are being made here that are important not least for the expectation principles that they may state morally, if not legally, for the future: what adjustments to make to the £4.3 billion relative loss figure for public purse considerations; and what principles of fairness to apply to the allocation of funding and the priority of payments to policyholders who are not with-profits annuitants. If we take the first matter, it is not clear, as my noble and learned friend Lord Davidson said, how the relative loss figure has been abated for public purse considerations. What were the considerations that led to that £1.5 billion figure being announced in the spending review? How have the Government decided to ameliorate their liability? Little or no adjustment has been made to the compensation for with-profits annuitants as the Government propose to cover their total relative loss because of the irreversible nature of the purchase transaction and the size of the losses. It is the funding allocated to the other categories of policyholders where the extent of the adjustment to the public purse is greatest and the reasoning least transparent. These issues are very important. How matters were determined in this instance could well influence the reasoning of others when borrowing in future. It is important to understand whether the process followed by the Government is based on safe and sound principles. I noted that the Parliamentary Ombudsman said in the Public Administration Select Committee on 14 October: "““My view was that compensation for relative loss was the appropriate remedy. Then I did something unusual, which is to say, ‘That's a very large sum of money, and I absolutely understand that considerations of the public purse can legitimately come into play’””," thereby confirming her statement that we are in new territory. As to the second matter, principles of fairness identified by the independent commission may also set an expectation. Will the Government reflect on this before accepting any recommendation, not least to ensure that there are no untenable contradictions as to the hierarchy of priority between this compensation scheme and others that may exist, including pension saving compensation schemes? Hierarchies of priority have proved contentious in the past, not least in respect of pension savings. Clause 1(3) confers on the Treasury the power to make provision for the payments to be disregarded for the purposes of tax, entitlements to tax credits and the liability to make payment in respect of provision for goods and services. On 10 November, the Financial Secretary to the Treasury, in his response to a question in Committee, confirmed that payments should not be treated as income for tax purposes, so providing a benefit for policyholders. If that is the case, will the Minister say whether the loss to the with-profits annuitants is calculated on a gross basis, whether the reference to disregarding payments for the purposes of tax credits would be extended to entitlements to pension credits and savings credits, and whether any payments can be disregarded in respect of liability or payment for social care? I have also been reflecting on non with-profits annuitants. Is there an issue to be addressed in distinguishing between the holders of indexed and level annuities when assessing relative loss? I recognise that the Government are keen to start making payments as soon as possible. Speed is obviously important, particularly given the age of many with-profits annuitants. The independent commission is looking at whether the timing of any payments could be prioritised, but will the Government also consider making interim payments soonest to those who need them most? Notwithstanding the aspiration around the timetable, does the Minister remain confident that the report from the independent commission will be received by the end of January 2011 and that payments will commence by the end of the first half of 2011? It would also be welcome if the Minister could confirm that a review body will definitely be accessible to policyholders who wish to challenge payments, with the review body having the power to overturn calculations. I recognise that the Government’s weighing of the public purse with the compensation for injustice is a difficult issue. Citizens look to the Government to protect them against injustices experienced as a result of regulatory maladministration or inadequacy. Equally, the Government have a duty to taxpayers to have regard for the liability and responsibilities which they require the taxpayer to accept and the competing demand for public resources—a difficult balance. There have been significant controversial compensation cases over the past few years, as instanced both by Equitable Life and by the creation of the financial assistance scheme that was set up to compensate pension scheme members whose employers became insolvent prior to April 2004. It is probably appropriate for me to say that I am on the Pension Protection Fund board, which of course administers the financial assistance scheme. It is important that people are not put off saving, and off pension saving in particular. I share the concerns of the noble Lord, Lord Kirkwood, who said that we must avoid such a tragedy happening again. How confident are the Government that their approach to regulation will ensure that such a tragedy does not happen in the future? With the advent of auto-enrolment in 2012, we will see millions more people saving and a significant increase in the level of saving going into private pension provision. Much of that saving will go into contract-based pension products. We will also see a corresponding growth in the annuity market. It is important that the regulatory system for long-term saving is robust and fit for purpose. There is a need to create an environment in which the need for compensation in the future becomes negligible. The policy of auto-enrolment strikes a deal between the Government and the citizen that the latter will take greater responsibility for saving for their retirement. In return, the citizen deserves a regulatory system and a standard of governance and behaviour in the financial and insurance industry that support them in taking on this responsibility. I know that the Government are set on a programme of reform for financial regulation and the creation of a new consumer protection and markets authority. The noble Lord, Lord Kirkwood, referred to conflicts between regulators. There are currently two regulatory regimes in the area of pension saving—the Pensions Regulator and the body or arrangements that will replace the Financial Services Authority. I will not go into the detail of who covers what, but there is an issue to be looked at here because there is unquestionably regulatory overlap, particularly as the future will provide a combination of contract-based and trust-based saving. In implementing these reforms, will the Minister give the assurance that giving savers confidence in insurance and long-term saving in the future will be at the forefront of government policy and action?