The Chancellor George Osborne accused the previous government of having "dithered and delayed" and said that two thirds of the compensation would be found within the period covered by the Spending Review. We take a look what's happened and how safe all our pensions and investments really are...
Why are people getting compensation?
Between 1950 and 1988, Equitable Life sold pensions offering guaranteed annuity rates, which paid a generous income in retirement. But these became unaffordable for the insurer, which tried to prove that it no longer had to honour the guarantees it had originally offered.
Eventually the House of Lords ruled against Equitable Life, leaving the company with a £1.5 billion liability, and policyholders facing large cuts to the value of their prospective or current pensions. The insurer closed to new business in 2000 and sold its assets to Halifax in 2001.
Why did things go wrong?
What happened at Equitable Life was primarily down to bad decisions made by senior executives working there during the 1980s and 1990s. However, their actions should have been overseen much more closely.
Failures by financial regulators and various government departments including the Department for Trade & Industry, The Government Actuary's Department and the Financial Services Authority were therefore also to blame for the company's downfall.
How many Equitable Life policyholders are affected?
Up to a million people lost out when Equitable Life was brought to its knees a decade ago. The sum that they are being offered in compensation is three times than that recommended this year by retired judge Sir John Chadwick, but £4.5 billion less than the £6 billion victims claim they are owed. So far, around 50,000 Equitable Life policyholders have died while waiting for compensation.
When will the payouts be made?
The Government needs to arrange schemes to pay out the compensation, so the first payments will be made next year. Of the total £1.5 billion compensation, it is thought £500 million will be given in annual payments to people holding with-profits annuities who were promised an income during retirement that has failed to materialise.
Could the same thing that happened at Equitable happen elsewhere?
The way Equitable Life ran its with-profits life insurance fund was described by Lord Penrose's review into the scandal back in 2004 as "uncommon even unique" so a repeat of the events that happened there is unlikely.
However, there's no such thing as a completely risk-free investment, so it's well worth knowing where you stand in the event that something should go wrong. How much would I get if the insurance company managing my pension runs into trouble?
If an insurer were to go into default, the maximum protection the Financial Services Compensation Scheme (FSCS) could provide is 90% of your claim. There is no upper limit on the amount of compensation that could be paid.
How much protection do I have if I belong to a final salary or defined benefit scheme?
Protection for these schemes is offered by the Pension Protection Fund which was set up in 2005. This will pay compensation if your employer goes bust and its pension scheme can no longer afford to pay you your promised pension. Members over normal retirement age will receive 100% of their pension, while those below this age will receive 90% of their pension, subject to an annual cap of £29,748.68 at 65.
Compensation payments rise in line with inflation each year, subject to a maximum of 2.5% a year. But this will only relate to pensionable service dating from April 5, 1997. Payments relating to any pensionable service before that date will not increase.
What about investment funds and cash savings?
The first £50,000 held with any one financial institution will be protected by the Financial Services Compensation Scheme (FSCS), provided the company involved is authorised by the Financial Services Authority. The FSCS can only pay compensation when a company is in default.
The £50,000 limit for deposits will increase on December 31, 2010 to the equivalent in sterling of 100% of the first €100,000 per person per company - currently around £85,000. The limit for investments will remain at £50,000.
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