Victims of the Equitable Life scandal reacted with fury todayafter a government report suggested they should share no more than £500m in compensation – a tenth of the amount campaigners argue they are due.
The Treasury minister, Mark Hoban, said details of precisely how much would be paid out would be revealed in October, and the aim was to begin making payments to policyholders in the middle of 2011.
However, campaigners' fears that they will be short-changed were fuelled by the publication of a report, commissioned by the previous government, which suggests policyholders lost up to £4.8bn in the debacle but should only receive a payout of between £400m and £500m. With about a million people having seen their retirement savings slashed as a result of the company's well publicised problems, this would average out at £400 to £500 per policyholder.
Paul Braithwaite, a spokesman for Emag, the Equitable Members Action Group, described the report's proposal on compensation as "a bitter blow to policyholders' expectations," and claimed the Treasury was engaged in "dirty tricks" with the aim of limiting payouts.
The parliamentary ombudsman, Ann Abraham, also appeared to question whether the plans would mean a fair outcome for policyholders, saying that "it is not clear from the material presented to parliament today whether such justice will be delivered".
The insurer was brought to its knees in 2000, and later repeatedly slashed the value of policyholders' investments, after it lost a legal battle over pension guarantees. In 2008, Abraham said she had found evidence of "serial regulatory failure". The Labour government apologised for the "maladministration" that contributed to the insurer's problems, but rejected recommendations that it should compensate all Equitable policyholders.
In May, the new government signalled its intention to help policyholders, saying it would implement the parliamentary ombudsman's recommendations to make fair payments to people who suffered through the firm's near-collapse. Plans were included in the Queen's speech.
The report published todaywas by a retired judge, Sir John Chadwick, who was commissioned by the last government to work out which policyholders had been hardest hit and what proportion of their losses could be attributed to maladministration.
Hoban said the Chadwick report was "just one of the building blocks in resolving what is a complex matter" and added there were other judgments to be made in deciding the final shape of the compensation scheme.
But he warned the overall size of the fund would be considered "in the light of what is affordable" as part of October's spending review. He said ministers were aware that some of Chadwick's findings were contentious, and they would listen to representations from interested parties ahead of the spending review.
Actuary Towers Watson was asked to calculate estimated losses based on Chadwick's conclusions. It said the "relative loss" suffered by policyholders – the difference between the returns they received from Equitable and what they would have got if they had invested with another insurer – was between £4bn and £4.8bn.
But Chadwick said compensation should be restricted to 20%-25% of the actual loss they suffered at Equitable, between £2.3bn and £3bn, to reflect his view that most policyholders would have invested in the company irrespective of maladministration. Further reductions brought the final loss figure down to £400m to £500m.
Braithwaite said: "The Treasury is continuing with its dirty tricks and damage limitation. Chadwick should have been sidelined."
Equitable Life said it welcomed the minister's statement and believed the relative loss figure should be "the foundation for compensation".Equitable's £6bn closed with-profits fund still has about 400,000 individual investors and pension scheme members.