Goverment passes the buck on Equitable

THE Government has driven another stake into the heart of Britain's savings industry with its refusal to accept any direct responsibility over Equitable Life. As a result, hopes of compensation for policyholders, many of them elderly, have been dashed.

After a lifetime of saving, they face impoverished retirement or expensive legal action to try to restore the value of their pensions.

In his report, Lord Penrose is absolutely clear that blame rests with Equitable's senior management. And he comes down hard on the Government regulators employed to maintain the integrity of Britain's savings industry.

But Ruth Kelly, the Financial Secretary to the Treasury, sought to exonerate the insurance supervisors.

She was seeking to shift the blame for the debacle from Labour - which came to power in 1997 and presided over the failure - to its Conservative predecessor.

Yesterday she tore into former Tory trade minister Francis Maude, whom she alleged failed to heed warnings on the need to tighten insurance rules.

The truth is that it was the responsibility of an army of officials at the Department for Trade and Industry, the Treasury and in the Government Actuary's Department, to crawl over the annual returns and affairs of insurers and, where necessary, to query the figures.

This is the least policyholders could have expected.

The Equitable debacle has its roots in promises made to policy holders in the Eighties. Management assumed that the high interest rates seen in those years would continue. They did not.

Equitable tried to lower the value of future returns by going to the courts. But the law lords ruled Equitable had no right to do this, leaving it with a £1.5bn shortfall.

Desperately short of capital, the insurer was forced to close its doors to new business in 2001.

Lord Penrose argues this was the final straw because there was already an unknown black hole in the firm's accounts covered up by former chief executive Roy Ranson and his successors over a number of years.

If this was the case, then regulators should certainly have been more alert. Indeed, problems at Equitable reached crisis proportions just when the Labour Government was engaged in the complex task of tidying up regulation.

Insurance inspection moved first from the DTI to the Treasury and then the Financial Services Authority, which was created by Gordon Brown and took on the job in 2001.

The FSA, which Kelly praised in her statement, had been criticised in a previous report for failing to see the Equitable crisis coming.

I have a serious concern that the Government's efforts to shuffle off blame for the crisis to the company, while protecting the regulators, relates directly to the fact that it has nothing but disdain for the middleclass savers who trusted Equitable.

Equitable, of course, catered to professionals, many drawn from law and accountancy rather than Labour's own core voters, many of whom take no responsibility for saving at all.

Since Labour came to office, the proportion of income saved has fallen from 10% to 5.9%.

The Government has presided over a series of savings debacles including the implosion of defined benefit pension schemes, the split capital trusts affair (only now being resolved with compensation) and Equitable Life.

In its latest move against savers, the Government is to remove another incentive.

At present individual savings accounts (ISAs) attract tax relief on both the capital gains made and the dividends earned on shares in that fund. From April 5, the tax relief on dividends will be dropped, making ISAs a less attractive investment.

Lord Penrose's report and Ruth Kelly's statement make it clear: savers are on their own. If the Serious Fraud Office (not known for its effectiveness or speed) does find that the wrongdoing uncovered by Penrose was criminal then policyholders might - if they are still fit and well - eventually have a chance of going to the courts for redress and force the Government to pay compensation.

But given the painfully slow nature of Britain's judiciary, that looks like a remote possibility.

All investments, of course, carry risk. Everyone knows that shares are highly risky. As a result, savers have been urged for decades to put their money into the collective investment funds, like Equitable, operated by our large insurers, which offer comfortable returns and safety.

Despite efforts to tighten up regulation post-Equitable by adopting stricter accounting standards, investor confidence has been shaken to the core.

Lord Penrose gave the Government the opportunity to restore faith in the insurance industry by offering, at the minimum, to properly examine compensation claims.

But it has slammed the door shut, banging another nail in the coffin that is the nation's savings culture.