Julian Knight: At last – a little overdue justice for Equitable policyholders
After a decade of delay and stalling, the first compensation cheques are finally arriving
Sunday 03 July 2011
Nearly 4,000 days after Equitable Life closed its doors to new business, the Treasury has confirmed that the first compensation payments have gone out to policyholders.
The grim reaper and more prudent management of the Equitable since its near collapse mean that the final compensation bill will be around the £1.5bn mark, much less than was thought a few years ago.
The scandal of Equitable Life – and there is no other word for the mutual which was so disgracefully mismanaged – has covered my entire professional life. I still remember vividly going to meetings of policyholders and seeing often stressed and ill old men and women seeing their life savings going down the swanny. Almost to a man or woman they were clutching huge piles of paper correspondence from the Equitable.
Seeing that I was a journalist I would often be buttonholed and told tale after tale of retirement dreams dashed. At the time, I admit, I thought there was little to be done for these people. They had been wronged for sure but they had also invested, and as we all know in investment what goes up can go down. Your money is never truly 100 per cent safe, even with the world's oldest mutual insurer.
However, I hadn't accounted for Ann Abraham, the parliamentary ombudsman who decided that, in effect, the financial authorities and by dint the Government had failed in its duty of care to Equitable policyholders and she ordered compensation to be paid. The Equitable had been allowed to put thousands of people's finances at risk by growing out of its financial crisis.
In fact, in the late 1990s the Equitable's business plan was akin to a pyramid scheme. Yet despite all this Labour ministers stalled and stalled.
In a rather sick way it reminded me of a story about William Cecil, Elizabeth I's chancellor who after the defeat of the Spanish Armada decreed that the victorious English fleet should be kept at sea so that the disease that was rife aboard would kill off more sailors, saving the exchequer the expense of paying their wages.
The ironic thing is that that by delaying and delaying doing what was right, the Government now has to find the money in the middle of a period of almost unprecedented austerity. Back in 2004 when the ombudsman started to investigate how the Government had regulated the Equitable, the money could have been easily found. After all, it represented a fraction of what was being wasted on such bright spark ideas as ID cards and the NHS computer system. Now it's an expense that will directly lead to the loss of military, nursing and policing jobs.
Of course, the money as promised doesn't really go anywhere near covering the true cost to the policyholders of the Equitable Life scandal – not just for the loss on their investments but also in terms of time and the emotional stress. But those in receipt of compensation can at least be grateful that they survived long enough to out last the delaying tactics of Her Majesty's Government.
Stagflation unlikely? It's already here
Stagflation – where you get rising prices and no growth – is according to the Bank of England's Adam Posen "unlikely" to happen in the UK.
Mr Posen's thesis is that the good work of the Monetary Policy Committee (of which Mr Posen is a member) combined with wages being under control will prevent prices from escalating while productivity growth should feed through into more buoyant economic numbers.
Unfortunately, what Mr Posen doesn't seem to cotton on to is that, instead of stagflation being unlikely, we are actually living through it right now. Anyone who has been to the supermarket or petrol station will be able to tell you how much more expensive the cost of living to ordinary people – rather than economists – actually is, while at the same time the economy, while not in recession , is spluttering along. Whereas those relying on their savings are earning next to nothing with interest rates being kept artificially low.
Mr Posen says he is still more worried about a 1930s style deflation cycle. We are in a stagflation scenario now and the attitude of Mr Posen and his other colleagues on the MPC is incredibly complacent.
Act now on Budget hint on pension tax relief
As I have suggested before, the post-election austerity Budget is just a foretaste for worse to come. The so-called structural deficit is likely to prove even more difficult than was set out by the coalition.
With growth understandably sluggish, it would be a mistake at this time to raise direct taxation from individuals. Further cuts to the public sector above and beyond what has been set out risks sparking an Ireland-style undermining of confidence in the Government's programme. But the reality the Government's figures won't stack up.
Ironically, the travails of the Pigs make the UK look like a bit of a haven – we can borrow at a hefty 2 per cent interest rate below Spain at present – which should allow the Government to borrow more than set out in the Budget.
However, extra billions are going to have to be found next year. One option which was muted in the last Budget and seems to be gaining traction again in the Treasury is to get rid of higher rate tax relief on pensions. Now, in principle, I agree with this as it is simply a massive tax break for the rich in our society. About four-fifths of tax relief in pensions in this country goes to the top 10 per cent of contributors; it's as unfair as private sector people being asked to sign a blank cheque for the public sector pensions.
What I'd much prefer is flat-rate tax relief for everyone – say about 27p or 28p in the pound on all pension contributions, thereby boosting incentives to save among the millions of Britons who aren't putting enough away at present.
But in the real world, and with coffers running dry, the Treasury is much more likely simply to scrap top-rate tax relief without any redistribution to basic-rate pension savers, and that would be a backward and damaging step.
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