Who should pay the Equitable pensioners’ compensation?
The MPs on the Public Administration select committee have now added their calls for Equitable Life pensioners to be compensated, but who should pay?
Equitable was a mutual life office writing guaranteed annuity policies over many years. By the 1990s it was becoming clear it hadn’t the funds to meet its obligations and it closed to new business in 2000.
Over the past decade various reports have sympathised with policyholders who face pensions of half their expected level but no recompense has been paid. The government ignored a call for compensation by the ombudsman and belatedly appointed a judge to decide who will decide during 2009 who should receive ex-gratia payments. The MPs brand that “shabby, constitutionally dubious and procedurally improper.”
But who should pay this compensation? The poor old taxpayer again? We are the compensator of last resort but governments did not cause Equitable to promise more than it could pay and ignore the warnings. Nor should a regulator have to pay up, any more than crime-prevention police should compensate people who are burgled.
Further, making people who do not even have pension provisions pay for those who do is fundamentally unfair.
The fault is with the company, but a mutual has no rich shareholders to tap. Claims against the auditors and directors are insufficient to fill the funding gap.
So why not make the policyholders pay for choosing such a risky investment? That is normally a good argument; people who put all their money in Icelandic banks or with Bernard Madoff should suffer from their own choice. Bailing out the Icelandic savers has set a bad precedent unfortunately.
But Equitable customers had no reason to believe they were taking high risks. It was an old and apparently boring company that attracted cautious investors. It had a diversified portfolio of blue-chips. For once, policyholders were not being rash or greedy. They really are innocent.
What about a levy on all pension funds or companies? That would be unfair on companies that saw the risk of offering over-generous policies and shunned them. The good should not have to fund the bad.
But a levy on all other pension policyholders might be fair. The point is that Equitable’s customers no more thought they were taking a risk than any other customers did. The public did not shun the company because it saw the danger. It happened to be Equitable that went wrong, but it could have happened to any policyholder – so every policyholder should contribute, if only because it might be them next.
A levy on all policyholders is, in effect, a levy on all pension companies but it would remind the public who has to pay when money is lost. In practice however, it will be us the taxpayer that forks out on Equitable, just as it is for everything else.
Compared with the cost of rescuing banks it will be peanuts, and if we have to pay, let’s do the decent thing and pay out in full promptly rather than prevaricate further.
