Millions in line for compensation as government faces blame over collapse of Equitable Life

A Million savers hit by the Equitable Life scandal are to get fresh hope of compensation next week when a damning report is expected to blame the Government.

The investigation by Parliamentary Ombudsman Ann Abraham is likely to accuse the Treasury and financial regulators of maladministration.

They face being held responsible for not spotting problems at the insurance giant, which almost collapsed in 2000.

This would open the door to claims from policyholders who saw billions wiped off the value of retirement pots.

Estimates on the potential cost to the taxpayer are as high as £4billion.

The problems date back to 2000 when 238-year-old Equitable, then a £26billion firm, was forced to close to new investors.

It was unable to pay policyholders guaranteed bonuses when interest rates fell and the promises became unsustainable.

When Law Lords ruled it had to honour the deals, sold to more than 90,000 savers from the Fifties to the Eighties, it blew a £1.5billion hole in the firm's finances, forcing it to slash payouts to other policyholders and sell shares in favour of less risky investments.

The move has left a million facing smaller pensions or working years longer to make up the shortfall.

They have been campaigning for compensation, claiming watchdogs were 'asleep at the wheel' when they should have known about the dent in the company's finances.

The ombudsman's office refused to discuss the report's contents yesterday but confirmed the findings of the four-year probe could be published on Wednesday or Thursday.

However, sources close to the inquiry indicate that a draft shows the Treasury, Financial Services Authority and Government Actuary's Department face criticism.

Miss Abraham is expected to recommend that victims, many of whom lost at least half their savings and pensions, are compensated.

Jeweller Mike Chatwin, 63, wants more than £100,000.

He took out a guaranteed annuity rate pension in the Seventies and built up more than £300,000.

But poor investment performance and losing his guarantee left him with a pension pot of  £200,000.

He had to abandon plans to retire early because of the deficit. He said: 'It's difficult if you are nearing retirement because you don't have many years to make up the losses.'

Full details of the report are secret and the Government could escape total blame. But if ministers dispute the findings and take the matter to judicial review, an outcome for savers could be further delayed.

The Treasury will be keen to limit payouts following the Northern Rock bail-out and the £2.7billion to compensate those hit by the abolition of the 10p starting rate of tax.

Paul Braithwaite, of the Equitable Members Action Group, said: 'We expect Gordon Brown to fight to avoid paying a penny.'

Campaigner Ros Altmann, a former-Government pensions adviser, said: 'If the Government is found responsible for the losses, it should comply with what the ombudsman says as quickly as possible rather than make people wait more years.

'If the Government can find billions of pounds to bail out savers in Northern Rock  -  who should have been aware of the compensation terms if that company failed - then how can it deny treating fairly people who have suffered losses from failure of the Government itself?'

A Government- commissioned report into Equitable by Lord Penrose in 2004 said watchdogs 'failed policyholders'.

He added that the Department for Trade and Industry and the Treasury, which regulated Equitable from 1998 to 1999, were 'ill-equipped', and the Government Actuary's Department, responsible before 1998, was ' complacent'.

But he said the firm was 'author of its own misfortunes', allowing the Government to avoid compensation.

However, in 2006 the European Parliament ruled that the Government should assume responsibility.

Equitable sold most of its operations, transferring many fixed pensions to Canada Life last February and its £1.7billion with-profits annuities to Prudential in December.