Ministers should set up a compensation fund for policy holders in the Equitable Life, so say the Parliamentary Ombudsman. The life insurance company almost fell apart in 2000 after it was ordered by the high court to fulfil financial promises which it could not afford. Over a million of its policyholders were left with reduced retirement saving.

Ann Abraham believes the government should apologise for a “decade of regulatory failure” and identified 10 instances of mal-administration by its departments.

Ms Abraham said that the various regulators, such as the Department of Trade and Industry, the Governments Actuary’s Department, and the Financial Services Authority, simply failed to use the powers available to them to protect the interests of the Equitable’s policyholders.

She said that the regulators failed to verify the solvency of the company and make sure the information that was in the public domain was reliable.

“Those responsible for the prudential regulation of Equitable Life failed to do so throughout the period covered in my report,” Ms Abraham said.

“I have alerted Parliament to the injustice which I have found in this case resulted from serial maladministration on the part of the former Department of Trade and Industry, the Government Actuary’s Department and the Financial Services Authority,” she added.

The Ombudsman did not say exactly how many people might be eligible for compensation, or how much they should receive.

“The aim of such a scheme should be to put those people who have suffered a relative loss back into the position that they would have been in had maladministration not occurred,” she said.

Ms Abraham said that the Equitable’s plight had unique features and said her report did not suggest that the conclusions drawn could be applied more widely.

The current executives of the Equitable welcomed the report. The oldest mutually-owned life insurance firm in the world, they were appointed to replace the old management in the early years of this decade.

Equitable chairman Vanni Treves said the Ombudsman’s conclusions were damning. “From a policyholder point of view we think this is as formidable a report as the Ombudsman could possibly have produced,” he said.

“We could not really have asked for more. Her reasoning and recommendations are beyond argument.”

The board also announced it would assist in a scheme to compensate its policyholders. The Ombudsman’s report did not look into what role Equitable Life executives played in its near collapse, a role which was examined in a 2004 report.

Mr Treves said the firm had already taken responsibility for its failings. “We have done the right thing and paid out to all these who had a debt,” he said. “We’ve paid up for that responsibility. The government should now pay up.”

However, it will be some months before the government responds to the proposal for a compensation scheme.

“The government recognises that the Ombudsman’s report raises issues of concern for the parties involved,” said a Treasury spokesman.

“The length and complexity of the report mean it would be inappropriate to comment before giving it our full and careful consideration. We expect to provide a full response to the House in the autumn,” he added.

Campaigners welcomed the findings of the report, saying that it was a “devastating indictment” of the performance of regulators over many years.

Paul Braithwaite, from the Equitable Members Action Group (EMAG) said, “The UK regulators were fully aware for a decade that Equitable Life was effectively insolvent, yet they allowed the company to suck in another £20bn in pension contributions from more than a million new investors.”

The Ombudsman says that in the run up to the Equitable’s financial crisis, the society’s regulators failed to check properly on its financial position and allowed it to dress up its finances to the tune of £2.7bn. As such they allowed the society to continue giving misleading financial information to its policyholders.

Then, “on an unsound basis”, they allowed it to stay open for business even though it was in a “dire financial position”. As such, anyone investing in an Equitable policy after 1990 was misled and lost the chance to put their money elsewhere.

Ms Abraham also found that, after the Equitable shut to new business in December 2000, the work of the regulators was ineffective. She said they misled policyholders and the public when they claimed, falsely, that the society had always been solvent.

Exposed in an earlier report by Lord Penrose, published in 2004, Equitable’s problems lay in the policy of its executives who had, for more than a decade, told policyholders that their investments were worth far more than was actually the case. The crisis in the society’s finances were crystallised when it went to the High Court in 1999 for permission to continue ignoring promises to make minimum payouts to people who had invested in so-called “guaranteed annuity rate” pension policies.

The eventual loss of the court case in 2000 meant that society was immediately short of the £1.5bn necessary to make good the promises it had made when it first sold those policies, in some cases as far back as the 1960s, until 1988. Attempts to find a buyer for the society failed and it closed to new business in December 2000. It has been winding down ever since, with most of the business now having been sold off to other insurers.

Most policyholders who were still with the society by 2001 found its near collapse a disastrous experience. Those still saving had to face their money being invested in an ultra-safe but very low return investment strategy, or see the value of their polices slashed if they moved their money elsewhere.

Those whose money continued to be invested in with-profits policies had the value of their investments slashed anyway, because there simply was not enough money to go round. This was an approach that was applied not only to those still saving but even to some of those whose pension policies were already in payment.

Ann Abraham pointed out that one decision by the society’s new management in 2001, to impose an across-the-board cut in policy values, cost society members £4bn and should have been fairer.