Budget: Equitable Life compensation set at £1.5 billion

Spending review in full

The sum is three times higher than the 400 million to 500 million that former Appeal Court judge Sir John Chadwick recommended that policyholders should receive.

But it is well down on the 4.8 billion that it is estimated policyholders have lost, compared with what they would have got if they had invested their money with another life insurer.

The first payments should be made by the middle of next year, with 1 billion of the compensation due to be paid out in the first three years.

The Government also said 620 million of the total would be used to cover the losses suffered by the 37,000 with-profits annuitants in full.

This group of policyholders, dubbed the trapped annuitants, have been hit hardest by the problems at the society, as unlike other members they do not have the option to move their investment elsewhere.

They have seen the value of the retirement income provided by their annuities more than half in some cases, while they also tend to be the oldest policyholders, with more than half of the losses suffered by people aged 75 or over.

With-profits annuitants will receive their compensation through regular annual payments for the rest of their life, effectively replacing the income they have lost.

Chancellor George Osborne said the Government accepted in full the Parliamentary Ombudsman's report, in which she found 10 instances of maladministration by regulators and Whitehall officials in relation to Equitable in the period leading up to December 2001.

He said the Government also thought compensation should be based on the relative losses policyholders had made as a result of being with Equitable, compared with if they had been with another institution, not the actual amount by which their policy values had been cut.

The Government estimates the figure for relative loss for people who joined the society from the end of 1992 to be 4.3 billion, within the 4 billion to 4.8 billion range estimated by accountants Towers Watson.

But Mr Osborne added that, as suggested by the Parliamentary Ombudsman, a balance had to be struck between "being fair to policyholders and fair to taxpayers".

Financial Secretary to the Treasury Mark Hoban said: "We shall be paying in full the category of policyholders who suffered most from their losses.

"For other policyholders, we shall be providing a level of funding for the payment scheme that strikes a fair balance between the interests of policyholders and those of taxpayers in the current difficult financial circumstances."