Stay and sue, or cash in and go: it's your move at Equitable Life

After the Penrose report, Melanie Bien weighs up the options for policyholders

Equitable Life investors received a final blow last week after two years of waiting for some recompense for the losses they incurred when the company nearly collapsed in 2001. The Treasury published Lord Penrose's report into the company's downfall, and ruled out compensation for the thousands of policyholders who have lost much of their retirement savings. Below, I consider the most pressing questions now facing Equitable policyholders.

Equitable Life investors received a final blow last week after two years of waiting for some recompense for the losses they incurred when the company nearly collapsed in 2001. The Treasury published Lord Penrose's report into the company's downfall, and ruled out compensation for the thousands of policyholders who have lost much of their retirement savings. Below, I consider the most pressing questions now facing Equitable policyholders.

Who is to blame?

Lord Penrose was commissioned to examine the events that led to Equitable's near collapse; he was not given leave to apportion blame or assess whether compensation was due.

He concludes that Roy Ranson, the chief executive and actuary of the company between 1991 and 1997, and the rest of the board are primarily to blame. Secondary organisations such as the Government Actuary's Department and Equitable's auditors, Ernst & Young, may also have failed to anticipate the problems.

Will I get compensation?

The current Equitable Life board is calling on Lord Penrose to join forces with the Parliamentary Ombudsman to decide whether policyholders should be compensated in the light of Lord Penrose's view that the "regulatory system has failed policyholders".

But the problem is that the report emphasises the failure of the regulatory system as a whole, making it difficult to apply blame to one organisation. Because of this, it is hard to see how any claim for compensation can be made against the Government.

Even if policyholders club together and try to sue the Government, the chances of success are slim. Any legal action is likely to drag on for years and cost policyholders a fortune.

What about suing the former directors?

Such litigation is unlikely to yield enough funds to make a real change to policyholders' circumstances. Tom McPhail, the head of pensions research at independent financial adviser (IFA) Hargreaves Lansdown, believes that investors must pin their hopes solely on action against Ernst & Young.

Can things get any worse?

Unfortunately, the situation may deteriorate if more undisclosed liabilities are identified or in the event of legal action against Equitable by former policyholders.

What should Equitable policyholders do next?

The first thing they should do, advises Graeme Currie, a director at IFA Alan Steel Asset Management, is to write to their MPs saying they won't vote for them again unless the plight of Equitable policyholders is put before Tony Blair. "If MPs are bombarded with letters, they'll have to take some action," says Mr Currie. "Equitable Life is a far bigger scandal than endowment mis-selling because the company was held up to be as safe as the Bank of England - it is a black-and-white case of mis-selling."

Their next step should be to get some independent financial advice. As a general rule, if you can exit without penalty, it makes sense to do so.

Even if you can't, it may still be worth swallowing the market value reduction (MVR) on your investment. Hargreaves Lansdown calculates that, given an assumed return on the Equitable fund of 3.5 per cent and an MVR of 11.5 per cent, it will take less than six years of 6 per cent investment growth elsewhere to make up for the cost of the MVR.

If you stay put, you may get an uplift through compensation or combined legal action. But further losses are a possibility.

What next for with-profits?

The prospects don't look good. If you have a with-profits policy, you should review your investments. Alan Steel Asset Management's Mr Currie warns: "Insurers will have to build up reserves, so policyholders won't get bonuses anywhere near what they got in the past."

If you decide to shift out of with-profits, where you move your money will depend on your attitude to risk. "If you are going to invest for the long term, you should be in equity markets," advises Mr Currie, "and in the type of fund that doesn't limit the upside, as with-profits do."