Equitable Life policyholders will have to wait until the middle of next year for compensation, which could be as little as £400m.
This figure is way off the £5bn the Equitable Life Members Action Group has been campaigning for on behalf of 1.5 million savers after the UK's oldest insurer collapsed over a decade ago.
Mark Hoban, financial secretary to the Treasury, announced today the compensation amount could be between £400m and £500m with payments likely to start in the middle of next year.
This figure has been calculated using Sir John Chadwick's report into the crisis, published today, and other work by actuarial firm Towers Watson.
The reports found policyholders' relative loss, comparing what their policies are worth and what they would have been worth at a better run company, were £4bn-£4.8bn.
However, Chadwick recommended compensation be capped at policyholders' absolute loss of what they might have been worth had the firm not collapsed, which is estimated at £2.3bn-£3bn.
Policyholders would only receive 25% of this capped loss but this would be reduced further because some actually gained from the maladministration of Equitable.
The report will be used to help the Government determine the level of payouts to policyholders, which will be announced in the Autumn Spending Review on 20 October.
Hoban says: "The Government is also aware that some of his (Chadwick's) findings are contentious and because of this, and the complexity of the methodology, it will reflect on his report and will listen to representations by interested parties ahead of the Autumn Spending Review.
"In addition, as the Ombudsman noted in her report, it is appropriate to consider the impact of any scheme on the public purse.
"The scheme will be a significant spending commitment for this Government and cannot be considered in isolation from the other spending decisions that it will need to make over the coming months, and what is affordable in that context."
The Government also announced today an Independent Commission will work out how the payments will be made to policyholders. However, it is unlikely to report until the end of January 2011.
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