The information received to date is unconvincing and raises serious questions about the company's solvency

Government memo, 1998

Equitable put itself up for sale in July after the High Court ruled it must honour pension guarantees totalling about �1.5bn - something the company on its own can not afford.

As many as one million people are thought to have been hit by the Equitable's troubles and demands for compensation are growing.

Chance of a sale

Many policy holders want to know why the Equitable Life was allowed to continue trading until now.

They are likely to be further angered by claims that the government and regulators were aware of the Equitable's problems since November 1998.

Liberal Democrat Trade and Industry spokesman Dr Vincent Cable quoted from a government memo in a House of Commons debate.

"Our primary concern is over the company's ability to reserve adequately for these ( annuity rate) guarantees. The information received to date is unconvincing, and raises serious questions about the company's solvency," wrote a member of the government's insurance directorate in a memo to the FSA.

The FSA's Michael Foot has said the FSA agreed to allow the Equitable to continue trading because this raised the chances of there being a sale, which would have been in the interest of policyholders.

Guaranteed income

The Equitable, founded in 1762, remains solvent and says it will continue to pay out benefits and accept premiums under existing policies.

The court battle focused on Guaranteed Annuity Rate (GAR) policies sold by Equitable Life, which allowed policyholders to opt for minimum pension payouts and land a bonus when their policy matured.

About 90,000 Equitable Life policyholders out of a total of 500,000 have GAR policies.

They bought products with a guaranteed minimum annuity - typically �12,500 a year for �100,000 in pension savings.

The guarantees were made by many life insurers, but longer life expectancy and lower interest rates mean they are now much more expensive to honour than originally expected.

Court defeats

A shortfall in funding led Equitable to ask the GAR policyholders to accept a cut in their bonuses or give up their right to guaranteed annuity rates.

This led to an outcry among policyholders who launched the legal action alleging breach of contract and abuse of discretionary powers by the society's board.

Those most likely to be hit by the crisis are those holding with-profits policies as the Equitable has to change its investment strategy.

It says policyholders who were making regular contributions could continue to do so, although with-profits policyholders should consider the impact of the likely lower investment returns on their savings over time.