The UK government has confirmed a £1.5 billion (€1.7 billion) compensation package for policyholders of Equitable Life, with the most generous payouts reserved for thousands of elderly with-profits pension investors.

Chancellor George Osborne said it was “time to right the wrong to many, many thousands of people” – including 6,500 in Ireland – who were “innocent victims of a terrible failure of regulation”, as he announced details of the Equitable Life Payments Scheme.

The £1.5bn figure was well below the £4 billion to £5 billion hoped for by some policyholders. But Mr Osborne described it as a “fair amount” which took into account the interests of policyholders as well as taxpayers.

Equitable Life, Britain’s oldest mutual insurer, nearly collapsed after the House of Lords ruled in 2000 that it should be forced to honour tens of thousands of unprofitable policies sold in the 1980s, a decision which left it with a £1.5 billion liability.

The insurer closed to new business and sold its assets to Halifax in 2001, resulting in a long-running campaign by policyholders for compensation.

Under the payments scheme £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, called the “trapped” with-profits 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.

With-profits annuitants will receive their compensation through regular annual payments for the rest of their life, effectively replacing the income they have lost. – Copyright The Financial Times Limited 2010