THE government has ruled out compensating policy-holders of troubled mutual Equitable Life after the Penrose Report found the society was the "author of its own misfortunes".

Financial Secretary to the Treasury Ruth Kelly said the report by Scottish judge Lord Penrose did not find that the losses suffered by policy-holders were as the result of the regulatory system.

But the report did say the system had "failed policy-holders", was not overseen or kept up to date, and operated in an "ineffective manner".

Lord Penrose's most stinging criticisms were reserved for the society's board, which he said failed to get "fully to grips" with the financial situation it faced, while the collective skills of its members were "inadequate for the task".

Lord Penrose said there was a culture of "manipulation and concealment" on the part of some of the society's senior management, while its executive management failed to keep the board fully informed about the state of the company's finances.

He added that non-executive directors were wholly dependent on actuarial input from Roy Ranson, who was for a time both chief executive and appointed actuary, but they were largely incapable of exercising any influence on the actuarial management of the society. He added that Mr Ranson did not inform the board about several key management decisions and the business risks inherent in the general actuarial management of Equitable.

As a result, the board's understanding of the annuity guarantee issue, which related to liabilities from policies which guaranteed people a retirement income, was at best limited until the autumn of 1997.

Lord Penrose found that the society's problems stemmed from the over-allocation of assets in its with-profits fund as bonuses.

During the 1980s the society paid out competitive bonuses on its policies in a bid to attract new business.

But it funded these pay-outs through cutting back on its general resources, until by 1990 the aggregate policy values were "significantly higher" than the assets the society had available.

It also failed to reserve the terminal bonuses paid at the end of an investment term on a with-profits policy, taking the view that it did not need to do so, as they were not guaranteed.

Lord Penrose found that the excessive valuations of policy values over assets continued until the end of 2000, when policies were over-valued by around £3 billion, around £1.8 billion of which had already been lost to people moving policies away from the society.

This rose to £4.5 billion once the £1.5 billion liability, which Equitable had to its guaranteed annuity rate policy-holders (GARs) was included.