Equitable Life policyholders will find out how much money is in the government’s compensation scheme in three months time, with payments scheduled to begin in the middle of 2011.

Treasury minister Mark Hoban confirmed this morning that 1.5 million savers who lost out when Equitable Life closed to new business in 2000 and subsequently collapsed would be compensated for their loss.

The government will reveal how much money is in the kitty for the former policyholders in the autumn spending review on 20 October. However, the Treasury warns that ‘the government will need to consider what is affordable in light of the fiscal position and other spending pressures’.

Today’s announcement comes after a final report by Sir John Chadwick in relation to how government maladministration led to Equitable Life savers losing vast sums of money, and how these losses can be quantified.

Hoban comments: ‘For almost a decade, Equitable Life policyholders have fought for a just resolution in relation to losses suffered as a result of regulatory failure.

‘Unlike the previous government, we are committed to compensating these policyholders.’

Chadwick said the investors' absolute loss should be between £2.3 billion and £3 billion, but the compensation should be capped for each policyholder at between 20 and 25 per cent of that. So after further downward adjustments that would have implied a total payout of between £400 million and £500 million.

But he also said the relative loss suffered by policyholders, compared to what would have happened if they had invested in comparable pension policies, was in fact between £4 billion and £4.8 billion.

Chris Wiscarson, Equitable Life’s chief executive, welcomes the report. 'More has been achieved in eight weeks than in the previous eight years. The timetable, the transparency and the total amount stated for relative loss of over £4 billion at last represent a proper basis for doing right by Equitable policyholders,' he says.

However, Laith Khalaf, pensions analyst at  Hargreaves Lansdown, says the amount of around £450 million is far lower than the £1 billion figure that the Equitable Members Action Group was expecting Chadwick to recommend.

‘Equitable investors are probably now expecting the worst without bothering to hope for the best,' he says. 'It will be welcome news that the compensation scheme is finally being set up, but the amount of compensation paid looks likely to disappoint.’

Hoban says the government will now reflect on Chadwick's report and listen to interested parties ahead of the autumn spending review.

An independent commission has been set up to advise on how best to allocate payments. The government says it will not make interim payments as it believes it will ‘introduce more complexity and could delay the set up of the full scheme’.

There will also be no means testing.

Policyholders do not need to do anything at this stage until the commission reports back on payments, which is expected early next year.

The government has also said that compensation may be payable to the descendants of policyholders who have died.