The UK government has formally apologised to over a million Equitable Life policyholders for failures spanning over a decade, which effectively wiped out a significant portion of life savings due to the collapse of Europe's largest mutual.

A very large number of Equitable's customers are now bracing for further disappointment, with the government having promised only limited compensation for those customers who have been "disproportionately affected".

Chief secretary of the treasury Yvette Cooper told the UK Parliament that she wished to apologise to policyholders "on behalf of the public bodies and successive governments responsible for the regulation of Equitable Life between 1990 and 2001, for the maladministration we believe has taken place."

Cooper said that the government now intends to set up a scheme that would make ex-gratia payments to customers who were "disproportionately affected." She said that the former Lord Justice of the court of appeal, Sir John Chadwick would aid in deciding the size of the payouts to policyholders.

The government, Cooper said, would first prioritise those customers who were the hardest hit, while warning that it could be over two and a half years before payments are complete.

Equitable Life practically collapsed after being forced to shut for new business in 2000, with the UK Parliament's House of Lords ruling that it needed to honour its financial obligations to customers holding guaranteed annuity policies. That closure left Europe's oldest mutual society with liabilities of £1.5 billion, and also caused a collapse in the value of policies.

Reports said that over a million policyholders lost an estimated £4 billion, of whom hundreds have since died. Reports also talked of several policyholders having commited suicide in the wake of Equitable's near death. Campaigners were reported as saying that around 15 victims of the collapse were dying each day, without receiving what was owed to them.

After an eight-year campaign by action groups and policyholders, two damning reports were authored about the Equitable Life debacle. Last July, parliamentary ombudsman Ann Abraham said three government departments presided over a "decade of failure" at Equitable Life, saying that regulators including the Financial Services Authority completely failed to identify the early warning signs. Thereafter, she demanded an apology from the government, and asked for a compensation fund to be set up within six months.

Now, Cooper's apology admitted to the fact that regulatory returns filed by Equitable between 1990 and 1996 should have rung the alarm bells, but were not noticed, while accepting that a form of insurance contract used by Equitable to justify its financial strength should have been scrutinised by the FSA.

Cooper said that it was virtually impossible to figure out exactly how to compensate all policyholders, besides the fact that doing so would set an undesirable precedent. Therefore, the government would not pay universal compensation, opting instead for ex-gratia payments to the "disproportionately affected." That also means that some policyholders would not get anything at all.

Equitable had greatly overestimated the value of its investments, which caused its near demise when courts ordered it to provision £1.5 billion to cover guaranteed annuity rates that had been sold to 90,000 members during the 1970s and 1980s.

Reports said that almost 32,000 policyholders died since the society closed to new business, with around a 100 passing away each week. Further delaying the compensation payment reduces the potential cost to the government.