It is now in the public interest to have a wider, independent review

Ruth Kelly, MP

"It is important that lessons are learnt from what has happened - this inquiry will allow us to do that," said Ruth Kelly, economic secretary to the Treasury.

The inquiry will be headed by Lord Penrose, who trained as a chartered accountant and who has spent the past three years working as a judge in Scotland, dealing with specialist commercial matters.

Lord Penrose will be given powers to compel the production of information or require the attendance of witnesses, if the Equitable does not cooperate fully and frankly with the inquiry.

But the government has also stressed that it will not advise or financially compensate the pensioners involved.

Going back decades

The Treasury's statement indicated that the inquiry could probe the firm's activities as far back as the 1950s, when it began selling the guaranteed annuity policies that brought the firm to the brink of failure.

Timeline of the scandal

July 2000 Loses appeal in High Court Dec 2000 Closes to new business Dec 2000 FSA starts probe Feb 2001 Halifax steps in July 2001 Slashes policies July 2001 Government announces probe

Members of the Equitable Life have repeatedly called on a full government investigation after complaints that the inquiry by the Financial Services Authority (FSA) watchdog does not go far enough.

The FSA's investigation, which has yet to be officially handed over to the government, only goes as far back as the beginning of 1999.

"The government believes it is now in the public interest to have a wider, independent review that can look back as far as is necessary," said Ms Kelly, adding that the FSA report will be important input into the Lord Penrose inquiry.

Both the society and policy holder action groups welcome the inquiry.

Old problems

Equitable's problems are believed to have started far earlier than 1999.

The generous guarantees Equitable offered on pensions until the late 1980s saddled it with huge unquantifiable costs, leading to fears it will not be able to honour its promises.

The assurer closed its doors to new business at the end of last year.

More recently, concern has arisen that there will be further calls on the Equitable's funds from mis-selling claims.

Policy holders without guarantees argue they did not know when they bought their policies of the existence of the guarantees and the resulting liabilities.

Both groups saw the value of their pension policies cut by 16% last month.

No advice for policy holders

But the government stressed that the inquiry will only look at the circumstances that led to the problems, rather than seeking to advise policy holders on a future course of action.

In the statement announcing the inquiry, the government distances itself from the compromise deal now being debated in the board room of the Equitable Life and the firm's tie up with the Halifax.

And it would be inappropriate for the inquiry to review the decisions taken by the courts, in particular the decision by the House of Lords, said Ms Kelly in a letter to Lord Penrose.

Founded in 1762, the Equitable Life is the UK's oldest life assurer, and once had a strong brand name and an unrivalled reputation.