The Government has rejected calls to compensate people who lost millions of pounds in troubled mutual Equitable Life.

Almost 800,000 people lost money after Equitable made financial promises it could not keep to a large group of its own policyholders.

Policyholders had pinned their hopes on the findings of the Penrose Report into what went wrong at the society, published yesterday.

But Financial Secretary to the Treasury Ruth Kelly made it clear the Government did not believe the case for compensation had been fully proved.

The world's oldest mutual life insurer had to cut the pensions and retirement savings of its policyholders to stay afloat.

Scottish judge Lord Penrose criticised the Treasury, DTI and Government Actuary's Department over their handling of the mutual in his report, as well as several of Equitable's former directors.

Miss Kelly said problems went unnoticed because of the 'hands-off' regulatory framework put in place by the Conservatives, rather than a failure by the Government to enforce the rules. She said Equitable's former directors failed to reveal the true state of the society's finances.

The Treasury told policyholders who had lost money they should check letters they received from Equitable to assess whether they had proof that they were deliberately misled and submit them to the Serious Fraud Office (SFO) if they did.

Equitable's crisis began to unfold after it emerged it did not have sufficient funds to honour guaranteed annuity policies (GARs). The guarantees were made by many life insurers but longer life expectancy and lower interest rates mean they are now much more expensive to honour than had been expected.

A shortfall in funding led Equitable to ask its GAR policyholders to accept a cut in bonuses or give up their right to guaranteed annuity rates.

GAR policyholders took the Equitable to court and won, forcing the insurer to close to new business in December 2000.

Equitable was regulated by the Department of Trade and Industry until 1998, when the Treasury took over for a year before handing the responsibility over to the Financial Services Authority.

The SFO, which was asked to look into issues raised in the report by the Government, has yet to announce whether it will launch a formal investigation into Equitable.

Equitable chief executive Charles Thomson previously said legal hurdles the society would have to clear to pursue the Government were high.