Select Committee on Treasury Minutes of Evidence


Examination of witnesses (Questions 140 - 157)

THURSDAY 15 FEBRUARY 2001

MR JOHN SCLATER, CVO, MR PETER MARTIN AND MR CHRIS HEADDON

  140. Never?
  (Mr Sclater) That matter was not discussed, as I recall, on those occasions.

  141. It is true, is it not, Mr Sclater, that the negotiating position of the board and potentially the position of the policyholders, might have been very much better in that period between 1993 and 1998 than it now is?
  (Mr Sclater) Between 1993 and 1998 we had absolutely no idea that the events that subsequently unfolded in the House of Lords were remotely on the cards.

  142. Mr Sclater, my question was whether the position of the board and the policyholders is weaker now than it was between 1993 and 1998, when you were receiving these informal approaches?
  (Mr Sclater) Clearly the judgment of the House of Lords posed a very heavy burden on the Society so it would be, as was recently demonstrated, much harder to sell the Society post the House of Lords judgment than would have been the case before.

  143. But is the position of the board and the policyholders weaker now than it would have been had you pursued these approaches between 1993 and 1998?
  (Mr Sclater) I just said that our position was seriously—

  144. I am trying to get you to say "Yes"?
  (Mr Sclater) I said our position was seriously weakened by the House of Lords judgment in July 2000.
  (Mr Martin) Mr Cousins, I would like to encourage my Chairman to say "No" for this reason: in those years, and for many years previously, mutuality was very much an article of faith with us and, accordingly, we resisted those approaches principally because we were determined, as we thought it was in the interests of our members, to remain a mutual, and all those approaches would have involved demutualisation.

  145. Were you the source of the advice to the board on these occasions?
  (Mr Martin) Certainly not. It was a matter of discussion between us.

  146. It was a matter of discussion but you were not particularly the source of advice on that?
  (Mr Martin) Certainly not. I have never been the Society's solicitor; I happen to be a solicitor on the board. These matters were entirely a matter for discussion of the board and what we were determined to do, to the best of our ability, was to remain a mutual.

  147. Speaking as a solicitor who "happened to be on the board", in retrospect do you not think it is a bit unfortunate that, in the context of these discussions with people making informal approaches, in that period the issue of guaranteed annuity liabilities and how they might turn up was never ever raised?
  (Mr Martin) Let's suppose—

  148. Was it unfortunate or not?
  (Mr Martin) I do not think it was. Let's suppose that John Sclater had reported to us a very attractive sounding approach and we had decided to take it up in a serious way. We would have put ourselves into the hands of investment bankers and also the bidder to discuss the kind of deal that might be made and, in the course of that, there would have been the fullest disclosure of all these matters. A decision would then have been taken in the light of that disclosure.

  149. Mr Martin, why is it that not all the policyholders have a vote on the Halifax deal?
  (Mr Martin) There are two reasons really, Mr Cousins. The first is it was a matter of timing. Our sales force in particular but the administrative office as well in Aylesbury was likely to have been a wasting asset if we had not very quickly been able to secure a deal with the Halifax because the uncertainty affected our people very badly, so we were under great pressure. If we had gone to the members that would have taken weeks and possibly longer, and there might have been a continuing uncertainty and the disappearance of the sales force which it was important for us to be able to sell. We had the powers under the articles, we believed as a board of directors, to deal with that matter ourselves; we took the most comprehensive legal advice given the circumstances we were in; we were advised that we were under an even greater duty to act in the best interests of the members on our own, given the circumstances. That is why we made that deal with the Halifax which has been wrongly described, I think, as "hasty".

Sir Michael Spicer

  150. Can I just pursue this question of the future for the with-profits policyholders if the Halifax deal goes through? As I understand it, there is only a certain £500 million to be put into the with-profits funds if it does go ahead, and there will be no restoration of the lost seven months of bonuses. In those circumstances, what is the incentive for people to stay with the Society?
  (Mr Headdon) I think it is the features I referred to in response to quite an early question. There is new money coming into the fund; it will help to strengthen it and improve investment freedom and, compared to a closed fund situation, we have secured cost-effective administration for policyholders going forward, whereas closed funds typically begin to suffer rising costs.

  151. But if everything was hunky dory, as I think you are implying, you would not have needed to have raised the penalty? You have doubled the penalty for leaving the Society.
  (Mr Headdon) The adjustment we made to surrender terms was made back in December to ensure the principle that I described earlier—that those leaving the fund should take away a fair amount but should not prejudice the interests of those continuing.

  152. There are two reasons why you might have raised the penalty; one is to prevent people leaving—is that the main reason?
  (Mr Headdon) The main reason is to ensure that the funds that they take away do not prejudice the interests of continuing members. It is to have the matter at a fair level. A significant reason for the penalty was the fact that the stock market fell by 8 per cent over the last year.

  153. So is your present judgment that doubling the penalty has, in fact, achieved the second objective, which was to enable the Society to stay afloat?
  (Mr Headdon) Well, the level of withdrawals has not been at a level which would have threatened the Society one way or the other. I believe it has achieved the objective for those that have wanted to go that they have received a fair payment but one that has not left the remaining policyholders in a weaker position than if those people had not surrendered.

  154. But are you quite clear that, with the present penalty level, if there was to be a mass exodus, the resulting situation because of the penalties that they would leave behind would keep the Society afloat? Are you absolutely certain about that?
  (Mr Headdon) We believe the adjustment is correct for current financial conditions.

  155. But it must be just a matter of mathematics, must it not? It cannot be a matter of uncertainty?
  (Mr Headdon) As I say, we believe it is at the right level for current conditions. In different economic conditions, it could need to be higher or lower to achieve that same result.

  156. What sort of different economic conditions?
  (Mr Headdon) Principally significant falls in asset values.

  157. Equity asset values?
  (Mr Headdon) Yes.

  Chairman: Thank you very much for the way you have answered our questions.





 
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