Examination of witnesses (Questions 120
THURSDAY 15 FEBRUARY 2001
SCLATER, CVO, MR
120. So your advertising was designed to keep
Equitable Life in business, even at a potential risk to policyholders
who would be entering into an uncertain position. As you will
know, many people who do enter into financial policies are not
necessarily people who are very expert and do go and get all the
information. They will listen and look at the advertising. Equitable
Life traditionally had a very good name as a secure institution.
It is not necessarily the case that people would go for other
information than what was in the advertising and what you said
to them. Do you still think it was right to advertise new business
in that way?
(Mr Headdon) I think it is important to say that the
advertising was generic and was intended to encourage people to
come and talk to the Equitable. It was not off-the-page selling.
So everyone would have received subsequent advice from the representatives.
As Mr Sclater has said, during that period people were required
to sign a special statement acknowledging that they were aware
of the particular circumstances of the Society.
121. So you did alert investors to the prevailing
circumstances surrounding Equitable Life?
(Mr Headdon) I think the fact that we were up for
sale and the reasons for that were very widely known. I am sure
at every sale that was a key point of discussion.
122. Did you take the responsibility for ensuring
that every potential investor knew about it?
(Mr Headdon) The representatives were provided with
extensive briefing to answer the whole range of questions that
they were inevitably going to encounter on this issue.
123. They were given briefings to answer questions
but did you ensure that they made sure that potential investors
knew about the positions?
(Mr Headdon) We encouraged them to discuss the matter
fully. Clearly we cannot sit in on every meeting between a representative
and a client, but they were encouraged to discuss the situation
124. Can I move on to the new bids which I think
everyone here is interested in? Why did Equitable not manage to
get a suitor before closing to new business in December, given
that there was a considerable amount of interest?
(Mr Headdon) That is quite a difficult question to
answer because I expect the other organisations involved all had
their own reasons for not ultimately pursuing the transaction
but, from the discussions that I had with the relevant parties,
the view was taken for a whole range of reasons. We are quite
a large organisation: it would have been a major strategic investment
for any acquiring company and people would have weighed up that
investment against the other ways of spending their shareholders'
money. Clearly the disagreement between the groups of policyholders
and the GAR situation would have been a factor in that, but my
understanding is that the decisions ultimately were taken for
a whole range of strategic reasons.
125. What changed between 7 December when the
Prudential withdrew their bid and 5 February when the Halifax
made their bid?
(Mr Headdon) Over the summer period we were trying
for, if you like, a full sale of the business including a demutualisation
because we believed that that would achieve the highest value
and the best outcome for policyholders. In December we effectively
changed tack and said that we were prepared to consider rather
more limited sale transactions and, of course, in the case of
the Halifax, apart from a relatively small part of the business,
what it has mainly bought is the operating side of the business,
and the Society itself continues as a separate legal entity.
126. Mr Headdon, I want to come back to the
reassurance policy for a moment. You told Mr Davey that the circumstances
under which a claim can be made had not yet arisen and when Mr
Cousins pursued Mr Sclater about whether the eventual cost could
be more than £1.5 billion, Mr Sclater I think thought so
but he did not mention any possible capping of the liability because
of the reassurance policy. We have heard that all the suitors
walked away from buying your company. Is it a reasonable surmise
from that that the reassurance policy is worthless?
(Mr Headdon) I do not think it is worthless; it does
protect in certain circumstances but your question is predicated
on the assumption that it was purely the GAR situation that led
suitors to walk away. As I said, I do not believe that is entirely
the case but there could be a range of experience where the cost
would be higher than £1.5 billion before the significant
benefit would be achieved from the reassurance arrangement.
127. What are those circumstances? Please tell
(Mr Headdon) As I have said previously, economic circumstances
where there are very low levels of final bonus being paid and
there is a high take-up of these guaranteed annuities.
128. Does that produce any kind of cap on liability
(Mr Headdon) Ultimately it does, yes.
129. At what level?
(Mr Headdon) That is a very complex question to answer
because it will depend on the set of financial circumstances at
the time. If one had a situation of low interest rates but favourable
equity performance so there was still substantial final bonuses,
the cost could go higher and there may not be a reinsurance claim
in those circumstances, so it is really quite a complicated matrix
of different economic circumstances. There is no one simple answer
to say that, at one sum of money, the reassurance will kick in.
130. Was the reassurance just a sham to satisfy
the regulator that you had adequate reserves to be able to pay
future claims, and that you never expected there to be such claims?
(Mr Headdon) As I said earlier, the regulations require
the assumption really of quite adverse sets of circumstances.
In those circumstances, there would be a transfer of risk to the
reassurer and that is reflected in the reserve position.
131. So if 80 per cent of the GAR holders made
claims, is that when the reassurance kicks in?
(Mr Headdon) There would certainly be a claim then
if there was very little final bonus being paid.
132. I am bound to say that it is not a very
useful reassurance policy because they just recovered the cost
that they paid to your GAR holders out of your future profits.
(Mr Headdon) It comes back, I think, to the previous
points I made about how the assets within the fund are used for
policyholders. A reassurance arrangement which produced a claim
in much less onerous circumstances would be much more expensive,
and you would be paying the premiums of that out of policyholders'
funds now for some benefit in the future. It is a question of
degree of what level of protection you think it is appropriate
133. So, for a reasonable premium, the terms
you have are that you give them the money back later from reducing
everybody else's profits. That is what the terms say, is that
(Mr Headdon) The terms are that, once there has been
a claim, if there is then surplus in future years above that needed
to support the statutory reserves, there is a recovery to the
134. It makes you do after the event what the
Chairman said you should have done in 1993use everybody's
profits in order to make proper provision?
(Mr Headdon) It is a way of spreading the cost over
a number of years, yes.
135. Mr Sclater, did the board of Equitable
Life receive any approaches from potential bidders or purchasers
or partners in the period between 1993, when the guaranteed annuity
liabilities started to become an issue, and 1998 when the regulator
intervened with the effects that we have just discussed?
(Mr Sclater) There were never any formal approaches.
There were people occasionally who approached us and said something
like, "We would very much like to team up with the Equitable
and if you were ever to decide to abandon your mutual status we
would very much like to be considered as the prospective buyer,
or as a prospective bidder, for the Society", but at that
time the view was taken by the board that the Society was doing
well and was in good order and above all that the members of the
Society, we firmly believed, had joined it particularly because
it was a mutual society, and nobody wanted us to change that.
Formal approachesno; suggestions that if we were to change
our status they would like to be thereyes.
136. I would just like to be clear about this,
Mr Sclater. I am talking about the period between 1993 and 1998.
You say that you did not receive formal approachesonly
informal approachesbut you have also told us that the board
took a decision not to pursue any of those informal approaches,
and that those were board decisions.
(Mr Sclater) If ever anything was said to me or to
another director about another organisation being interested in
doing a transaction of some sort with the Equitable, that was
always reported to the board; the board would then discuss the
matter and the board took the view on each occasion that, at that
stage, in the light of the information and circumstances we then
had, it was not appropriate to offer the Society for sale.
137. So we are talking about board level decisions,
albeit that the approaches might have been informal? These were
explicit, minuted board decisions.
(Mr Sclater) I do not have board minutes in my head
but I can assure you that any approach of that sort was certainly
reported to the board and discussed by the board.
138. When the board was taking the decision
not to engage or respond to these informal approaches that were
being made to it between 1993 and 1998, did the issue of guaranteed
annuities ever figure in the board's decisions on that matter?
(Mr Sclater) No.
139. Was there ever any discussion about where
you might get to, or what this might mean?
(Mr Sclater) No.