Memorandum by Equitable Policyholders
In representing over 6,300 members of the Equitable
Life Assurance Society who have expressed support for us as an
Action Group, Equitable Policy Holders Action Group (EPHAG) has
been active in gaining two meetings with representatives of the
Equitable Board of Directors and one meeting with the Financial
Services Authority in order to gauge the extent and nature of
declared problems as well as to learn how these have come about.
In this process we have collected information on the Society's
treatment of different classes of member.
It has emerged that "With Profits"
policyholders, especially those with Retirement Annuities and
Personal Pension contracts have been placed in the invidious position
of having funds, such as bonus distributions, at least temporarily
denied to them in order to enable the Society to meet its obligations
to other policyholders who have annuity rates guaranteed by contract.
The latter entitlements were re-affirmed by a House of Lords ruling
in 2000 following previous class actions in the High Court and
Court of Appeal.
EPHAG has found that the conditions which have
produced the situation whereby the Society's Directors believe
that the Society must be sold to preserve its viability are long
standing. It has further emerged that Annuity Conversion Rates
were granted to investors with Retirement Annuity Contracts for
a long period and that the rates guaranteed far exceed present
and recent market rates thus creating a shortfall in funding for
which no, or little, provision has been made. This previously
unknown aspect has caused many members without guaranteed elements
to feel aggrieved and this has been exacerbated by the news that
it is the "with profits" policyholders that are being
penalised by subsidising other members. Previously, this liability
was not known to members. The written evidence which follows covers
the facts we have uncovered in meetings as well as what we regard
as outstanding and unanswered questions.
Consequently, this submission generally highlights
our lack of information in our quest to protect members' interests
particularly those of the most vulnerable group, the "with
profits" policyholders, who bear the risk in a mutual assurance
For the purposes of this submission, the Equitable
Life Assurance Society is referred to as ELAS, the Equitable Policyholders
Action Group as EPHAG and the Financial Services Authority as
1. Formation and purposes of EPHAG
1.1 The EPHAG Committee is comprised of
members of the Accountancy, Actuarial, Assurance, Legal and Pensions
professions, who supply their professional expertise on behalf
of EPHAG members in a voluntary capacity. The Chairman, and several
other members, have experience of Directorships of UK public companies
and all members of the committee have been Equitable Life Assurance
Society (ELAS) members (ie with profits policyholders) for many
years. The Committee aims to represent the interests of 6,300
ELAS members and this number is growing.
1.2 EPHAG was formed subsequent to the House
of Lords ruling which upheld the claim of those policyholders
who hold Retirement Annuity contracts with Guaranteed (minimum)
Conversion Rates included. This coincided with the declaration
by the ELAS Board that ELAS was up for sale as a chosen priority.
1.3 The original aim of EPHAG was to monitor
the decisions, recommendations and actions of the Board up to
the point of sale of the Society but when a sale failed to materialise,
EPHAG's aim was adjusted to that of representing the interests
of Non-Guaranteed Annuity holding members.
1.4 Henceforth, the initials GAR refer to
Guaranteed Annuity Rate holders with guaranteed conversion rates
included and Non-GARs to Annuity Rate Holders without guaranteed
conversion rates included. This change in aim demonstrates how
the Action Group has found it necessary to alter its purposes
in the light of facts seemingly to the detriment of certain categories
of membership being uncovered in a quest for fair and equitable
treatment of members.
1.5 Fundamentally, we wish to stress that
the facts in our possession are sparse. As each different and
new situation obtaining at ELAS has recently emerged indicating
potential disadvantage to one or more categories of policyholder,
some previously covert facts have likewise emerged with consequent
concern to ELAS members. It is the pre-eminent need for information
and the disquiet arising which has caused EPHAG to be formed with
the aim of influencing future events in the protection of members'
interests and entitlements as well as to limit disadvantage to
"With Profits" (Non-GAR) policy holders who have now
been identified as the most vulnerable group.
2. Events leading to the present crisis obtaining
within ELAS and the identification of factors known to EPHAG
2.1 In setting out the facts as known to
us we realise that we may state matters that are obvious or known
to the Committee. However, we are unaware of the extent of their
information and seek to err on the side of caution but apologise
in advance for any unnecessary burdening of the Committee. The
facts as we know them are:
A The Society wrote guaranteed annuities
(GAR's) from 1956 to 1988.
B By 1993 a gap between market rates and
the rates guaranteed in the annuities began to appear this divergence
increased as interest rates fell.
C By 1999 ELAS had encouraged some holders
of guaranteed annuities (GARs) to bring a class action in order
to establish their guaranteed entitlement. They were successful
in the Court of Appeal and the House of Lords.
D The outcome was that the Society estimated
that this would give rise to a deficit of £1.5 billion in
the With Profits Fund and reversionary bonuses were suspended
for seven months in order to make good this shortfall.
E In order to overcome further deficit, the
Society put itself up for sale, but failed to find a buyer.
F Thereafter ELAS closed to new business
and has sought to sell parts of its operations. At the time of
writing these efforts have resulted in only partial success.
G Alan Nash, as Managing Director and Appointed
Actuary, resigned. The Chairman and other Non-Executive Directors
also offered their resignation.
2.2 EPHAG has met representatives of the
Board of ELAS on two occasions and the following points emerged.
A The Board has claimed that it was only
the decision of the House of Lords that gave rise to the massive
B Whilst this possible judgement of the House
of Lords had been previously addressed by the Society the chances
of its occurring were considered to be remote.
C Prior to the above decision the Society's
reserves had apparently been considered adequate.
D There was some (unspecified) reinsurance
in place but insufficient to cover all GAR liabilities.
E Efforts were being made to cap the open-ended
liability to the guaranteed annuitants (GARs).
F The 10 per cent deduction as Market Value
Adjustment applicable to those members prematurely leaving the
Society reflected the proportion of loss which otherwise would
be carried by those Non-GAR policyholders who remained.
G The guaranteed annuities (GARs) only applied
to single lives, and were further restricted by compliance with
other conditions, thus the uptake was relatively low.
H The figure of £1.5 billion was the
best estimate of the increase in Reserves necessary to meet the
liability to GAR's established in the Courts.
I The Board was satisfied that it had interpreted
the decision of the House of Lords correctly.
3. Factors specific to ELAS and its directors,
appointed actuary and auditors
3.1 As the oldest mutual society in the
UK, ELAS enhanced its reputation in modern times through having
efficient administrative systems and a generous bonus policy.
Both of these, together with a rapid rate of expansion, especially
in pensions, earned it great and justified respect over several
3.2 ELAS ceased selling GAR Pensions in
1988 and, for the following ten years, the Annual Report prepared
for members, coupled with Bonus declarations and other statements
gave members no reason to suspect that investor confidence in
ELAS was in any way likely to be unprogressive or the basis of
3.3 The ELAS Board of Directors was believed
to be competent and efficient in pursuing the principles of stewardship
vested in it; independent Auditors regularly stated Annual Accounts
represented a true and fair view of the Society's financial situation
without qualification and, as is normal practice, the Appointed
Actuary played a vital role in the valuation of future phased
forward liabilities such as the GARs entitlements.
3.4 In the light of subsequent events and
declared problems, the foregoing must now be viewed with suspicion.
The problems admitted recently cannot be described as short-term,
immediate or small but rather long term, increasing in intensity,
fundamental and very serious indeed. The facts now speak for themselves
and very transparently.
3.5 Indisputably, a substantial number of
members who are relying on the Society for retirement income have
been misled or betrayed and are likely to suffer loss. This state
of affairs is specific to the Equitable, which closed its funds
to new business on 8 December 2000.
3.6 Significantly, it would also seem that
those investors who took out a "With Profits" Personal
Pension policy between the date of the House of Lords judgement
and the ELAS closure to new business may well have a very transparent
case of "mis-selling" for resolution. These investors
were effectively contributing to a fund ostensibly to benefit
themselves but actually also to subside GAR entitlements. No warnings
nor explanations of this feature were prominent, thus providing
new investors with less than the full picture, and obviously not,
in consequence, fair dealing and honest disclosure of disadvantageous
3.7 Owing to uncapped liabilities to GAR
members being set to continue as a drain on the Society's resources
for many years to come and the probable exercise of annuity conversion
rates well above market rates, ELAS has achieved the unique position
of setting one category of member (non-GARs) the responsibility
of subsidising another category of member (GARs), whilst some
members hold both GARs and non-GARs, of course. Additionally,
certain members may seek to bring actions based on the facts,
matters and circumstances of their own individual position.
3.8 It seems that ELAS could have prevented,
or limited, this situation through adequate reinsurance treaties
being contracted. EPHAG does not know what future market annuity
rates were assumed by ELAS as part of a plan or whether indeed
there was a plan based on some stated assumptions. What is abundantly
clear is that the various Rates of Annuity guaranteed at conversion
have proved very substantially above market rates yet seemingly
substantially lower than that required to activate one or more
reinsurance treaties in favour of ELAS.
4. Consequences for the UK life assurance
and pensions industry and effects on investor confidence
4.1 As ELAS has been such a respected pensions
provider the "knock on" effect on other pension providers
and life assurers in the UK is difficult to predict. However,
the "bigger they are, the further they fall" runs the
proverb, so it is reasonable to believe that failure of the fourth
biggest of the UK life and pensions providers has shattered investor
confidence severely, not only because substantial numbers of members
are affected but also because the associated publicity has highlighted
the disturbing aspects of its decisions and its high profile disclosure.
4.2 Potentially, the more the failure is
analysed the more damaging it might be to Mutal Assurance Societies.
The situation of member subsidising member in order to honour
guarantees granted by the management is viewed with extreme concern
and it needs to be recognised that this situation could scarcely
have arisen in a public limited company since the shortfall caused
by guarantees would have had to have been met by its shareholders.
4.2 Government (no matter what its political
colour) is a pension provider albeit at a basic level. Consequently,
Government exhortation for the public to make provision for privately
funded pensions under the banner of "Self Reliance"
must be at least temporarily damaged by the ELAS experience. Trust
and Investor confidence could be at least partially restored and
perhaps fully restored by government compensation making good
the shortfall at ELAS. The case for this will, hopefully, become
clear when the Committee has reported its findings to the House.
5. The role of regulatory bodies in providing
investor protection since 1986
5.1 The Financial Services Act (1986) was
intended to provide, first and foremost, investor protectionthis
has been the fundamental and vital overall objective of much effort
and organisation. Various bodies, both statutory and self-regulatory,
have been employed in providing higher security expectations for
investors owing to these agencies being charged with financial
supervision of pension providers such as ELAS. Latterly, this
duty has passed to the FSA.
5.2 It is clear that the FSA has failed
to safeguard the interests of the Non-GARs in ELAS despite the
fact that HM Treasury had sent a memorandum to the FSA (or its
predecessor) in or about November 1998 in which concern was expressed
about ELAS liabilities.
5.3 Many EPHAG members are aggrieved that
no intervention or action appears to have been taken at that time
or with urgency afterwards, so extending the perceived deception
by those in authority with responsibilities to members concerning
5.4 EPHAG has met representatives of the
FSA on one occasion and the following points emerged:
A There was larger provision shown in the
Statutory accounts when compared with the Annual Company accounts
produced for the Members.
B The FSA wished to be pro-active in seeking
to stimulate a scheme for capping the liability to the Guaranteed
5.5 Up to the time of the decision to close
to new business, the Society was aggressively advertising and
soliciting new business. These efforts included large advertisements
in the press and mailshots without any mention of liabilities
either actual or contingent to potential investors.
6. Outstanding questions
6.1 EPHAG Committee remain interested in
several outstanding questions and as it is clear that we are woefully
short of facts, we set out below some matters which may be relevant
to the Committee's inquiry.
6.2 On an annual basis what steps did the
ELAS Board take to:
A Investigate the position of the growing
shortfall in general, assess the liability and obtain all necessary
and relevant professional advice?
B Place reinsurance and/or bolster reserves?
C Make provisions in the fund and show this
in the Accounts included in the Annual Report to Members?
D Make other disclosures to Members and potential
6.3 Of equal concern are the following questions.
A What were the reasons for the failure of
the sale of the Society as a going concern?
B What will be the impact of movements in
C What would be the impact of capping the
liabilities of the guaranteed annuitants (GARs) on the remaining
D What effective steps did the Treasury take,
when and what were they?
E What effective steps did the Regulator
take, when and what were they?
6.4 We wish the Committee of Inquiry to
draw inferences from the following:
A Why was little or no provision made when
the shortfall first emerged and why was no effective provision
made prior to the House of Lords decision? This suggests at least
negligence if not misfeasance.
B Immediately the House of Lords decision
was known, why was it stated by Mr Nash that there was a shortfall
of £1.5 billion and that the Society would have to be put
up for sale. This indicates that this contingency had been identified
C The lack of disclosure to policyholders
from 1993 onwards of the growing liability appears to be at least
negligent, but could perhaps also be regarded as misrepresentation
or even fraudulent.
2 February 2001