Madame Chairman and members of the committee, thank you for giving me the opportunity to make this presentation to you this afternoon.
My name is Peter Scawen and I am the chairman of ELTA (Equitable Life Trapped Annuitants), approx 2,000 members out of we believe 50,000 annuitants and ECL (ELTA Claims Ltd), a subset of ELTA members who are actively pursuing a claim for compensation through the English courts.
I should stress that whilst I am not myself a plaintiff in this action I must ensure to the best of my ability that I do not prejudice this litigation.
In the invitation to make this presentation, you specifically stated that; “the Committee would be interested to hear from you about the status of policyholders’ claims and remedies available to them under UK law.”
SLIDE 2 INTRODUCTION
The group of policyholders that I represent here today share the opinions, beliefs and the general comments about the Society and the role of the various UK government departments, which have already been extensively covered by EMAG, ELCAG, the Investors Association and others.
We use the word “trapped” for two reasons.
1. As annuitants in payment, we cannot or are not allowed to transfer our policies to another provider. The Society has reduced our annuity payments by substantial sums, in my case by some 40% and with the prospect of continuing reductions in my income for the rest of my life.
2. Even if we could now transfer our policies to another provider in order to gain some sense of stability for our future income, in all probability the transfer value would be so low that the new annuity payment would be substantially below even the current level being paid the Society.
We are trapped two times over!
Other policyholders have not suffered in the same way. Let me give you two examples:
1) “Just to reinforce the point I met a friend who had his money invested with ELAS and he eventually withdrew it (£850K) less 16% and stuck the money into a risk free high interest account. After 3 years he has now recovered his capital and is a relieved and happy bunny.”
2) One annuitant has told me that his wife’s investment has increased by some 25% in value, since 1999, even after the 16% reduction that was imposed in 2000.
You might care to ask why have the annuitants been treated differently?
SLIDE 3 WITH PROFITS ANNUITANTS
The people that I represent are uniquely different from other policyholders.
I will give you two illustrations:
1) A annuitant phoned up to advise me of his new address. So I asked what it was and there was silence and he said, sadly, “I’m sorry I have forgotten, I will go and check!”
2) Another annuitant phoned me and said he was sorry for not doing more but he already had one leg amputated, was going into hospital for a tumour and in all probability would need his other leg amputated as well!
These are the people who need our active support and assistance.
We also come from a generation that reached political awareness at the end of the pre-war depression, survived the war, or grew up in the years of austerity following 1945. We learnt to survive, so whilst many have sold their properties in order to create funds to meet their liabilities, most of us just “tighten our belts”, travel less and reduce our non-essential spending. Others rely on their families or the various income support schemes available to UK citizens from Social Services.
SLIDE 4 AGE of ANNUITANTS
We are all retired, with an average age in the mid 70’s, some relative youngsters like myself, active both physically and mentally, and others reaching the end of their lives with all the associated problems of memory, physical and intellectual frailty that comes with the ageing process.
This slide is based on data that was collected in 2003.
SLIDE 5 SIZE of ANNUITY PAYMENTS
We are not wealthy and our annuities are not large but the key point is that it makes no difference whether we have a large or small annuity, as we planned our retirement lifestyle around that “known” income.
Once it has been irreversibly reduced then we have to completely recast our plans for our retirement years. Within broad constraints, we knew our income for the rest of our lives. It was fixed or at best inflation linked. We have no future job prospects, no promotions in sight, no career moves, just the same income year in and year out.
This slide is based on data collected in 2003
SLIDE 6 THE LOSS OF INCOME
Why are we different from other classes of policyholders?
I have already made clear that we, the With-Profits Annuitants, are different from all other classes of policyholders because:
1) Our income is already significantly reduced and probably the reductions will continue for the rest of our lives. In my case my annuity, which started at approximately £10,500 (approx. 15,200 Euros) is now £7,600 and by 2020, my actuarial age of death, I estimate that it will be £4,800 and that is before any adjustment for inflation is made.
2) What most With-Profits Annuitants (WPAs) thought they were buying was an annuity that would increase at least broadly in line with inflation. Whilst we all understood there would be temporary variances from time to time as a function of the financial markets, it was never explained that nearly 50% of our annuity could, and indeed has, been removed by the Society.
SLIDE 7 THE STOCK MARKET FALLACY
These policies were presented as being as secure as the so-called Blue Chip investments by a financial institution that had the highest reputation for probity in the UK and whose clients included many workers in state industries and service providers, Civil Servants and indeed MP’s.
The claim often repeated ad nauseam by the Society that it was all down to the Stock-market crash is revealed as a “terminological inexactitude” to quote Churchill as can be seen with the comparison of my With-Profits Annuity with Equitable Life and my With-Profits Annuity with the Norwich Union!
The core issue that we are discussing today is that these policies were not the secure low risk investments they were represented to be, as is evident from the reality, and that this fact was known to the Society and should have been known to the official regulator in the UK.
SLIDE 8 THE ANNUITY CONTRACT
The annuity contract by the Society was remarkably brief and relied heavily on product literature. It failed to clearly explain the terms and possible risks to future income.
At the time of my contract the document merely said the annuity might go up or down depending on the overall performance of the fund. Given that we were participating in a With-Profits scheme that is entirely reasonable and is to be expected. What neither the contract nor the product literature indicated was that as much as 50% of the annuity could be removed in its entirety at the sole discretion of the Society.
Either the Society explained the annuity contract in detail or it did not. That is a matter before the courts in the UK and nothing more can be said about that at this time.
But it also follows that the FSA either knew about this condition or it did not.
a) If it did not know, then it failed in its duty and was clearly incompetent.
b) If it did know and took no action then it was negligent.
Either way, the regulator failed in its duty to the public and on this basis alone, compensation is due to those people who invested in the Society and whose life’s savings have been so abused by the Society to meet its other financial obligations.
The “standard” practice with annuities is that money invested with a pension provider is “ring fenced”. That is the money cannot be used for any other purposes than to provide an annuity for life. It was not made clear that this was not the situation with the Society where the investment was lumped into the general With Profits fund to be used for any purpose the Society saw fit. The risk to annuitants is therefore substantially increased. No explanation or warning was offered by the Society and the regulator took no action to ensure that it was.
It is inconceivable that anybody who understood these points and was seeking a secure income for life, that is in the range of 20 to 40 years, would ever have bought such a product. In other words it was quite unsuitable for the purposes for which it was offered and the regulator had a clear duty to ensure that the Society’s literature alerted the public to this risk
SLIDE 9 CHOICES WITH WITH-PROFITS ANNUITANTS
The suggestion by Lord Penrose was to seek our remedy through the courts. This is a perfectly reasonable statement until one considers the problems that confront a potential litigant. I must emphasise again the relative age and thus fragility of the policyholders I represent here today. Their ability to deal with the complexities of the law, the associated stress and ill health make this a bigger challenge than it might be for younger persons.
I will now explore the choices open to my members.
SLIDE 10 THE SOCIETY – EQUITABLE LIFE
Many policyholders have taken the view that they will rely on the Society to “do its best” for them, and will wait on events and trust that somehow it will be OK by the efforts of others, such as ECL, EMAG, ELCAG, etc. They are at the end of their lives and that seems and maybe is the best option for them.
I have seen no evidence that the Society can be relied upon to take any action that is in the best interests of my members, a group of policyholders who have by any measure been abused by the society because of their weak position.
SLIDE 11 THE PARLIAMENTARY OMBUDSMAN
The Parliamentary Ombudsman is in the middle of her second enquiry with the report due late in 2006 or early 2007. Of course we have no way of knowing what the report will conclude, but recent experience does not encourage confidence.
The P.O. presented a report to Parliament on the treatment of pensioners with Failed Company Pension schemes. Even though, the PO found in the pensioners’ favour, the Government just said we don’t agree and will not make any compensation payments, even going so far as to wildly exaggerate the costs to the Treasury in the process.
So it is no help to us if there has been mal-administration if at the end of the day, the Government takes no notice of the report and takes no action to compensate victims of its incompetence.
SLIDE 12 THE FINANCIAL OMBUDSMAN SERVICE
Many policyholders have tried to make a claim through the Financial Ombudsman Service.
The public perception is that the FOS is a neutral, consumer-friendly arbitration service. In practice, it is nothing of the sort not least as its primary obligation is to the Financial Services Authority. It is highly politicised, effectively controlled by the FSA & Treasury with the apparent objective of keeping Equitable functioning rather than servicing the public.
Equitable can hire solicitors and counsel to present their case and argue against the public who evidently cannot have the legal expertise. It is possible to employ a solicitor to act for you but this costs from £6,000 to £20,000, hardly a low-cost solution for what is supposedly a free service for the public, and somewhat defeats the objective of the exercise.
The length of time it takes to obtain a ruling has also become a problem. The FOS has ruled that you cannot both make a claim in the courts and a claim through FOS at the same time. But in many cases the FOS ruling takes so much time that by the time a decision has been reached, the policyholder has become statute barred, thus severely limiting the choices open to policyholders.
Finally in the normal course of events, when a Government department writes you expect to receive a considered, balanced reply using the available data and the appropriate and correct interpretation of the law.
The Financial Ombudsman Service is now part of the Problem and not part of the Solution!
SLIDE 13 MY EXPERIENCE OF THE FOS
For example, I made a claim against the Society through the FOS and was told by return that my claim was rejected due to the GAR compromise. Since I had very specifically ensured that my claim in no way mentioned or referred to any aspect of the GAR compromise, I wrote a strongly worded letter back pointing out their error. In return I received a reply saying they would now consider my claim.
The point I am making is that I am reasonably knowledgeable about the issues, certainly more so than the overwhelming majority of policyholders. I suspect that most claimants would have accepted this so-called “ruling” and let the matter rest. This is not an acceptable standard for a Government Department, which should have a clear duty to ensure accuracy and fairness.
Regrettably, we know from pronouncements made by the FOS that whole classes of claims have been rejected on quite arbitrary grounds. For example, even accepting the GAR compromise strikes out part of the claim for compensation, it does NOT strike out the whole claim. It should be the duty of the FOS to allow policyholders to pursue a claim, maybe for a reduced amount, not block the entire claim. This is NOT an Ombudsman’s service in any terms that I think are reasonable.
SLIDE 14 THE ENGLISH COURTS
The overwhelming problem facing plaintiffs in the English courts is simply one of costs. If I decided to sue the Society for compensation, then I am advised that my risk for costs:
A) In the event that my case went to trial and was lost, would be of the order of £150,000 on each side--£300,000 in all (440,000 Euros).
B) In the event that the Society settled out of court before trial would be of the order of £56,000 to £180,000. Of course I would recover this sum from Equitable in this situation.
Apart from the fact that I do not have that sort of risk money, it does not seem to be a cost effective approach as my claim is only of the order of £70,000, (101,000 Euros).
The costs of pursuing a claim against the Society lie outside the financial resources of the overwhelming majority of my members let alone the stresses and strains of the legal process.
Thus we are forced to rely of the PO or the FOS for any hope of recompense.
The other obstacle from a legal perspective in the Limitations Act, which imposes on potential plaintiffs a time limit within which they must initiate proceedings. As of today, the overwhelming majority of policyholders are now time barred and by the end of 2006 the Society will be free of any further risk of litigation.
SLIDE 15 THE SMALL CLAIMS COURT
The Small Claims Court is where an individual is seeking to recover a small amount of money, but where the plaintiff is allowed to present their own case in effect supported by the presiding judge who makes the ruling. Some policyholders have taken this choice and I believe all have been successful, but as the maximum jurisdiction is £5000 the amounts of money involved are trivial.
SLIDE 16 THE HIGH COURT
In The High Court, the first major problem remains one of having to meet the defendants’ costs in the event that the court decides in favour of the Society. The second problem is to find lawyers and barristers who not only understand the law as it applies in this case, but also the complexities of the relevant Pension regulations and the complexities of the Society’s annuity policies.
The only exception is where a group coalesces around some organiser with the requisite numeracy, literacy and PC skills, in this case myself and the ELTA members, and can also retain a proactive firm of solicitors willing and able to take on the case. We were able to establish a mechanism by which a group of policyholders (ELTA members) were able to band together (ECL) and effectively mutually insure each other if one or more of the cases failed with a maximum cost exposure of approx £12,500 if all the cases were lost.
Even this much-reduced sum was too much for many policyholders who do not have or are not willing to take that financial risk this late in their lives.
Further we should also note that Clarke Willmott have undertaken this litigation on a “No Win, No Fee” basis where potentially if the case is lost they will have to write off many millions of pounds of fee income. It goes without saying that not many firms would be prepared to undertake such a risk.
SLIDE 17 SUMMARY
In my personal experience, when entering litigation one should plan to win, but budget to lose. The potential cost liability in the event of losing the case is so high in the English courts, that to all intents and purposes this option is closed to the overwhelming majority of the population.
Given that the Society declines to accept responsibility for the losses my members have incurred, the choices facing the annuitants seeking redress are:
1) The Small Claims Court: low risk, low cost but very limited compensation.
2) The Financial Ombudsman Service: low risk, low cost but arbitrary, inconsistent decisions.
3) The High Court: high risk, high costs but the potential for good compensation.
The overwhelming majority of the trapped annuitants now have no legal remedy unless they have already initiated an action of some sort. They are nearly all now time-barred and for those who are not, they risk the very high costs of an individual legal action. The FOS which should provide this service has proved to be more of a problem than a solution.
So we are dependent of the P.O. in the UK and on this committee.
In my opinion, the key problem facing this committee will not be discovering mal-administration but getting the UK government to accept responsibility and act on its liabilities to those members of the public that it has so badly let down.