Equitable Life

Trapped Annuitants

supporting the With-Profit annuitants of Equitable Life



News Update June 2007

In this edition:


1.      Diana Wallis and the European Parliament draft EQUI report—

Scheduled for publication in June.


2.      The Parliamentary Ombudsman’s report—

Further delayed to 2008


3.      The transfer to the Prudential—

Key points to consider


From time to time people say to me that ELTA is not very active and in one sense that is true but in many respects the project that became ELTA is largely finished in that we are awaiting on a report by the Parliamentary Ombudsman, details of the transfer of the With-profits Annuitants to the Prudential and of course the report by the EQUI committee of the European Parliament.


The work has been largely done and we are waiting to see what happens next. If actions are required they will be undertaken and of course there is continuous discussions between the various  action groups.


1) Diana Wallis and the European Parliament’s Draft EQUI report


The European Parliament set up a committee, the EQUI committee, to look into the European issues raised by the Equitable Life saga. The EQUI Inquiry team considered ALL proposed amendments by MEPs on 11 April.


A large majority in the European Parliament’s Committee of Inquiry has approved UK Liberal Democrat MEP Diana Wallis’s report of the probe into the UK authorities’ role in what went wrong at the troubled mutual Equitable Life, on 8th May.

Diana Wallis said:

"For the victims of the Equitable Life failure, the report delivers an analysis of the UK's flawed process of implementing EU law which, combined with the imminent report of the UK Parliamentary Ombudsman, should arm the victims with powerful findings.

"For European Parliamentarians this process has provided a once in a generation opportunity to focus on the law-making and implementation process of one particular directive, the third life directive. If our recommendations are taken on board, this will enhance the future lawmaking process.

"We have to get tough about access to cross-border redress. Whilst our preference maybe for ADR systems, they have to be strong and more visible and there must always be the fall-back to cost-effective legal process across borders. It is essential that such rights be guaranteed in an internal market. In other words, (there must be) no mobility or access to the internal market for business without concurrent rules on liability.

"Blame is attributed to the UK government for failure to transpose and implement the 3rd Life Directive coherently and for their generally hands-off or light touch regulatory system. The report also contains numerous forward-looking recommendations on better EU lawmaking and better access to cross-border redress for consumers and citizens."


Diana Wallis's report will now go to the full Plenary of the Parliament in Strasbourg in June.


The FINAL approved version has to be circulated to all MEPs by about 10 June prior to a Plenary session in Strasbourg discussion on 19th June.


Diana Wallis will give a press conference in London on 15th June.


Diane Wallis who is the rapporteur to the committee published a draft of the EQUI report on her web site. I have extracted from the full document, which is nearly 400 pages long and can be found at:




Please note that it is in Adobe pdf format and without broadband takes some time to download


The draft report sets out the issues clearly as can be seen by this extract of the report pages 300 to 302


It should be recalled that Equitable Life victims are not investors willing to take risks for prospect of attractive returns. Rather they prudently set aside money for their retirement highly reputable Society, which led them to believe that their investment was absolutely safe. These policyholders were entitled to expect from the UK Government thorough and rigorous supervision of all financial services providers that offer such sensitive products as assurance and private pensions, including Equitable Life. This holds true especially light of growing tendencies among European governments based on population trends to urge their citizens not to rely on state pensions but to purchase private schemes instead .


It is one of the major objectives of the Third Life Directive to ensure "adequate protection" of policyholders through rigorous supervision.  As was shown in Parts II and IV of this UK regulators failed in a number of respects to supervise and monitor the financial health of equitable Life, including its state of solvency, the establishment of adequate technical provisions and the covering of those provisions by matching assets, according to the requirements laid down in the Third Life Directive. Had the UK regulators correctly applied provisions of the Directive, they would most likely have achieved its objective to 'ensure adequate protection of policyholders' and thus have avoided the crisis at Equitable Life, which caused substantial losses to policyholders


As this part of the report illustrates, there have been no adequate remedies available for aggrieved policyholders to recuperate their losses either under UK or EU law


As regards EU law, it is rather unlikely, given the judgments in comparable cases, that an action in damages against the UK under Francovich would be successful. Likewise, policyholders have no realistic prospect of successfully pursuing their claims against the regulator under the UK legal regime for regulatory liability because they would have to prove misfeasance, which is virtually impossible.


On the other hand, the current investigation by the UK Parliamentary ombudsman into whether individuals were caused injustice through mal-administration on the part of UK prudential regulators could result in a recommendation to pay compensation. However, the Ombudsman's remit is limited in terms of both the time period and regulatory authorities covered. In particular, her terms of reference exclude the question of whether the UK regulatory regime at the time met the requirements of EU law.


In light of the above, the committee considers it appropriate to recommend strongly to the UK Government to devise an appropriate scheme with a view to provide full compensation for Equitable Life victims both within the UK and abroad for its failure to protect policyholders in accordance with EU legislation.


In the absence of viable alternatives, the committee sees it as a moral obligation for the UK Government to assume responsibility for its failures and provide redress for citizens' grievances. The committee believes that this must happen now, in order to put an end to this affair and secure relief for the many victims.


The compensation should be payable to all (previous and existing) non-GAR policyholders and annuitants, who by the affected by the 16% cut in policy values in July 2001 and should cover all losses that were not market-related, in particular those due to the Society's practice (which remained unchallenged by regulators) of paying excessive bonuses during the 1990s. The calculation of compensation should provide for adequate differentiation between various groups of policyholders according to when they joined, that is whether or not they had previously benefited form over-bonussing.


Please note that I re-typed this section so it is possible that I have transcribed some words or phrases incorrectly. If you wish to raise issues arising from the EQUI report you must go back to the original document.


It would be surprising, without knowing in any way what the UK Parliamentary Ombudsman’s report may contain or her recommendations, if it reached significantly different conclusions about the actions or inactions of the UK regulators. However, the P.O.’s report is likely to be delayed until the mid 2008. (see below)


It is somewhat depressing reading the efforts being made to weaken the EQUI report and no doubt is a preview of the attempts by the Government to weaken the P.O.’s report.


2) The Parliamentary Ombudsman’s report—further delayed to 2008


The P.O. sent me this information in May 2007, which sets out the current situation.


“The Ombudsman sent her draft report (which set out the provisional results of the investigation and which contained her draft conclusions) to the Government in January 2007, in line with her commitment to Parliament that she would do so.


We have now received the response of the relevant public bodies to that draft report. This response is substantial, being over 500 pages in length. It makes comprehensive representations about the investigation process, the proposed scope of the draft report, the actuarial and legal basis for the Ombudsman’s analysis, and the standards and approach that the Ombudsman proposes to adopt when determining whether injustice has been caused in consequence of mal-administration by the prudential regulators and/or GAD in the relevant period.


The nature and extent of these representations and our need to give them proper consideration, which will involve further work by our professional advisers and which may require further dialogue with Government, means that we do not think that we can now meet our objective of publishing the final report before the summer Parliamentary recess as we will need time to resolve the issues raised by Government and to provide ELTA with an appropriate opportunity to read and comment on a revised draft report.


I recognise that this will be disappointing but I think it is very important that proper process is followed and that we do not enable those who might wish at some future stage to do so to argue that the outcome of this investigation is flawed because of an unfair process or because the Ombudsman did not give careful consideration to all the submissions made to her.


We will keep you informed of progress as this work continues. The Ombudsman will also inform Parliament of this before it rises for the Whitsun recess on 24 May 2007 – and I will send you an advance copy of our letter when it is ready. (In fact now received!)


Self evidently there is still much work to be done by the P.O. and it is not at all clear now when the final report will be produced though clearly it will not be before mid 2008. However, the obvious objective is to ensure that when it is presented, nobody can say their opinion or beliefs have been ignored, and that all the pertinent facts have been taken into account.


A copy of the letter to Parliament can be found on the ELTA web site.


3) Transfer to Prudential—Key points to consider


It is believed that the transfer will be handled under the terms of what is called a Part VII transfer. The Part VII mechanism has been around for a long time but it differs from the corresponding, more general, provisions in the Companies Act in that there is no provision for the policyholders to vote on the proposal.  Instead, an independent expert is required to write a report on the effect of the scheme on policyholders of both companies.  He is not required to approve the scheme.


It has become usual for the actuaries of both companies to submit reports.


Any policyholder has the right to be heard by the Court, but this is not easy unless he happens to be an expert in such matters or takes advice.


The FSA has the right to appear in Court but prefers to exercise its power behind the scenes.  They will review the proposal and make “suggestions” as to how it might be altered but will not formally approve it before the court hearing.  This avoids having to backtrack if someone comes up with a valid objection that they have overlooked.


There are absolutely no rules as to how a Part VII transfer should be arranged.  It would be normal for the policies to be taken over without alteration to their terms, but the policy terms are not the whole story for with profits business.  The scheme will have to specify whether other liabilities, such as mis-selling compensation, remain with the transferor or are transferred across. 


The amount of assets to be transferred must also be set out in the scheme.  This is often based upon the sum of the individual policy reserves as set out in the FSA Return, with or without amendment, but this is not necessarily mean such a process will be followed in this situation.


The key issues are as follows:


It is essential to establish exactly what annuitants are being offered, and this is certainly not clear from the documents published to date.  We need to know:


a)      Whether the guaranteed benefits are to be transferred in exactly the same form.

b)      Whether credit will be given for any remaining terminal bonus and, if so, how,

c)      What arrangements are to be made for future bonus payments? The Prudential has a different system for both declared and (particularly) final bonus so how will the transition be managed in detail or will they replicate Equitable’s methods?

d)      Whether the transferred policies are to be ring-fenced within their own with-profits sub-fund for bonus distribution purposes or whether they are to be incorporated into an existing with profit fund?

e)      If a separate with-profits sub-fund how will that sub-fund be invested?

f)        When will transferred policies be deemed to have commenced? (According to the document ‘2007 Bonus Rates With Profit Annuities’ issued by Prudential it operates a system of additional bonuses for which the rate depends upon the length of time that a policy has been in force.) It follows that it is very important to know if the transferred policy is “back dated” or deemed to have “started” on the transfer date, assuming of course that these policies are treated in the same way as the conventional Prudential annuities.

g)      Whether or not it is proposed that the transferred policyholders will have any recourse to the Prudential’s estate in the event of, for example, the underlying investments suffering a negative investment return in one or more years?


The transfer is being represented as a change to a strong company that has adequate free assets and therefore does not suffer from investment constraints. It is not clear why the Prudential would use its estate to support the ELAS business when it could just as easily set up a separate with profits sub-fund for it and transfer into that fund only the transferred assets?


If that were to be done the With-Profits annuitants would in reality be little better off as either investment freedom would be restricted or there would be a risk of negative final bonuses if markets were to fall.  Equity markets are at high levels at the moment, having experienced nearly a 4 year bull run, and interest rates are expected to rise further (which will reduce bond prices) so this is a real risk at present. It would be unfortunate if the outcome of the transfer meant that the annuitants existing woes were merely replicated within another company.


As I say, there are many unknowns in the proposed scheme and no doubt we will know more in the near future but one point is for sure, nobody should assume that the transfer will result in any significant FINANCIAL benefits to the With-Profits Annuitants in the sense that they will see any significant increase in their income, if at all.


Peter Scawen                                                                                                                           June 2007