An Equitable Assessment of Rights and Wrongs
by Dr Michael Nassim
AN EQUITABLE ASSESSMENT OF
RIGHTS AND WRONGS
paper by Dr Michael Nassim
article attempts to provide a general picture of what the underlying problems
were at the Equitable Life Assurance Society, and hence how the different
classes of member have been wronged and suffered losses. Without it there is no yardstick by which to judge the
relative importance of its many aspects, or balance the conflicting legal
opinions that spring from different interests and which are otherwise a
premature distraction. With it we can make the necessary assessments, and gauge
the appropriateness of other broadly based opinions such as the Penrose Report
when they appear. We may also
develop it further as other relevant facts emerge, and carry the new
understandings forward as circumstances dictate.
But for the Internet and the work of many people thereby made available,
the task would be impossible. From it the important facts, representativeness of
extracts, and the faithfulness of abstracts in the main article can mostly be
checked. The result is as much
story as picture, and it touches a number of areas:
historical, actuarial, insurance, business and marketing, investment and
financial, accounting standards, loss adjustment, socio-economic, legal, ethical
and regulatory, institutional and corporate governance, and political.
Plans and Practices
central importance were seminal decisions and actions which took place prior to
1989/90, i.e. around the time that Guaranteed Annuity Rate (GAR) policies were
discontinued. They overturned the
traditionally successful business and insurance paradigm of the With-Profits
Fund, affected all policies sold subsequently, and adversely influenced the
manner in which the Fund was administered and represented. Sophistries were the bedrock, and it is also relevant that
they are in essence antithetical denials of the major lessons previously learned
in the Society’s own history. Of
special importance was an overarching sophistry to the effect that a
With-Profits Fund could be run on what has euphemistically been termed a
negative technical solvency gap. This
arises when the sum of all total policy values exceeds the assets, whereas
absolute insolvency arises when the assets are exceeded by the sum of the
guaranteed portions only in all policies. These two criteria can give rise to
very different valuations and expectations of the asset shares of individual
the un-guaranteed portions are unconsolidated, and might do multiple duties to
cover other contingencies until required, ultimately they are a “moral
charge” on the assets. In times
when the unconsolidated terminal bonus element of policies is high this becomes
important. The Society maintained
that it was in practice unimportant, because its declared practice was to pay
out total policy values (including the unconsolidated element) in full, such
that this was policyholders’ reasonable expectation. Effectively, therefore, the moral charge was thereby made a
real one, and the difference was only unimportant so long as the technical
solvency gap remained small or intermittent.
But since this also implies a reserveless scheme, which could only work
given well-nigh perfect forecasting, this was a vain and fallacious hope.
Other actuaries were unhappy with all this, essentially because it
betokened a fund with scanty reserves, and perhaps insufficient financial
strength in the event. Actuaries
were also concerned that all policies were indiscriminately placed in the same
unitised fund and asset mix, irrespective of their maturities or levels of
guarantee, because under conditions of technical or absolute insolvency some
policies would acquire inequitable claims on the remnants of the fund.
Not surprisingly they wanted policyholders and their advisers to be
informed of the potential risks that all this posed in accordance with the
Financial Services Act of 1986. To
this the Chief Actuary of the Society paid overt lip service, but in practice
nothing effective was done in over a decade afterwards. And so all the important
omissions, dissembling, concealments and deceits stem from this sophistry,
including dual and conflicting presentations of the new paradigm, firstly to a
select but sceptical actuarial forum but then not the Society in full, and
secondly of the accounts, an optimistic total policy asset share value version
for members and a pessimistic discounted policy value asset share version for
the regulator, which enabled the Society to survive for so long.
solvency gap arose because the Society’s estate had disappeared, or was in
process of doing so. How, why and when this occurred is a matter of pivotal
forensic importance, because the central sophistry sprang directly from it.
In the Equitable’s long history members and outsiders have repeatedly
been tempted to raid the estate, and the Boards of Directors and the actuaries
of the day had resisted this. It is therefore important to ask what other
influences affected the Board and management on this final and fatal occasion,
and if so why they were allowed. The
resulting gap led to the transition from a With-Profits Fund for old and
established members to a With-Liabilities Fund for newer and future members,
which in turn could not have happened unless the fund also degenerated into a
Ponzi pyramid selling scheme, fuelled by irresponsibly high bonus declarations
and total policy values. In this it
resembles the Lloyd’s debacle, and the ensuing “recruit to dilute”
campaign whereby asbestos claims liabilities were transferred from old to new
“Names”. Hence there is also a
need to find out from what level in the Society any “incentivised ignorance”
of sales personnel originated. This
must be balanced against the more innocent picture of an office which was unduly
influenced by commercial and marketing considerations and expanded too rapidly,
giving away overmuch as incentives to gain new business and incurring excessive
strain on any remaining reserves in the process.
The Society may also have ascribed overmuch importance to the
profitability of investments in its sole asset mix when investment certainty and
insurance should have been its overriding priority.
Though there may be elements of truth in this, it does not explain the
Society’s persistently duplicitous and irresponsible conduct or the origins of
the faulted paradigm on which that conduct was based. Nor does it explain why
the repeated warnings against injudicious expansion by eminent actuaries in the
Society’s own past were also neglected.
coherence, consistency and duration of the ensuing misdemeanours indicate that
when traced fully backwards they will have relatively few origins. They are also
tantamount to fraud because they satisfy its cardinal elements.
nature and corporate life being as they are, there is no point in calling for a
witch-hunt until it is clear to what extent the situation was a response to the
pressure of evolving circumstances, or was more deliberately contrived.
What those circumstances may have been, and the corporate and
contemporary culture through which they may have operated is also explored at
some length in the main article. And if the Society’s descent into fraud was insidiously
cumulative, many officers and directors are likely to have been either too
closely or loosely engaged to be aware of what the whole amounted to.
Even so one cannot escape the conclusion that some did know, or perhaps
that others too long suppressed their real doubts.
For the sake of the innocent this needs close attention.
underlying situation all this created was thus highly fertile ground for future
trouble. In the 1970’s there had been brisk inflation and high interest rates
such that equities also increased in monetary value and many pension funds began
to acquire surpluses; at the same time traditional safe investments like fixed
interest securities became less attractive.
But when more normal conditions eventually returned interest rates fell
and there was an eventual secondary reactive dip in the value of equities, which
were no longer an indiscriminate hedge against inflation. Under these
circumstances growing numbers of earlier policyholders (pre-1988) exercised
their rights to guaranteed annuity rates (GAR) when they retired and took their
annuities. The Equitable
With-Profits Fund became technically insolvent, and to such an extent that the
Society reneged on policyholders’ reasonable expectations by cutting the
terminal bonuses of those exercising the GAR option. As is now common knowledge,
the House of Lords deemed this selection against one group of policyholders
unlawful, and this decision precipitated the current crisis.
expensive crisis waits in the wings, because when the Society stopped policies
with the GAR option, from 1988-96 they awarded a guaranteed interest rate of
accumulation of 3.5% per annum (GIR) to policies until they matured.
In practice this could be arranged to cost it little or nothing, mainly
because although the accumulation rate was guaranteed, the proportion allotted
as guaranteed and un-guaranteed annual bonus was at the Society’s discretion.
What the product particulars did not relate is that once an annuity was taken,
the minimum total rate of return to ensure it remained level was also raised by
3.5%, such that it suffered an automatic below-the-line compound drain rate 3.5%
p.a. on both its guaranteed and un-guaranteed elements. Hence GIR policyholders
and annuitants are at a disadvantage compared to earlier GAR and later non-GIR
policyholders, because their annuities erode at a greater rate.
Ironically, now that the fund is closed to new business the Tontine
effect also threatens to disadvantage GIR policyholders selectively versus newer
policyholders who do not have them. Increasing life expectancies will exacerbate
this problem, and place more strain on the remnants of the fund.
Alas this issue was not addressed in the Compromise Scheme, which is why
further troubles now threaten.
and Consequences of Regulatory Failure
individual actuaries had between them spotted the big trees, their vision of the
whole wood was less clear. Neither
they nor the Government Actuary’s Department appear to have articulated it.
They had, however, been informed that the paradigm they faulted had been
presented to and deemed attractive by an unspecified number of policyholders.
This may have allayed their suspicions somewhat, but it begs the question as to
why, if the paradigm was so well received, it was not thereafter disseminated to
all policyholders and their representatives either as a whole or in any
reasonable degree of detail. Beyond
this, lack of awareness by the profession of its own history and communication
deficiencies in the regulatory network identified in the Baird Report may have
contributed to the ensuing regulatory failure.
But in practice, no regulatory apparatus can function any better than the
milieu in which it operates. Sadly,
the informing and guiding influence of Government was also deficient; had this
been better exercised the consequences of regulatory failure would not have
attained their present dimension. Instead the Government has chosen to be
inactive and silent, which gains it three advantages:
is a familiar position, and in that the deficiencies occurred long before,
during and after the Compromise Scheme vote, both political parties may have
some responsibility for it. Here
warily recall that the government of the day indemnified Lloyd’s by special
Act of Parliament before the Lloyd’s Bubble burst.
It would be unfortunate for Her Majesty’s Opposition if this now
inhibits them, because the Equitable Bubble is big enough to involve around 2%
of the electorate directly, not to mention their dependants.
Moreover this inaction has had three enduring consequences for the
Society and its members:
so, the New Board should have known better than to maintain that mis-selling did
not have a central and generic character such that future litigation could only
be individual and piecemeal, or that the total shortfall in the funds was solely
due to the GAR liability and could be as little as 1.5 billion pounds.
Wrongs Suffered by Policyholders
last we can glimpse something of how the various categories of member have been
wronged, and gain a more accurate impression of their losses.
Most if not all have suffered the following:
main article also addresses factors affecting individual categories of
policyholder. These largely depend
upon their guarantee class, whether or not they accepted the Compromise Scheme,
whether they are now annuitants and their status as voting members or otherwise,
which in turn calls into question the role of their Trustees.
of the Penrose Report
then, is the kind of structure that we should expect the Penrose Report or any
other comprehensive inquiry to probe, illuminate, refine or expand.
If it fails to do so in any important respect then the reasons for this
will need to be exposed, and further prompt action will become necessary.
To help forestall such an unsatisfactory outcome the main article also
attempts to anticipate why it might come to pass. In that lamentable event
Equitable victims and the electorate must also remind Government of its
responsibilities, and lay them plainly at its door.