An Equitable Assessment of Rights and Wrongs
by Dr Michael Nassim
3. A New With-Profits Fund Manifesto, or Sophistries of the First Order
A New With-Profits Fund Manifesto, or Sophistries of the First Order
This questionable subject was
broached by Roy Ranson and Christopher Headdon of the Equitable in their paper
entitled: “With Profits without Mystery”8 presented to the
Institute of Actuaries in London on March 20th, 1989; an analysis and
commentary on it has appeared previously9.
Headdon delivered the paper again the following year on the 19th
February at the Faculty of Actuaries in Edinburgh10. As will become apparent, it cannot have been easy to deliver
the paper, let alone act on any comments or advice thereafter received, and so
we shall later consider why it might have seemed necessary at the time. As to
the origins of the changes described, in paragraph 1.1.3 Ranson acknowledged the
help of his colleague D.C. Driscoll and the later help and involvement of C.P.
Headdon, and that he formulated the position while working for his predecessor,
M.E. (Maurice) Ogborn. Though the
wording is sometimes opaque, the more important points in the argument can be
summarised as follows:
This précis of necessity reads
more bluntly and less blandly than the Ranson-Headdon paper.
Yet whether we react to it with hindsight or attempt to see it in
context, the outcome is much the same. Not
only is it pragmatic rather than principled, but also it contains several
notable sophistries, all of which were represented as refining simplicities at
the time. First and foremost, the traditional estate is not a windfall
inheritance to be squandered by the current generation(s), but is rather a
charitable benefice held in trust, to be deployed for future generations as much
as the present. Secondly, moving
beyond disinheriting future generations and requiring them also to finance the
“profligacy” of the current one only compounds this unfairness.
Thirdly, the actual or potential running on a negative technical solvency
gap is the very antithesis of prudent axioms of insurance, and flies in the face
of experience, which argues for positive financial strength.
Worse, it flouts the core concept of policyholders’ reasonable
expectations, and the consequent appellation of unconsolidated bonuses and
benefits as a “moral charge”. For this reason alone the House of Lords
Decision was essentially correct. Albeit
imperceptibly, such a fund sooner or later crosses over from being a
“With-Profits” fund for maturing policyholders, to become a
“With-Liabilities” fund for current and future premium payers.
As this transition takes place, the fund risks becoming crucially
dependent upon future premiums unless very definite actions are taken.
And fourthly, if guarantees are not meaningless, then they must be
properly explained, and charged for openly rather than by stealth. The
impropriety of this is compounded by causing those without guarantees
unwittingly to underwrite the guarantees of those who have them by placing their
asset shares in the same fund, especially when the safety margins of the fund
have been eroded deliberately. Subsequent
developments require that this be qualified further, as in Section
Not surprisingly, these issues
were reflected in the ensuing discussions in London and Edinburgh.
To aid continuity extracts and a commentary are given in Appendix
although they may be read at this point. It
will be seen that discussants repeatedly emphasised the following:
Mr Roy Ranson closed the
Edinburgh discussion for the Equitable. The
full flavour of his remarks should be enjoyed entire and verbatim, but
space must be found here for the following:
“The Paper covers practically
the whole range of activities associated with the operation of a predominantly
with-profits office. The kind of points made through the paper are discussed
with the Board and senior colleagues very much in the way we put them in the
Paper (the wording is a bit different on occasions) and to the extent that we
can, with policyholders. That of
course is a difficult exercise but we are making efforts.”
This now seems an over-liberal, rather than a too economical version, of
the emergent truth. It will be interesting to learn in due course how far Board
Members past and present (and the non-executives in particular), let alone local
office representatives, now agree with him. It seems unlikely only to be humble
policyholders who do not. And:
“Regarding the estate, of
course we do not have objections to its existence and of course if it exists it
is of value to existing policyholders, but I will keep asking the questions: -
who created it, which generation, and why was it created?
Those points need to be taken up and answered. What contribution is required towards it from the current
generation? When are the holders of
estates going to tell the public what it is all about?
How did they have this flash of inspiration to create it and who paid for
it? Who is going to go on paying
for it? As a matter of interest I
did not inherit one so perhaps that influenced my views.”
One can admire the sheer effrontery of this, but still must ask- had
Ranson also helped spend what he might otherwise have inherited?
Bombast aside, Roy Ranson’s
remarks now look disingenuous. He above all others present should have known the
answers to the rhetorical questions he posed, since they are given in his
predecessor Maurice Ogborn’s bicentennial history of the Equitable11,
published in 1962. Richard Price,
DD, FRS (1723-1791) was a nonconformist minister, a friend of Benjamin Franklin,
the Rev. Thomas Bayes and Adam Smith, and a leading radical figure in the
English Enlightenment. He was also
a not inconsiderable mathematician in his own right, and one of the earliest and
most important formative influences on the Society from 1768 onwards.
In 1775 he wrote that £4,000 or £5,000 should be “established as a
reserved stock…never to be entered upon except in seasons of particular
mortality…the interest…to be added to the principal, till it shall rise to
such a sum as may be deemed a sufficient surety to the Society in all events (Ogborn
Price was also instrumental in
securing the appointment of his nephew William Morgan, FRS (1750-1833) who
rapidly succeeded to the post of Actuary at the Equitable, and by whose probity
and prudent industry the Society was raised to unparalleled eminence and
prosperity in over fifty years of his service.
At his uncle’s instigation Morgan conducted the first valuation of
1776, and wrote an early book entitled: “The Doctrine of Annuities and
Assurances on Lives and Survivorships” in 1779.
Ogborn (p108) described how Price took the opportunity to give the
Society some good advice in the introduction to this book.
Price had given only qualified approval of the reduction of one-tenth in
the premiums which had followed Morgan’s valuation, for he disagreed with the
return of the “whole overplus”:
“Different opinions have been
entertained of this measure; but the truth is, that (however safe and just the
prosperous state of the Society then rendered it) it is in itself a measure of
the most pernicious tendency…A repetition…might hurt the Society
essentially, by withdrawing from it that security which it has been providing
for many years, and bringing it back to infancy and weakness.”
True words indeed, but even then there were detractors, viz the
rejoinder: “Ergo - A Society or
company not encumbered by such engagements may safely make that reduction and
charge only as much premium as the value of the life requires.”
This comes from annotations to the preface in a copy of Morgan’s book
owned by an original director of the Pelican, a rival Society (Ogborn p135-6). Not
so safe in the event, because the lean scheme can only work given perfect
forecasting; thus it may be considered only to be dismissed.
More than two hundred years were to pass before the point was decided at
the Equitable itself.
Back now to Roy Ranson, who
continued: “There were quite a
lot of comments about mix of assets and asset shares.
We quite deliberately do not look at individual contracts and I think
that when considering that point, we need to bear in mind that for all practical
purposes, I repeat practical purposes, our business is all effectively
short. We have contractual guarantees with a very wide range of pension ages on
our business (80% of our business is pensions).
There is also a contracted payment basis on prior death.
In practice, we also pay full value on withdrawal and surrender at any
time. That is not guaranteed and
that could be the first thing to go if things got difficult.
On the regulatory side, we take account of the earliest possible
contractual age for pension purposes in the costs of our guarantees.”
Here Ranson himself gave the lie to First Order Sophistry Items 7 &
8; practical realities later determined that he could not have it both
“On investment mix, we made a
point in the paper that we try to keep the balance between declared and final
bonus such that it does not influence investment strategy.
What I mean by that is that I like to advise the Board, whom I advise
each year on investment strategy, that investment managers may form their own
views. The mix of assets we have is
a direct outcome of what our investment managers choose to do. It is five years or more since I recommended any kind of
investment constraint. On the point
of asset mix we are always puzzled as to why these offices which promote to
(sic) the philosophy that, as you approach maturity, you move into fixed
interest, have such high proportions of fund proceeds in terminal bonus?” This
pictures the Equitable as an office less concerned with assurance than
investment return, and it is consistent with the notion that the management was
unduly influenced by commercial and marketing considerations9.
Here we may note that over-rapid expansion can create a very heavy weight
of potential claims (i.e. strain) on a life assurance office. In essence this is
because the assurance element dominates in the early phases of a policy before
much premium income has been received, and so the ratio of assurance obligation
to asset share is high. And if the
number of policyholders doubles rapidly because of an indiscriminate influx of
new and younger members while the size of the estate or reserves remains
constant, the additional demand can erode the reserve safety margin. At the same
time the newcomers expect their share in the benefits of the estate in due
course, but this expectation must diminish as their numbers increase unless
appropriate measures are taken to increase the estate pro rata. Longer
established members therefore have an interest in keeping the rate of influx
down, so that their asset share is maintained. If not, they may demand that a
higher proportion of the surplus is given to them. Hence one way a bubble
threatens, and on the other stagnation looms- a classical dilemma which dogged
the Society into the second half of the 19th century (Ogborn Chapters
11 & 12)11 and will surface again later.
All this aside, as will later
emerge it is also pertinent to ask why, if part of the reason for presenting the
paper was, as it should have been, to seek peer review and advice, the various
caveats and advice (and particularly the items in italics which relate to the
duties of information, to which Roy Ranson himself had paid lip-service) were
neither heeded nor acted upon. Suffice
it for now to note that as a result it may be concluded that there were
germinating seeds of maladministration, misrepresentation and negligence in the
ground no later than the end of March 1989.