LETTER TO JOHN TINER - RECTIFICATION SCHEME 2003

EQUITABLE LIFE  

RECTIFICATION SCHEME

PRESENTATION

TO THE FSA

BY

THE ELTA WORKING PARTY

JULY 2004

CONTENTS

REPORT                                                                                           

1.      Background

2.      Causes of Concern

3.      Issues of Contention  

Unfair

Hindsight

Missing facts

4.      The Typical Annuitant’s Situation

5.      The current Procedure in making an offer

6.      Summary and Conclusion

Report by Peter Butler on the ELTA Working Party on the

EQUITABLE LIFE

RECTIFICATION SCHEME

1.       BACKGROUND

In February this year I published a letter in the website of the Equitable Life Trapped Annuitants (ELTA) with my concerns over the Revised Rectification Scheme and received a steady flow of emails from fellow sufferers with similar views.

As the numbers approached 70 I asked 4 of them conveniently located around London to form a Working Party to consider what action might be appropriate. Members of the Working Party are  

We understand there are still around 17000 Rectification Review cases outstanding who will doubtless share our concerns but are probably in the age scale of people who are not yet “connected” with computers.

2.       CAUSES OF CONCERN

The previous Board of the Society implemented the original “benefits adjustment plan” later described as the Rectification Scheme in 2001 after extensive legal advice before and after the House of Lords Judgment in the Hyman Case. (ref  Penrose Report, page 37, 180, 269).

This scheme was apparently problematical and replaced towards the end of 2003 by a revised scheme with a statement from the Society that the initial scheme

“…gave GAR Policyholders the opportunity to replace the product they chose when they retired with a GAR annuity. This was unfair because it allowed those who bought Managed Pensions and with-profits annuities to change the investment decision they took with the benefit of hindsight…”

We have received complaints that Offers being made under the revised scheme are less beneficial that those under the original scheme, difficult to understand and requests for the detailed breakdown of the computations are being resisted by the Society.

Policyholders are also being asked to respond within 28 days, under threat of of the offer being withdrawn if this deadline is not met. Quite apart from the implication that the offer is an altruistic one rather than the meeting of a legal obligation, the policyholders are being pressured to respond before they have reasonable time to gain clarification of the basis of the offer or seek independent legal/financial advice. While some time scale (90 days perhaps) is obviously necessary, 28 days should be seen in the context of the 3-4 years that it has taken EL to make even those offers which have been received at this point.

3.   ISSUES OF CONTENTION

We contend that the adoption of these two key issues of “fairness” and “hindsight” are in conflict with the House of Lords Judgement.

“This was Unfair”

As clearly demonstrated in the House of Lords Judgment there is a conflict between fairness and what is legally correct, and fairness has to give way to what is legally correct.

The concept of fairness was used to justify the original Differential Bonus Policy and is now being used as a justification for revising the Rectification Scheme and reducing the rights of affected annuitants to change their choice of annuity. The reverse argument of fairness might be used by annuitants who believe they are a trapped minority of policyholders in contrast to the much larger number of policyholders who still have the right to depart from the Society and can therefore “contain” their loss.

At the recent AGM there was a noticeable message that the Board still hope to get things right “ in the longer term”., and there were sighs of despair from the many elderly 70 plus annuitants watching the performance of the young members of the Board in the 50 – 60 age range.

“Changing the investment decision with the benefit of hindsight”

It must be obvious that most annuitants – in the evenings of their lives - are not making simple money investments when buying annuities. They are in fact making a complicated pension investment decision and the quality of that decision analysis relies heavily on

Full disclosure of all relevant facts and risks and

A clear understandable presentation of those facts and risks

It follows therefore that if crucial facts are missing or unclear in the annuitant’s original decision analysis it must be wrong to deny that annuitant the right to change that pension investment decision.

What were the missing facts?

Under the Differential Bonus Policy between 1993 and 2000 the Society allocated a lower final bonus to a potential GAR annuitant and as confirmed in the Penrose Report the With Profits Funds was “flawed”.

The annuitant’s decision analysis therefore did not include

·         The higher level of terminal bonus to which he was entitled and

·         The excessive risk involved in investing in the With Profits Fund

A policyholder choosing a with profits annuity would obviously assume a “normal” investment risk i.e. the risk of marginal fluctuations in profit or loss within a properly regulated pensions investment ring fenced fund. It would be clearly unthinkable for an annuitant to hand over a significant amount of his pension savings to be used in a fund that was “flawed”.

4.    THE TYPICAL ANNUITANT’S SITUATION.

The following comments represent a summary of the views held by most annuitants affected by the Rectification Scheme.

Typically many policyholders claim to have been unaware of their GAR rights in their pension policies as these rights were tucked away in a mass of incomprehensible pensions language in documents they probably signed very many years before retirement. They received annual statements of their funds showing guaranteed benefits and estimated final bonuses, but we now know that in many cases they were not given the correct amount of the terminal bonus to be allocated to their fund and did not therefore have the full information to support their choice of annuity.

It is clear from the Penrose Report that the With Profits Fund was seriously “flawed” and if that knowledge had been made known to a purchaser of an annuity from 1993 onwards then clearly it would have made a significant impact on that decision. It must be obvious that a Pension/annuity purchase is not a normal investment decision with attendant risks but a decision, which requires maximum safety.

5.      THE CURRENT PROCEDURE IN MAKING AN OFFER.

The annuitant receives a letter with the following paragraphs

“ We have worked out the supplementary annuity by comparing the value at the retirement of the GAR annuity that should have been available to you (with a fund where we used the higher differential final bonus) with the value at retirement of the with-profits that you bought with the same fund”

“We have offered you the extra value as a supplementary annuity. We have calculated this annuity using the annuity rate that was available at your retirement date. This annuity will be guaranteed and will be paid to you by us. Your existing annuity will stay in force and will not be affected. We have received legal advice that t his is appropriate compensation for our failure to tell you the correct value for the GAR annuity.”

Inevitably the annuitant will ask for some explanatory numbers and will in appropriate cases be given and will receive the following type of reply

“When you retired the GAR was more valuable than the Society’s comparable current annuity rates and this makes the fund to which GARs were applied worth the equivalent of  £xxxxx at retirement.

We need to compensate you for the differerence between the value of the annuity that you actually took at retirement, £000000 and the value of the GAR annuity which we should have offered to you £xxxxxx . That is the differential bonus practice resulted in you getting benefits worth £zzzzzz too little.”

Most annuitants will find this language confusing – especially the use of the word  “value” and would like to know

·         The size of their fund before and after the New Bonus Resolution and

·         The amount of the guaranteed annuity they should have been offered on retirement.

But in the cases referred to us The Society have so far refused to provide these figures despite the fact that they need them in to do the review calculations. In one of these cases we deduce that the annuitant should have been offered a Guaranteed annuity around 31% higher than his With Profits Annuity. This was not made clear to him at the time and the stark reality of those choices is still not being made clear to him now despite his many attempts to get figures presented in this way.

6     SUMMARY AND CONCLUSION

We conclude that

1.    The Rectification Scheme 2003 is legally incorrect and does not meet the Society’s Obligations from the House of Lords Judgment, and

2.    The Society’s presentation of an “Offer” under the revised scheme is unclear, and couched in similar language to that described in the House of Lords Judgment as “opaque”. This will inevitably cause many annuitants difficulty and stress resulting in appeals and complaints procedures -or after frustration and exhaustion -signing the Acceptance form under feelings of duress.

3.    There is sufficient doubt on the legality of the Scheme and the way it is currently being implemented to justify an urgent formal legal assessment of it by the FSA.