Parliamentary Ombudsman- Executive Summary
is a copy of part of the text, The Executive Summary, submitted to the
Parliamentary Ombudsman that was included in her report to Parliament.
1) The With-Profits annuity was a particularly complex financial product, poorly understood by the vast majority, if not all, the annuitants who purchased it, and predicated on the belief that the Equitable Life Assurance Society was a blue-chip, properly regulated institution of sound financial standing. Annuitants would not have purchased the product had they believed otherwise.
2) Three core issues differentiate With-Profits Annuitants being:-
a. Their inability to surrender the policy or transfer it to another provider;
b. The importance of the purchase in the context of providing a safe and reliable income, when the individual’s abilities to find replacement income were increasingly remote; and
c. The fundamental role played in the product by the increasing terminal bonus to maintain their retirement income.
3) The With-Profits Annuity was deeply flawed and arguably could never have delivered what it promised. Annuitants were invited to "take a risk" in the market, but it was a risk that could not have paid any more than any other annuity type and, in addition, exposed the annuitant to an ever increasing amount of the total annuity that was "not guaranteed", and that could be, and was, removed. In effect, the risk was not “the market", but the financial status of "the Society". This made the WPA a quite unsuitable product for the consumer trying to create a life-time’s income.
4) It was the responsibility of the Official Regulator to ensure that the products on the market were in fact capable of delivering what they were offering, since annuitants are reliant on the regulator to carry out the sort of tests that lie beyond the competence of the general public.
5) The Ombudsman’s findings that the information on financial standing was incomplete, that liabilities were understated and that the solvency position was not appropriately verified leading to a misleading picture of the financial health of Equitable, means that the clear injustice sustained by With-Profits policyholders was the purchase of a product, which, without this maladministration, they would not have purchased.
6) The purpose of compulsory annuity purchase is to require individuals to secure a safe and reliable income for retirement when, crucially, they will be unable to supplement their income from alternative sources. Since this is a key statutory requirement, that an individual MUST buy an annuity, it follows that the regulating authorities have an absolute obligation to ensure that the products offered on the market can meet that statutory objective. Any failure to do so must inevitably result in a justified claim for maladministration.
7) The ever increasing gap between the “guaranteed” annuity and the total annuity was not covered by reserves, nor was it accrued for in the accounts and could therefore only be met by an ever increasing sales effort so that new investments were required to meet the obligations of the old, creating in effect a pyramid scheme.
The inter-generational transfer that Equitable sought to avoid, where
excess investment returns in the past subsidised current policyholders, was
replaced save that now future policyholders subsidize the current. This is an
inevitable consequence of the Society’s flawed financial and business model.
9) It is clear that 50,000 With-Profits Annuitants have suffered significant financial loss as a direct result of the maladministration found. As a result, any redress should be to provide direct financial compensation to them for their losses. Clearly, payment into the fund will not assist them as their policies have been transferred to the Prudential and as explained above, there is no prospect of their policies recovering sufficiently to avoid loss despite that transfer.
10) With-Profits Annuitants are a unique group with unique and more complicated elements to any calculation (to determine their compensation). The preference should be for individual calculations against their individual alternative transactions. In the absence of that, a standardised scheme should be capable of formulation.
7 May 2008”