EQUITABLE LIFE MEMBERS

THE EQUITABLE LIFE DISASTER- DOES IT COMPARE TO THE LLOYD’S ASBESTOSIS SCANDAL OF THE 1980’s?

Last Updated: Friday, November 16, 2001 04:55 PM

THE EQUITABLE LIFE DISASTER- DOES IT COMPARE  TO THE LLOYD’S ASBESTOSIS SCANDAL OF THE 1980’s?

With thanks to Dr Michael Hassim

a) The evidence:

Introduction 

During the 1970’s, Lloyd’s accepted retrospective liability for asbestosis and similar long tail claims arising from its North American industrial business.  In the ensuing years it slowly became apparent that the totality of these claims threatened to make Lloyd’s insolvent.  During the same period, Lloyd’s, through its Syndicates, embarked on a massive recruitment drive which brought in thousands of new names, many of whom were risking too much of their total wealth.  This had the effect of diluting the liabilities of the ‘old names’ and bankrupting many of the new names.  The resulting scandal led to fundamental structural changes at Lloyd’s.

The history of the Equitable’s With Profits fund shows alarming similarities to the events at Lloyd’s.  Guaranteed annuity rates were written into policies from 1955 to 1988, rendering the Society at risk of insolvency if future open-market annuity rates should fall well below the guarantees.  From 1988 onwards, a very large number of non-guaranteed policies were sold, all participating in the original with profits fund, and thereby diluting the burden of the guarantees.

The question that must be addressed is this:  Was the decision to keep the non guaranteed policies in the original with-profits fund just the result of carelessness, or was it a deliberate stratagem to conceal the implications of earlier errors at the expense of the new, non-guaranteed policyholders? [A]

It is certainly simpler to explain the whole sequence of management errors that contributed to this debacle as arising from a single misconceived stratagem, rather than being the product of random incompetence.  However the simplest answer is not necessarily correct, and the truth could be sometimes between the two, given that the situation may not have been comprehended fully by every senior officer of the Society.

The remainder of this article examines the evidence for a dilution of Guaranteed Annuity Rate liabilities among new members; if, when and by whom it may have been known, and whether the effective concealment of such a liability amounts to mis-selling of With Profits policies in a widespread, even universal sense.  It also considers the implications of the answer to the central question [A] being in the affirmative. The circumstantial evidence and a sceptical appraisal of human motives, plus a comparison of words with deeds or events over sufficient time are well tried starting points for this sort of enquiry.  This is the prima facie evidence the writer has so far collected; other parties are welcome to add additional material of their own, and are asked to communicate important additions to him:

1)      Between 1957 and 1988 The Society acquires 170,000 members with Guaranteed Annuity Rates (GAR) (Source: Society’s Way Forward documentation).  The GAR members believe that their policy documentation guarantees their annuities in a simple and straightforward manner.  (When the Society attempts post hoc to help fund guarantees by cutting terminal bonuses within the same policies they object, and the House of Lords support them.) 

2)      The Society becomes apprehensive about GAR liability as and if interests rates fall, such that more members will exercise the GAR option.

3)      As a result the Equitable board is understood to have discussed closing the With Profits Fund and writing new business from a new fund (Money Telegraph Sept 8^th).  In the light of subsequent events we can infer that this was a very uncomfortable option indeed, and that measures such as re-insuring the liability might even then have proved prohibitively expensive.

4)      So, what else could or should have been done at that point, instead of what actually happened?  Which board members and senior officers, understandably or even reprehensibly, went into Ostrich (denial) or Chameleon (camouflage) mode, and, if they did so, why?

5)      Exactly the converse of fund closure happens:  With Profits Policies are sold at a hugely increased rate: in the first 30 odd years only 15% of GAR members are recruited.  By contrast, the 85% majority of 930,000 non-GAR members are recruited in just 12 years (Society’s Way Forward documentation).

6)      The GAR risk now looks pretty well diluted by the large influx of non-GAR members, but even this proves insufficient in the light of subsequent events:  There are now over 1 million members, but the 15% of GAR members still hold 25% of fund value. Even so, the 75% majority non-GAR buffer is very helpful (ibid). When the crunch comes, sale of the Society’s business and penalties already imposed will just about cover the deficit (as presented in the compromise documentation), though this is based on GAR uptake rates of 50% and yet interest rates are continuing to fall, threatening to push the uptake rate much higher (e.g. as shown in the table on page 9 of the extract from the year 2000 annual report). 

7)      While this is going on, the Society Officers responsible for the original actuarial calculations and the later sales pitch are being promoted to the highest ranks of the Society (an historical fact).  How could they not have been tempted to conceal or minimise the consequences of earlier wishful thinking when it had seemingly served their personal interests so well?  Did they or the Board discuss this situation openly and in a continuing manner with the membership and regulators from 1987-8 onwards?   If not, how could the regulators have found out, and what was their earliest opportunity for doing so?  On the answers to this depends the secondary issue of possible regulatory failure.

8)      None of the Society’s brochures, advisory letters and cautionary information in my possession make any reference to the fact that GAR members are locked into the same fund as non-GAR members, and have first call on it such that non-GAR members alone are underwriting guarantees of which they may sometimes have been unaware and never themselves gave.  We should therefore initially assume and maintain that there was likely to have been a universal and continuous omission of appropriate warnings from the Society’s sales and advisory or cautionary literature.

9)      The writer has dealt personally and successively with 4 members of the Society’s Nottingham office when purchasing an AVC in 1993 and personal investment plans in April1999.  None of them warned of the liability, although the first certainly told him that GAR’s were no longer offered.  Hence assume that staff did not themselves know, since it is improbable that branches of the Society would have recruited a whole succession of sales staff whose conduct fell below the standards it should have required.

10)  We should therefore assume that the sales staff was in general unaware of the risk at the heart of the products it was selling.  In the light of the Society Board’s longer standing apprehension concerning this very matter, a persistent state of ignorance of more junior staff cannot be dismissed as merely a simple if very persistent oversight. This is not difficult or expensive to establish, and can be done by interviewing a sufficient number of Society and ex-Society staff independently of looking at sales policy directives originating from a high level within the Society. If proven, below what level did ignorance begin?

11)  Was (5) above at least partly a consequence of incentives being offered to sales staff to direct clients and members towards the With Profits Fund?  Did the With Profits Fund grow proportionately faster than other investment vehicles offered by the Society? Here an analysis of the Society’s internal written records and fund growth will prove invaluable alongside selected interviews.  If so, at what level in the Society did it originate, and when?

12)  The Financial Services Authority took over responsibility for overseeing the Equitable from the Treasury at the beginning of 1999, and its chief Sir Howard Davies recently said that the FSA was obstructed at every turn by the Equitable, and threatened with judicial review (Daily Telegraph, Nov 12^th) What honest motive might the Equitable’s officers have had for obstructing the Regulator? Did they believe and state that regulatory activity would prejudice the GAR appeals?  Or was there a more general unease about the line the regulator might take in view of the information it was asking for, and the answers it might in consequence have obtained?

Thus put, the prima facie case for maintaining that there is a similarity between the asbestos liability new “names” dilution fiasco at Lloyds and the Equitable’s quandary looks as though it needs a thorough answer.  It is therefore fortunate that establishing the validity of the main thrust of these contentions is not very difficult, time-consuming or expensive.  It is, however, very sensitive, because if true every class of Society member will have a grievance. The deductions made have been composed in such a way as to facilitate their being checked separately and in an appropriate order.

Unfortunately, the prima facie evidence also indicates that one or more class actions alleging general mis-selling are highly likely to succeed.  If so, members who have quit the Society, institutions and third parties will bring it, whether or not an internal compromise is effected, and what then remains of the Society could be demolished from without.  The potential liability for this is not addressed in the compromise documentation, and is probably growing as more members realise this and quit in the absence of it being dealt with.  Indirect and third party actions are a particular threat, because they will take place whether or not the compromise goes through.  Ironically, the Society’s own Herbert Smith enquiry is likely to provide outsiders with much of the ammunition they need.  Therefore it is in everyone’s interest this issue should be tackled resolutely, and now.  To wait until a “Compromise” has been put through is to court disaster. So how could such litigation be prevented?   Though it looks difficult, there are a number of credible options, and this is fortunate because any solution may require a judicious combination of them.  This in turn requires that the Government and Treasury act decisively, rather than rely on the findings of surrogate non-Government organisations that have no executive power.

b) Derivative Questions.

Here follows a list of questions based upon the numbered topics above.  Some of them are angled to stimulate factual input from policyholders and others who were involved in the transactions mentioned. 

1)      Is there evidence that the Society was monitoring the issue of Guaranteed Annuity Rates (GAR) on a regular basis prior to 1988?  Or did the issue emerge with relative suddenness in a serious form?  Did it only emerge when its consideration was inevitable, and to whom was it communicated?

2)      When did Society Officers and/or Board Members first become concerned about and increased uptake?  (How much earlier was it than the Board resolution of December 22^nd, 1993?) December Is the evidence personal recollection or documentation?  If documentation, is this letters, memoranda or minutes?  What date(s) does it bear?

3)      When was the first time that Officers or the Society Board considered closing the With Profits Fund and so limiting the GAR issue?  Was closure considered more than once?  What reasons were advanced for not doing so, and by who?

4)      Were options other than Fund closure considered?  If so, what were they? Who put them forward, and when?  What reasons were given for not following them?

5)      Given that new members were being recruited to the With Profits Fund at a greatly increased rate, were misgivings expressed?  If so, when, in what forum, and by who?

6)      Is it correct that those responsible for carrying out the actuarial calculations and monitoring them in effect continued to shoulder this responsibility by virtue of their advancing seniority in the Society?  Did the Board hold them accountable for this, and require them to discuss it?  Or were they and the Board victims of their own “success” and plausible story line, such that everyone concerned lost their judgement?  But if so, what do you think of the professional attitude and competence of the actuaries and experienced insurance industry personnel over many years?

7)      On what occasions did the Board discuss the matter, and make effective communications with Society Members, Government and Regulators?  Did these occur on or prior to 1988, or did they occur later? Was it reviewed regularly in successive annual reports for the benefit of members? If later, when?

8)      Do Society brochures, policy documents and cautionary letters associated with your policy refer to the GAR liability that you were underwriting?  Are you aware of other Society members whose papers discussed this, or do you think everyone’s papers are likely not to contain appropriate warnings?

9)      Were the Society representatives who dealt with your policy aware that you were in the same Fund as members with guarantees, and did any of them tell you about this, or what the consequences of that liability could in theory be?

10)  If you judge that the representatives who dealt with you were in general ignorant of the fact that members without guarantees were subsidising those who had them, do you consider they should have been informed, and required to discuss the issue with you?  What valid reason could there be for such information being withheld from Society representatives, given that concerns about the issue may have been raised at higher levels within the Society before you took out your policy?

11)   Did you take out a With Profits Policy because you already knew about them and were convinced of their advantages, or were you advised that these were the Society’s best investment option?

Last amended on Wednesday 14^th November.

Dr Michael Nassim, non-guaranteed annuitant and With Profits personal investment plan holder, Equitable Life Assurance Society.

Main source material and acknowledgements:

Michael Josephs (city@london.polargrp.com):  An open letter to my MP-  main letter and brief.  12^th Oct 2001.  The main letter contains suggestions for ways forward. “The Pollyanna Brief” is an historical account of affairs at the Equitable, which inter alia suggests that the evidence for general mis-selling already looks damning.

Equitable Life Assurance Society:  Way Forward:  draft proposals and background information, Sept 18^th 2001

Hansard 17^th Oct 2001: Debate on Equitable Life led by Richard Ottaway (Croydon, South) columns 273-258WH.

Dr Michael Nassim (m.nassim@btinternet.com): Parliamentary and Governance aspects of the Equitable Life fiasco.  Letter to Alan Duncan MP.  Oct 17^th, 2001.

Daily Telegraph articles, Sept 8^th & Nov 12^th.

Dr Michael Nassim:  Prima facie evidence for general mis-selling of With Profits policies by the Equitable, and its similarities with the Lloyds asbestos liability dilution scam. Contained in:  Letter to Mrs J Hall and the Compromise Group, Equitable Life Assurance Society.  Copied to the FSA for the Penrose Enquiry et al.

The writer wishes to thank Michael Josephs for comments, editorial help, background information and contributory arguments, much of which has been incorporated.