EQUITABLE LIFE MEMBERS
EQUITABLE LIFE: PENROSE AND BEYOND
- ANATOMY OF A FRAUD
A paper by Dr. Michael Nassim
Last Updated: Wednesday, February 09, 2005 05:58 PM
|CONTENTS PAGE AND INTRODUCTION|
of “Equitable Life: Penrose and Beyond – anatomy of a fraud”
A paper by Dr Michael Nassim
The CONTENTS page allows readers to either download a .pdf version of the
report or to read the report as part of this website.
new sales drive was seriously affected by the 1973 oil crisis, which
caused a market crash followed by prolonged and severe inflation which led
into a sustained bull market. An unprecedented compensatory rise in
interest rates followed. Over its course, Appointed Actuary Barry
Sherlock and his deputy Roy Ranson used the estate as well as earnings to
fund bonus allocations and boost the Society’s competitive performance
year an un-guaranteed terminal bonus adjustment was introduced, and as
a matter of policy it became the dominant bonus form. Fatally,
the actuaries from then on repeatedly advised the Board that terminal
bonus was cheap to service because it did not require statutory reserving.
Since this could only be true if
the Society was prepared to renege on terminal bonus, it was a lethal seed
of bad faith.
1983 virtually all the estate was consumed, and the remaining funds were
all taken up by unconsolidated terminal bonus. The with-profits fund was
now a null fund. To support new solvency requirements under the 1982
Insurance Companies Act, all remaining capital appreciation was brought
onto the books. With no further reserves and interest rates falling,
senior management formulated a retrospective claw-back Differential Terminal
Bonus Policy (DTBP) to fund Guaranteed Interest Rate (GAR) annuities on
maturity. The DTBP was in
bad faith, and its non-disclosure was potentially, if not then actually,
· Having finally consumed all its 200 year’s accumulation of
traditional assets, the Society now moved into over-allocation of bonus to
current members so as to continue boosting its performance figures and
sales drive. But since the performance figures sprang from an
unrepeatable distribution of assets, the Society was thereafter trading on
a false basis.
In 1988 more flexible managed
pensions were due to be introduced, and the Society hoped fully to
discontinue its onerous GAR policies. The senior management team
(which included executive directors) elected to mix the new policies with
the old in what was now a with-liabilities fund, nominally in order to continue using the
unrepeatable performance figures.
There was, however, by any reasonable standard an absolute requirement to disclose the DTBP and inequities of
benefit and guarantee to the full Board at this fateful point - and to
minute the discussion. But equally, no competent non-executive director
would have approved carrying over the now inequitable liabilities into an
extended and over-allocated fund. Not
only was this in continuing bad faith, but also the Society was finally
embarked on a fraudulent course.
If the full Board was not
informed, then nor could anyone else be. Hence, once the unknowing sales force commenced selling the new policies, the
fraud became established, finally trapping over 1 million people.
1987 was also when outgoing Insurance Directorate Actuary George Newton
drew particular attention to the need for prudential and conduct of
business regulators to monitor the abilities of companies in
Equitable-style predicaments to satisfy policyholders’ reasonable
expectations. Failure to
follow the position up was disastrous.
In order to carry on boosting sales, over
the years to 2001, over-allocation was extended by devices that eroded
statutory solvency margins, and by inappropriate Zillmer adjustments and
loans which depended upon future premium income such that the fund
degenerated further into a Ponzi scheme. By the year 2001, 930,000
new policyholders had been drawn to the lure of the Society’s now
spurious performance figures.
Unfortunately, pension scheme trustees now insisted on
retaining GAR privileges for a further 5 years, which hazardous inequity
private policyholders unknowingly funded.
In 1989 and 1990 Ranson and his assistant Christopher Headdon
delivered a manifesto paper entitled “With Profits Without Mystery” (WPWM).
It was a post hoc rationalisation for disappearance of the estate
and periodic over-allocation, and purported to justify using all the
unconsolidated terminal bonus allocations to back the guaranteed portions
of policies and finance the business in the absence of any free reserves.
The paper also stated that since the Society’s practice was to pay out
policy values in full, it was of little importance whether bonus was
guaranteed or not. The actuarial audience was sceptical.
But since the Society was already over-allocated and falling interest
rates meant that the covert DTBP terminal bonus claw-back would sooner or
later become necessary, the entire exposition was integral with
pre-existing and fraudulent bad faith.
whatever whispers there now were in actuarial circles, prudential
regulators and the Government Actuary’s Department did not react, or
recall Newton’s caveats.
· Scheme GAR privileges having ended, the DTBP could at last be
deployed. It was obscurely placed in board papers and mentioned en
passant to the regulators. Only
slowly did directors and regulators realise the significance of what had
happened, but from now on retiring GAR policyholders encountered it, and
as time went on they increased in anger and number.
the Society had to fund the Hyman test case on legality of the DTBP.
Full re-insurance of the potential liability was too expensive, and so
Headdon entered into a show treaty which effectively he negated by means
of a side-letter agreement. And as lately as Feb 2000 Managing
Director Nash told policyholders by letter that losing Hyman would
cost no more than £50 million, i.e. what the Society would pay only if it
won, and had been officially held on the books as such.
When the House of Lords eventually found for Hyman the GAR
liability was valued at £1.6 billion. The now hugely expanded £32 billion fund was between £8 billion
and £10 billion short of with-profits status, and over a million
policyholders were involved.
this point the regulators had failed totally for 30 years. They
misread the long inflationary wave and its distorting effects on
competitive pressures. They allowed a WP fund to disperse its estate
inequitably, incur excessive new business strain and move into
over-allocation, did not react to disquiet over the WPWM paradigm, did not
probe ambiguities of hypothecation, allowed inappropriate gross premium
valuation, and failed to react to the DTBP, subordinated loan and quasi-Zillmer
adjustment. Their failure was in part systemic, but predominantly
attitudinal and hence operational. Regulators engaged in sometimes
self-absolving debate about the inches while the ship was off course by
miles and headed for the rocks.
energetic representations, the Society, Treasury, regulators and judiciary
turned a deliberately blind eye to the surrounding irregularities,
previous fraudulent non-disclosures, mis-selling, and regulatory failure.
In February 2002 the S425 Compromise, which was thereby founded on a
false prospectus, went through.
Further trouble was now inevitable.
regulators, and most notably the FSA, remain locked in denial in
continuance of self-absolution. The FSA deliberately ignored the
evidence for fraudulent mis-selling before the Compromise, since claiming
to have investigated and rejected the case without revealing its grounds. Like the Society, the FSA has become its own antithesis, and
is now an unaccountable public danger.
continuing denial, overwhelming contrary evidence has shifted the burden
of proof to the FSA and the Society. They must now demonstrate that the
With-Profits Fund did not lose its with-profits status on disappearance of
its free assets; that it did not thereafter trade on a false basis by
using unrepeatable performance figures, did not next become a
with-liabilities fund under circumstances of chronic over-allocation
complicated by the GAR/DTBP issue, and that at no time did it degenerate
further into a Ponzi scheme implemented by an ignorant sales force. If it could be demonstrated that none of the above happened, only
then should we concede that there was no fraud.
|CONTENTS PAGE AND INTRODUCTION|