EQUITABLE LIFE MEMBERS
Letter to MP with Attached Background Information on Equitable (The Pollyanna Brief)
Last Updated: Saturday, October 20, 2001 05:58 PM
With thanks to Michael Josephs for allowing us to reproduce this letter and report (The Pollyanna Brief) Michael will be happy to send file copies to interested parties if they email him with their name, address and email destination.
An open letter to my MP
I
have prepared the attached brief “The Equitable Life Story or The
Pollyanna Syndrome” to help us understand the complex background to the
Equitable Disaster. Much of
the detail has been omitted, or is not readily available, but I have tried
to focus on essentials and confine myself to accepted facts and
conclusions drawn from those facts.
When
I began to write the brief, I could not comprehend how such a capable
organisation could wreck itself in a few short years. It turns out that the seeds of destruction were planted in
the 1970’s, but it took sustained arrogance and fecklessness to allow
those seeds to bloom into a jungle which destroyed the policyholders
proper harvest. I hope that
the brief will help others to understand the nature of the failures and
how to tackle the many outstanding problems.
The
fundamental message from this record of misfortunes is that people failed
in their duty. It was not
that their duties were unknown or poorly defined: the thrust of their
responsibilities was clear, but they hid behind a fog of technical detail. They said one thing but did another, and the interest of
policyholders came last. The
pickings were too good and no one was brave enough to blow the whistle.
The
second message is that too many of the watchdogs who were meant to prevent
such a situation from developing withheld their concerns from the
policyholders, the real owners of the Society.
One timely letter from a Cabinet Minister could have halted the
downward slide. Secrecy is
the foe of good regulation, but it still holds sway despite the
appointment of a completely new Board.
Regrettably
there is a third message: once an organisation loses its essential
integrity, nothing that it does can be taken at face value and trust
becomes just foolishness. All
of the actions of the previous Board and its willing helpers need to be
re-examined with a sceptical and penetrating eye.
None of its policies and plans should be continued without
stringent re-evaluation.
The
Treasury is behaving as if the policyholders brought the problems on
themselves, while in truth they are virtually blameless.
Currently, Equitable is expected to dig itself out of the deep mire
in which it lies, and the policyholders are being made to bear nearly all
of the costs. Frankly this is a nonsense.
Equitable is too weak managerially and financially to do this on
its own, and too many of its managerial echelons are compromised by their
involvement in the destruction of nearly 25% of policyholders’ funds.
At
the same time a number of investigations have been completed, are in
progress or are just about to start.
Most of these are legally oriented, and will help to assign blame
in suitable proportions, if and when they are published, and some may help
to clarify what share of the cake should eventually be allotted to the
various classes of policyholder.
Many
of the million people dependent on Equitable for their retirement income
are in terror of further adverse developments - and why should they not be
given recent history and the secrecy which still clouds the Society’s
affairs? They are being
bounced into accepting a premature and ill thought ‘compromise
proposal’ whose only merit is the prospect of a spurious stability.
Instead,
the insurance industry, the media, Parliament and The Government should
all be providing positive help
The
most immediate needs are as follows:
·
To put a stop to the agony by providing each policyholder or
annuitant with a minimum figure for the pension that they will receive ,
come what may. Essentially
this implies an industry wide reinsurance with Government involvement.
With reasonable skill, this reinsurance need never be called upon.
·
To re-invigorate the management and board of Equitable, so that
they can cope with the massive task of putting right years of neglect, and
hopefully open to new business again.
·
To throw the bright light of day on all the workings of the Society
and its regulators, so as to rapidly identify what has gone wrong in the
past and prevent new errors in the future. The most appropriate way to Do
this is under the aegis of Parliament with the active involvement of the
Parliamentary Ombudsman. The
press should play its part by probing the murkier aspects of the whole
affair.
·
To deal with the issue of compensation in a just and expeditious
manner by setting up special machinery to avoid a continuous drip of court
cases over the next ten years.
I
hope that you will feel able to give active support to the necessary
initiatives.
Your constituent
[
This paper may be copied in whole or part with acknowledgement of the
source. ]
PREFACE:
This note has been prepared for my Member of Parliament, Rudi Vis to help
convey the nature and the causes of the financial catastrophe which has
befallen the policyholders of the Equitable Life Assurance Society.
The key events manifested in the Summer of 2000 when Equitable lost
a ‘straightforward’ court case in the House of Lords and closed to new
business. Subsequently a
shortage of at least £1500 millions was announced, and over a period of
twelve months Equitable cut 8% from current bonuses and 16% from
previously accumulated bonus funds in policyholders accounts, the
cumulative effect being a cut of nearly 25% in policyholders anticipated
pensions.
1.
Founded nearly 250
years ago, by the early years of the 20th century, Equitable
Life Assurance had become the epitome of reliable and resourceful pensions
provision.
2.
In the 1950’s Equitable introduced policies with guaranteed
annuity rates (GARs), as well as guaranteed fund values at retirement.
Initially, these guaranteed rates were quite low, but appropriate
reserving mechanisms to cover the guarantees were not introduced. In the
course of time guaranteed rates from 10% up to 15% were incorporated into
these open ended GAR policies, which many people regard as a reckless act.
3.
In 1978 Legislation was enacted enabling all personal pension
policies to have an ‘open-market option’, that is to say a fund value
that could be transferred to another approved fund at the policyholder’s
behest. This made it imperative to reserve against the guarantees in
each individual policy, but the Society
ignored the problem because market rates were still higher than
those guaranteed in the policies.
4.
In 1988 Equitable
ceased to write GAR policies, but continued to mix non-guaranteed policies
with the older GAR policies in the same with-profits fund.
Essentially the Society was commingling funds of incompatible
types. Moreover, none of the
new policyholders were advised of the existence of these earlier
guarantees underwritten by their own non-guaranteed funds. This meant that
non GAR members were unwittingly cross-subsidising those whose plans were
written at the highest guaranteed rates. This has provided
serious grounds for claims of MisSelling or misrepresentation.
5.
In 1990 there were clear indications that annuity rates were likely
to drop to levels which would activate the guarantees.
Such guarantees are essentially one-way options, and when options
are ‘in-the–money’, nearly all are exercised.
Still Equitable did not calculate a reserve for individual
policies, nor did they make realistic reserves for each class of policy.
The necessary pool of high yielding assets to match the guaranteed
rates was not created. This was serious mismanagement.
6.
The House of Commons Treasury Committee states in its Report on the
situation: “Equitable Life’s risky decision in 1993 not to build up a
reserve to cover the cost of GAR liabilities was a crucial turning
point.”
7.
In 1993 when the first guarantees were activated, Equitable decided
to meet the cost by arbitrarily reducing the final bonuses of the
policyholders opting to call on their guarantees.
This was a totally opaque method of dealing with the issue, which
should have been tackled years earlier by telling the GAR policyholders
how much of their ‘profits’ had been reserved
to cover the possible exercise of their guarantees.
8.
During the next few years annuity rates dropped further, with the
cost of the guarantees rising accordingly, but still the society clung to
the policy of using ‘Directors Discretion’ to reduce the expected
annuities to affordable levels.
9.
In 1997 when a groundswell of complaint started to build up from
GAR holders planning to take their pensions, The Board of Equitable laid
plans to tough it out and get legal approval of their apparently arbitrary
policy.
10.
In 1998-99 when writs were about to be issued by GAR policyholders,
Equitable launched their own action, which did not concede any fault or
weakness in their handling of the situation, and demanded that the Courts
confirm the Directors’ ‘carte blanche’ to vary individual bonuses as
they deemed fitting, (as set out in the Society’s Rules, but not the
policies).
11.
The ’all-or-nothing’ form of action put Equitable’s
non-guaranteed with-profits members at great risk of having to bear
most of the cost of guarantees
that were nothing to do with them. The Board disguised the scale of the
risk, by issuing formal statements referring to a cost of
£50 millions and reserves of £200 millions. It turned out that £50
millions was the cost of meeting guarantees that could not even be covered
by removing the final bonus, and was nothing to do with the court case.
This was seriously misleading to its members, and probably aimed at
ensuring that they would stay
with Equitable and give the
directors a free hand with the court case.
By and large this is what happened.
12.
The Board did not even advise the Courts of the scale of the
disruption that would ensue should they lose the case (which was actually
in the range of £1500
millions to £3000 millions). Not
surprisingly, the Court of Appeal and the House of Lords denied the
Directors the carte blanche that they were seeking, and in doing so made
it more difficult to restructure the funds in any rational way
13.
Moreover, the Board
declined every opportunity to negotiate a low cost settlement with the
claimants, particularly after it had won its case at the High Court stage.
The Directors arrogance demanded a total victory, but they lost
everything instead.
14.
At any time between 1980 and 1997 The Board could have admitted the
long standing weaknesses in record keeping and reserving, and asked the
Courts for permission to restate the Accounts and the allocation of funds
within each GAR policyholder’s account.
No policyholders need have lost what they were due under their
policies and the Courts would have been sympathetic.
The Board refused to do this, and despite the replacement of the
complete panel of Directors, they have not done so to this day.
15.
A valuable insight into these events is given by the Institute of
Actuaries Enquiry into the technical background of the Equitable affair.
Their report was published in September 2001 and is written in a
detached academic tone that would be more appropriate to a review of the
fiscal weaknesses of the Tudor dynasty, rather than
the causes of a present day financial disaster affecting nearly a
million people. Put into human language the key points that emerge are:
¨
The words ‘regret’, ‘sympathy’, ‘apology’ and
‘sorry’ do not exist in the actuarial vocabulary.
¨
There was a major cumulative failure of actuarial and underwriting
practice at Equitable from as early as 1975 to 1998, but the Enquiry is
not prepared to say whether the
appointed actuaries were in breach of their professional guidelines on
various occasions.
¨
Although, by the mid-80s Equitable had given a majority of its
policyholders guarantees, they never explicitly calculated the size of the
resulting liabilities in a proper manner.
¨
They did not inform those policyholders in advance that they would
reduce their already declared bonuses (or by how much) if they exercised
the guarantees that were explicitly defined in their policies.
¨
When Equitable introduced in 1988 a completely new series of
policies without guarantees those policies should have been put in a
separate bonus pool from the GAR policies, but instead all policies were
mixed together.
¨
With the passage of time the Board allowed the underwriting and
investment threats to the health of Equitable to grow increasingly large,
and they generally concealed their problems rather than addressing them.
16.
A proper awareness of risk is vital to anyone working at a senior
level in the life and pensions industry.
During the 1990’s the Board and executive team at Equitable went
the opposite way, courting greater and greater risks.
This was demonstrated in the most dramatic way when the Board found
itself unable to sell Equitable at any price because of the open-ended
nature of the liabilities that they had incurred.
They had fallen victim to the fatal Pollyanna Syndrome, the silly
belief that risks don’t
matter because nothing has gone wrong yet, and it will all turn out for
the best.
17.
At all relevant times Equitable was under the supervision of
Government Regulators, Appointed Actuaries and External Auditors, and from
1998 was under the overall supervision of the Financial Services
Authority. None of these august and potent supervisors took any
effective steps to prevent the misleading record keeping or to alert the
Members of the Society to the nature and scale of the problems that were
developing. or to the damage done to it and its members. They utterly
failed to detect or to counter the Pollyanna Syndrome which had taken over
the Society’s management.
18.
Throughout the whole of this sorry and depressing saga the
policyholders must be held blameless. There was nothing extraordinary
about the benefits that were
being credited to their pension funds and the regulators and the media
were consistently silent with any form of criticism until the GAR problem
was first aired generally in the summer of 1998.
19.
The Board of Equitable are now seeking approval of its members to a
‘Compromise Agreement’ [
draft published September 2001 ] that would buy out all the GAR policies
and change the company’s articles and prevent policyholders from
claiming recompense for the losses they have suffered whether from
mismanagement or MisSelling. This idea was inherited from the previous
Pollyanna Board. The present Board expects to avoid responsibility and
liability both for themselves and the regulator by this device, which is
particularly hard on the great majority of current policyholders whose
policies are not guaranteed.
20.
At the time of writing, policyholders are still denied essential
information about the causes of their troubles and about Equitable’s
present status. This
continues a perverse and longstanding tradition of this society. Until
such information is provided to the ordinary Member in a form which he or
she can reasonably understand it would be rash to fall in line with the
Board’s proposals.
21.
In addition, many people believe that the only fair and effective
way to sort out the problems and ensure proper compensation for the
policyholders is for their many justified grievances to be pursued in
court.
Michael
Josephs
12
October 2001
(020) 7281 0075
email: city@london.polargrp.com
I acknowledge the assistance that I have received from the EMAG web site
[www.emag.org.uk] and the helpful EMAG members with whom I have discussed these matters.
However,
EMAG bears no official responsibility for this paper.