EQUITABLE LIFE MEMBERS
OTHER ROUTES TO A MORE EQUITABLE LIFE
Last Updated: Friday, November 16, 2001 04:54 PM
OTHER ROUTES TO A MORE EQUITABLE LIFE
With thanks to Dr Michael Hassim
In a previous article [1], the writer presented evidence indicating that the Equitable Life Assurance Society stands to lose large class actions alleging general mis-selling of With Profits Policies, irrespective of whether a Compromise Agreement is reached. Such actions could gravely damage the Society and its future prospects, and so they must be avoided if at all possible. However, this thorny issue has not surfaced in the Compromise Documentation, or in wider discussion. One or more additional measures appear to be required. With this in mind, a range of options additional to those presented in the Compromise documentation is given below; the writer hopes that others will contribute yet better and more. The options aim to right or minimise the existing wrongs such that litigation becomes irrelevant. They do not assume that it is either wise or necessary to inject large sums of money immediately, but they do assume that measures must taken to ensure that existing resources can be helped to grow and be available when needed, and not before. Reflection will show that nothing can be done until Government governs, and in doing so creates the necessary helpful environment within which it is possible to discuss the full extent of the Society’s liabilities. So:
1) Government must provide an overall co-ordinating and responsible lead. That lead should come directly from the Treasury, and ideally the Chancellor of the Exchequer in person. The Government is relying on fragmented inputs from the FSA, Baird and Penrose Enquiries, Ombudsman, Office of Fair Trading, judiciary and Equitable management, for all of whom a Junior Minister is the spokeswoman. Currently there is a procedural log jam which is blocking the Ombudsman from acting. Meanwhile 1.1 million subjects and members of the With Profits fund remain bereft of help and guidance. It will surely be a convenient relief to many if and when the Society and its remaining members place themselves beyond help or redress by subscribing to the Compromise agreement. But the Compromise seems so flawed as not to be viable in the longer term, and so the eventual mess and misery could be even greater. So first: help trouble-shoot the Compromise; delay it if it is premature, halt it if it is ultimately not viable, or best of all, obviate it by righting crucial wrongs.
2) “Think the unthinkable”- start with the premise that all guaranteed annuities should be paid if at all possible. Therefore render the Equitable every reasonable assistance to do so. It is both constitutionally and in principle wrong for Parliament to award 170,000 citizens their rights, and then stand back while they are forced to sign them away again, and a further 930,000 bystanders are dragged into the mire with them. The complete absence of any external help has forced the Society to “go it alone” and attempt to bluff its way through a compromise, but, as we shall see, there are many advantages in the Society not being forced to do it. So, what constitutes “reasonable assistance”?
3) Allow the Equitable to resume a more aggressive investment policy immediately, and agree to underwrite the risk. This would untie the investment hands of the Society, and enable the With Profits Fund to better cover the deficit. It should not cost the taxpayer any money, although admittedly it could do at some time in the future.
4) Allow the Equitable tax relief on the With Profits Fund, and premiums it continues to receive. The Government might have to make clear that this is distress relief for one pension provider only, given under exceptional circumstances. This will need tact, because taxing pension funds is widely regarded as a “stealth tax” which has proved unpopular, and other providers could object.
5) 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. This suggestion of Michael Josephs’ is a good fit with 2) and 3) above, and provides a reliable baseline. Even so, the aim of any combination of measures should be to exceed this over time. This is admittedly difficult because Mr. Treeves and Mr. Townsend of the Equitable are reported to accept that, because of the constraints on the Society at the moment and being unable to take on new business, its performance will be sub-optimal (Hansard Oct 17th, end of column 244WH). But if this is just one of a range of initiatives, improvement may be possible.
6) Assist and require the Equitable to provide a better estimate of the Guaranteed Annuity Rate Liability. How can the Equitable expect any external help if it is unable to come clean about the full extent of its liability? We need the views of the Society’s new actuary (Mr Michael Arnold) on the matter. Almost certainly the liability is more than in the Compromise documentation, but it is not all needed immediately. Strong heads and nerves are required. Convinced it must “go it alone,” the Society may have underestimated the liability in order to help it maintain that the cost of litigation and recompense is comparatively small. The only figures used for the Compromise depend on Old Management pre-Michael Arnold: they assume a 50% uptake of guarantees, and are lifted from the year 2000 Annual report. And things do not add up: The total liability is estimated at £1.5 billion, of which at least 1/3 will come from the sale of the Society’s business to the Halifax. This leaves 750 million to be found from the With Profits Fund itself, i.e. less than £1000 per member. If so, why fret? But if one returns to the year 2000 annual report and looks at the cost of funding a 90-100% guaranteed annuity uptake which is nowadays more realistic, the cost is more like £3-4 billion. Even this looks overmatched by the 14%-16% per capita reduction in funds, the loss of 7 months investment income and further 10% Market Value Adjuster penalty for withdrawal of funds which the Society management has already imposed. So what is really going on? Is the fear of litigation and the cost of re-insurance really so expensive? How can those fears and their dependent provisions be set aside? We also need the half year figures to June 30th (Christopher Chope, MP for Christchurch, Hansard Oct 17th, 253WH,)
7) Help the Equitable avoid destructive litigation and obtain any rightful recompense. The best way of doing this is to enable the Society to pay the guaranteed annuities in full. For a start, it removes the hidden financial provisions that are built into the compromise, which can then be restored for the benefit of members. Secondly, Government might consider helping the Society in identifying and suing those responsible for the fiasco, rather than see members sue each other for the remnants of the Society itself. Meanwhile, a bigger Sword of Damocles overhangs the Equitable. The prima facie evidence of general mis-selling of With Profits policies without guarantees looks damning. It is reminiscent of the asbestos liability dilution fiasco at Lloyds, and the recruitment of new “names”. The general truth of this is not difficult to determine, and it must be done before the compromise agreement is voted upon. For if not, as we have previously seen, those who have already quit the Society and others will bring a class action that could demolish the Society, whether or not a compromise is reached. None of the legal opinions currently available can cover this adequately on the evidence so far available. And so ex-members also need part of any recompense.
8) Put the Society into Receivership. This would allow interim management responsible to Government and Members alike full access to the papers and records of the Society. It would remove lingering doubts about legitimacy of succession of the new Management, and reduce its inevitable dependence on elements of the Old Management, which are suspect. It could provide a useful platform for centralised negociation with the various classes of policyholders, or even for suitable variations of Crown Indemnity.
9) 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. This suggestion is taken almost verbatim from Michael Joseph. If the forebodings expressed in 6) are accurate it is essential, because the drip could become a flood.
10) As part of a co-ordinated lead, the insurance industry and media should be involved in any help as well as the Government (or in its continued absence the opposition) Getting the insurance industry “on side” is a reasonable expectation, but informing or instructing the media is much thornier. The latter could be invited to lead a constructive debate that concentrates on helping rather than blaming, and alerting people to the issues in good time.
11) Identify rapidly 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 affair. This amendment of a Michael Josephs initiative is a suitable point on which to conclude, particularly if Lord Penrose has been hamstrung by the Treasury (Ruth Kelly, Hansard Column 256WH)
Last amended on Wednesday 14th November.
Dr Michael Nassim, non-guaranteed annuitant and With Profits personal investment plan holder, Equitable Life Assurance Society.
References:
1) The Equitable Life Disaster- does it compare to the Lloyds asbestosis scandal of the 1980’s? (this web site)
Acknowledgements:
The writer wishes to thank Michael Josephs for comments, editorial help, background information and contributory arguments, much of which has been incorporated.