Select Committee on Treasury Minutes of Evidence

Examination of witnesses (Questions 60 - 79)



  60. And you would not be here this morning?
  (Mr Headdon) Probably that is correct.

Mr Beard

  61. Did you actually alert your policyholders to the dangers as well as the benefits that were inherent in the policy of fair distribution of these surpluses instead of maintaining the reserves on a level that was similar to the rest of the industry when you were actually distributing money?
  (Mr Headdon) I think over the years we, probably more than most other offices, made our approach to bonuses and our distribution policy very clear to policyholders. Each year when we sent them their annual statements we sent them a description of the bonus approach and explained this whole distribution policy to them.

  62. And the implications of it?
  (Mr Headdon) Not explicitly in the sense of saying that if we were doing something other, we would be building up a reserve fund that could meet some unforseen contingency; that was not said.

  63. What emerges is complacency because here we have a position of the Appeal Court giving a ruling; The Daily Telegraph spelling out what the worst consequences are; we are told by the Government Actuary here that there was a general rumour that your policy ended up with reserves less than the rest of the industry. Yet, when you are contemplating this issue, you did nothing to rectify, nothing to warn, policyholders and in fact you were writing to them and reassuring them that there was no significant danger. Is that not a fair description of the position and does that not reflect some complacency?
  (Mr Headdon) I am sorry if it comes across as complacency. That certainly was not the intention. As we said on number of occasions this morning, on all the advice that we had been given, the eventual outcome of the House of Lords and the extension of the Court of Appeal ruling that that represented was seen as very unlikely. In practical terms, as I said in answer to the previous question, the only thing we could have done was to anticipate the adjustment of policy values in July 2000 at an earlier date.

  64. Does it not amount to the fact that your failure to build up adequate reserves was a multi-million pound bet that The Equitable interpretation of the law would be correct and, if that bet did not come off, disaster would strike, and that is what happened?
  (Mr Headdon) It comes back to the point I made previously. There is no magic external source of money that can be brought in. The money can only come from policyholders in one shape or form. It is a question whether you produce that money gradually over a period of time or whether you make an adjustment at a single point. It is a judgment in the light of what was seen to be an unlikely circumstance as to whether one should have taken the money out progressively over a period or at a single point in time.

Mr Cousins

  65. Could I ask Mr Headdon this question? Bonus policy, as you rightly say, was not a matter for the regulators, but your policy on the reserves would have been a proper consideration for the regulator. That is right, is it not?
  (Mr Headdon) That is correct.

  66. Did the regulators ever raise with you your policy on reserves?
  (Mr Headdon) I think every office, when it submits its statutory returns, tends to get a number of queries from the regulators from year to year. We were no different in that. I do not think any major issues about reserving were raised by the regulator prior to the autumn of 1998 when the regulator began examining the guaranteed annuity rate issue in some detail and discovered that there was quite a range of reserving approach being applied by different offices and decided to issue some further guidance to encourage uniformity, and that is the guidance that was issued in January 1999.

  67. So it was the regulator and the regulator's requirements that first caused you to look at providing for the future of these guaranteed annuity liabilities?
  (Mr Headdon) No. I think we had always considered these as part of our liabilities but we had assessed them according to our view of what was an appropriate measure of reserving. That was different from the guidance which came out in January 1999.

  68. What provision had you made in reserves against guaranteed annuity liabilities before the regulator raised them with you in 1998?
  (Mr Headdon) There was no explicit provision at the end of 1997 because in the financial circumstances at the time that did not seem necessary.

  69. Mr Sclater, you have referred to the fact that policyholders could obtain your statutory returns from the regulator. They could write and ask for a copy of your statutory returns. Could you tell me how many pages there are roughly in your statutory returns for the relevant years, 1998 and 1999?
  (Mr Sclater) A very large number.

  70. Can you give me a rough figure?
  (Mr Sclater) 400.

  71. You are a bit light. I looked at this yesterday. There are 420 pages. Could you tell me where on those pages it is possible to see the reserving provisions that you then started to make as a result of the regulator's intervention?
  (Mr Sclater) Those provisions are there. Mr Headdon takes responsibility for preparing that return, so he will comment further.

  72. I am happy that he should assist you but I would like you to answer the question. You accept that the policyholders, if they got hold of this document of more than 400 pages, could see that there was an issue about reserves which you were starting to provide for. Where in those pages could the policyholder find a reference to that?
  (Mr Sclater) I cannot give you the page number but it is in the document.

  73. Mr Headdon, I am not an actuary but I found reading two documents of more than 400 pages quite a task. If I said to you that was roughly at page 140 and page 209, would that be about right?
  (Mr Headdon) There is a description of the approach to reserving and the actual reserves set out in detailed forms. The usual figure that people look at from the returns is the overall result, allowing for reserves of all types, which appears on the very first page of the returns. It is called Form 9 and it is frequently quoted in the press.

  74. Mr Sclater, when you told the Committee that the policyholders could obtain this information if they asked for the statutory returns, do you not consider that remark to be glib, possibly even deceptive?
  (Mr Sclater) Not deliberately so, sir, no.

  75. You do not.
  (Mr Sclater) We tried to present in our accounts for that year, as I have said, a true and fair view of what we believed the circumstance of the Society to be. It was greatly debated with our lawyers and with our auditors and we produced the accounts, which you have doubtless seen, on what we thought was the most appropriate basis at that time.

  76. Mr Sclater, we are talking about the crucial moment in the evolution of this affair and that is the statutory returns you made in 1998 and 1999. These are crucial documents in the evolution of this matter. For the first time in those documents we can see the effect of the regulator's intention. You have started to refer to this issue and you have started to prepare yourself for the possibility of dealing with it.
  (Mr Sclater) As I recall it, the regulator issued new guidance in very early 1999 and we, of course, had to comply with that, but the actuaries in the Society provided us with various calculations and various information which indicated that the basis on which guaranteed annuity policies were actually being taken up in our own circumstances was very different from what was in the guidance.

  77. I am right, this is a crucial matter. These are crucial returns. When I ask you, because you tell the Committee that any policyholder could have got hold of these documents and looked it up, where in those documents this issue is clearly set out, you cannot tell me, can you?
  (Mr Sclater) I could not tell you the page numbers where this comes but the information is in the return. That is the case.

  78. Do you think that merely making that provision in the statutory returns in a document that is rather opaque was the only way, the best way, of informing the policyholders?
  (Mr Sclater) I have already said that we presented our statutory accounts in the way which we and our auditors considered to be appropriate under the circumstances[1]. That remains the fact.

  79. At the end of the statutory return there is an auditors' report attached to the statutory return. Those are the very last couple of pages of the document. Mr Sclater, do you know what that document actually says on this point?
  (Mr Sclater) I cannot recall exactly the words.

1   Note by Witness: The intent of this response was to repeat the circumstances surrounding the presentation and debate concerning the Society's accounts for the year in question. Those circumstances and actions taken were described more accurately and fully in Question 75 which should replace this sentence. Back

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