Examination of witnesses (Questions 60
THURSDAY 15 FEBRUARY 2001
SCLATER, CVO, MR
60. And you would not be here this morning?
(Mr Headdon) Probably that is correct.
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
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
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
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
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.
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