Select Committee on Treasury Minutes of Evidence

Examination of witnesses (Questions 80 - 99)



  80. What it says is that the Auditor is relying totally on the appointed actuary for those statutory returns. Is that correct?
  (Mr Sclater) I think that is correct.


  81. You were the Actuary?
  (Mr Headdon) I was the Actuary from August 1997 onwards. It relies on the Actuary for the valuation of the liabilities, but that is in accordance with the requirements of the insurance regulations. I do think it is important on this point to remember that the purpose of the statutory regulations is to ensure, on a very cautious and prudent set of assumptions, that life offices have got sums available to meet their guaranteed benefits. It is not about bonus distribution and final bonuses.

  Chairman: I have not asked you about bonus distribution. I fully accept that was not a matter for the regulator.

Mr Beard

  82. Dealing with the situation, as you said, Mr Sclater, if you strike a compromise between the two groups of policyholders, there is an outcome, but if you cannot strike that compromise between the two groups of policyholders, what sort of liabilities could we be looking at?
  (Mr Sclater) I think that is very difficult to predict. It will depend very much on what happens to interest rates and it will depend on the behaviour of policyholders who have the opportunity to go on adding to their policies, if they so wish.

  83. Could it be more than £1.5 billion?
  (Mr Sclater) Again I would like to defer to the actuaries, but I believe the answer to that question is probably yes.
  (Mr Headdon) It could be more or less, depending on future circumstances.


  84. These liabilities are not all coming up straight away, are they?
  (Mr Headdon) No, they are spread out over the next 15 or 20 years as people retire.

Mr Cousins

  85. When did you first make reinsurance provision against these liabilities?
  (Mr Headdon) At the end of 1998.

  86. Again, it is the regulator's intervention in 1998 which clearly triggers the reinsurance provision. It was not something you did for yourself of yourself; it was the result of regulatory intervention?
  (Mr Headdon) As I said earlier, at the time we were experiencing a very low take-up of these options and our reserving approach previously reflected that. The regulator introduced guidance assuming a very high rate of take-up in fairly adverse economic circumstances. We secured a reassurance deal which would provide some protection in the sort of adverse circumstances envisaged by the regulatory regime.

  87. What was the size of the reinsurance provision in 1998?
  (Mr Headdon) The effect on our statutory returns is that it reduced reserves by about £800 million.

  88. What did your statutory returns at that point show as being a possible claim on reserves?
  (Mr Headdon) It showed, on the assumptions that we were required to make, that the guaranteed benefits would have an additional value of about £1.5 billion.

  89. So your reinsurance provision made in 1998 covered half the liabilities?
  (Mr Headdon) Approximately, yes.

Mr Fallon

  90. On the point of the deception of the policy-holders, so far this morning you have blamed the Law Lords; you have blamed the Press; now you seem to be blaming the policyholders for not getting hold of these statutory returns. Was it not simply misleading to tell the policyholders that the liability was £50 million at exactly the same time as you were telling the regulator that the potential liability was £1.5 billion?
  (Mr Headdon) The regulators make all sorts of adverse assumptions on economic conditions. That leads, as I said, to various levels of protection designed to ensure that life offices will be able to meet their guaranteed liabilities in all but the most adverse circumstances. It is not something that affects the distribution of bonuses between different groups of policyholders.

  91. In retrospect, Mr Sclater, do you not feel it was wrong to conceal that potential liability from policyholders in the annual accounts that they were sent?
  (Mr Sclater) There was no attempt to conceal anything. As I said earlier, we took extensive legal advice. We consulted our auditors at very great length and debated the matter carefully amongst ourselves, and we sought to put out a set of accounts which gave, to the best of our ability, a true and fair view of the position of the Society as it most probably was at that time.

Mr Beard

  92. On this point, it indicates that you had yourselves contemplated this £1.5 billion as being the liability that at least you had to put in according to the regulator's assumption, apart from all the issues I quoted earlier. Yet, on 1 February, a passage from your letter to policyholders states that, contrary to many of the reports that have appeared in the press, there will be no significant cost imposed on the Society if the Court of Appeal decision were upheld in the House of Lords. The speculation regarding financial difficulties and costs (incurred) by with-profits policyholders is therefore unfounded. Your Society remains and will continue to remain financially secure. Despite all this background, does that not almost amount to deception?
  (Mr Headdon) I think this comes back to the ring-fencing point I made earlier, that, although in the Court of Appeal the two judges had found against us, a legal difficulty with a differential final bonus between the two different benefits under the policy, they made it very clear that the Board retained its ability to set bonuses for the class as a whole at a level which would not seriously impact on other policyholders.

Mr Davey

  93. Were the full terms of this reinsurance policy that the regulator effectively forced you to take out declared in the statutory return?
  (Mr Headdon) We made all the disclosures that we were required to make under the regulations and the regulator was kept fully aware of the provisions.

  94. But in the return does it say that if there was a court ruling which challenged successfully your position with respect to bonuses and the way you were conducting your business, the reinsurance policy would not have covered you? Did you say that in your statutory returns?
  (Mr Headdon) The reinsurance was against the economic exposure of the Society in the circumstances envisaged by the statutory returns. It was not and never purported to be an insurance against a change of legal ruling.

  95. That does not answer my question, with respect. Did you say in your statutory returns that it would not apply against a successful legal challenge? Did you say that in the statutory return?
  (Mr Headdon) No, and I do not believe it would be appropriate to do so.

  96. Did you tell the regulator outside the statutory returns?
  (Mr Headdon) Yes, the regulator was fully aware of the terms.

  97. You chose to tell the regulator but you are now telling us that you did not want to disclose it in the statutory return which the public may have been able to get, if they had asked for it. Is that right ?
  (Mr Headdon) I am saying that the terms of the reinsurance were fully disclosed to the regulator.

  98. But they are not in the statutory return. Why did you think it was necessary to tell the regulator about that particular condition but not the public in the statutory return?
  (Mr Headdon) We did not tell the regulator that particular condition.

  99. You told me you did.
  (Mr Headdon) No, we told the regulator about all the conditions of the reinsurance.

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