Select Committee on Treasury Minutes of Evidence

Examination of witnesses (Questions 100 - 119)



  100. But you did not tell the public in the statutory return?
  (Mr Headdon) It was not intended to be insurance against a change of the legal position.

  101. Why did you think it necessary to tell the regulator that outside the statutory return but not declare it in the statutory return?
  (Mr Headdon) When these sorts of reinsurance arrangements are put in place the regulator is always fully involved in the full detail of the reinsurance arrangements.

  102. With respect, the regulator is not a policyholder. You, the Society, have a duty of full disclosure first to the policyholder.
  (Mr Headdon) We never purported that the reinsurance was a protection against the legal position. It was designed to cover part of the claims that would arise in certain economic circumstances.

  103. But if one of the policyholders had been sent the statutory return, if you had given it to him on request, and he had looked at whatever page it is Mr Cousins referred to and wanted to check whether or not this provision would protect him, he would not have been able to find that information, would he?
  (Mr Headdon) I am not quite sure what terms you mean by "protection". As I said previously, the statutory returns are all about the ability to meet guaranteed liabilities and that is not in doubt. As we said, we are not and never have been technically insolvent. The impact on policyholders of the House of Lords decision is on a final bonus entitlement.

  104. Let us look at that for a minute. You told us earlier that the Society had decided to stimulate a court case to clear the air on this position. Then you have also taken out a reinsurance policy to protect the policyholders on economic terms, but the Society chose not to reinsure itself against a successful legal challenge, even though it was stimulating the legal case.
  (Mr Headdon) In the first instance, as I said previously, the legal case was about the differential bonus between the two forms. It was not primarily about the ring-fencing issue, which only emerged at the House of Lords stage. Secondly, I think it would be very difficult to obtain general insurance cover against a possible adverse legal decision.

  105. You therefore say that the policyholders could not have expected you to declare that?
  (Mr Headdon) No, I think not.

  106. After the House of Lords ruling, was there a change in terms in respect to the reinsurance policy?
  (Mr Headdon) Yes, the reinsurance was renegotiated because clearly we were adopting a different final bonus approach than had been the case when it was originally set up.

  107. Did you disclose that to the regulator?
  (Mr Headdon) Yes.

  108. Why has there been no claim made against the reinsurance policy to date?
  (Mr Headdon) Because the economic circumstances in which it would apply have not arisen.


  109. Can you explain that?
  (Mr Headdon) All reinsurance is against the more adverse extremes of experience and the reinsurance would basically apply if we were in economic conditions where there was very little final bonus payable and there was a substantial amount of benefits taken in guaranteed annuity form. Those circumstances have not yet arisen.

Mr Davey

  110. At any stage did you discuss this with the regulator prior to the House of Lords ruling, as to what you would do in the circumstances of a successful challenge?
  (Mr Headdon) A successful challenge?

  111. A challenge against you?
  (Mr Headdon) Throughout the legal proceedings we had tried to assess the whole range of possible outcomes, however likely or unlikely, and prepare plans as to how we would need to react to those, and we shared those plans with the regulator.

Judy Mallaber

  112. Following on from that, can you clarify the fact that before all of this you did not have any insurance policy relating to guaranteed annuities and the potential losses and costs?
  (Mr Headdon) That is correct.

  113. You never at any time had any insurance policy before that time on those issues?
  (Mr Headdon) That is correct.

  114. Mr Sclater, I do not have an interest in Equitable Life to declare. The only reason why I do not is because I did not get it together to take out the AVCs that many other members of the parliamentary scheme do have. If I had done so, would I have received any indication or any warning at any time up until the point where you stopped taking on new business about your financial position? Would I have had any information from you at all on that?
  (Mr Sclater) I do not know what information your own office provides you with but the Equitable sought to make clear to its policyholders as the situation unfolded what the facts were as best it could.

  115. As a potentially new policyholder, what information would I have from you?
  (Mr Sclater) It depends what time you were becoming a new policyholder.

  116. At any time up until you stopped taking them: would I have known anything, for example, about the level of your reserves?
  (Mr Sclater) Yes, you would have been able to look them up in our report and accounts.

  117. As a new policyholder, I should not have been given any information about the financial difficulties that you were potentially going to have.
  (Mr Sclater) From late 1998 onwards I think our financial circumstances were debated very widely in the newspapers. We certainly did not attempt to cover anything up. For example, after the House of Lords judgment of July 2000, I think I am right in saying that any new policyholder taking out a policy was particularly asked to clarify the fact that he or she was aware of the circumstances in which the Society then was.

  118. Mr Beard has just read out to you a letter pointing out that, even in February 2000, you were giving assurances to existing policyholders, let alone new ones, that there would be no significant costs if the Court of Appeal's decision were upheld in House of Lords.
  (Mr Sclater) As Mr Headdon said just now, the Court of Appeal judgment supported the concept of ring-fencing, which would have left the guaranteed annuity rate policyholders in different position as to the sharing amongst those with guaranteed annuity policies. It would not have cross-infected over the larger body of policyholders who had no guaranteed annuity rate policies. So that statement you refer to was to the very best of our knowledge and belief correct at that time.

  119. Moving on from the letter, between July and November of last year, Equitable spent £2.9 million on advertising. That strikes me as being pretty aggressive advertising, even after the House of Lords judgment. Do you think that that was a proper thing for you to do, given the uncertainty that would have meant for new policyholders?
  (Mr Sclater) The Society, after the House of Lords judgment, as you remember, immediately put itself up for sale. Everybody agreed—the regulators, our board, our advisers, Schroders, our lawyers, et cetera—that by far the best outcome would be to sell the Society as a going concern. To that end, it was very important to remain in business and to retain what was considered to be a uniquely valuable asset in the form of the sales force of the Society. So the Society, with everybody's support and blessing, continued in business. In fact the level of the expenditure that you refer to on advertising in that period, I think I am correct in saying, was rather less than, for example, it had been the previous year. It was not an overly aggressive campaign at all. It was an effort to try and maintain the Society in business as a going concern in the hope that a good buyer would be found at a good price, which we firmly believed would be possible.

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