Select Committee on Treasury Minutes of Evidence

Examination of witnesses (Questions 120 - 139)



  120. So your advertising was designed to keep Equitable Life in business, even at a potential risk to policyholders who would be entering into an uncertain position. As you will know, many people who do enter into financial policies are not necessarily people who are very expert and do go and get all the information. They will listen and look at the advertising. Equitable Life traditionally had a very good name as a secure institution. It is not necessarily the case that people would go for other information than what was in the advertising and what you said to them. Do you still think it was right to advertise new business in that way?
  (Mr Headdon) I think it is important to say that the advertising was generic and was intended to encourage people to come and talk to the Equitable. It was not off-the-page selling. So everyone would have received subsequent advice from the representatives. As Mr Sclater has said, during that period people were required to sign a special statement acknowledging that they were aware of the particular circumstances of the Society.

  121. So you did alert investors to the prevailing circumstances surrounding Equitable Life?
  (Mr Headdon) I think the fact that we were up for sale and the reasons for that were very widely known. I am sure at every sale that was a key point of discussion.

  122. Did you take the responsibility for ensuring that every potential investor knew about it?
  (Mr Headdon) The representatives were provided with extensive briefing to answer the whole range of questions that they were inevitably going to encounter on this issue.

  123. They were given briefings to answer questions but did you ensure that they made sure that potential investors knew about the positions?
  (Mr Headdon) We encouraged them to discuss the matter fully. Clearly we cannot sit in on every meeting between a representative and a client, but they were encouraged to discuss the situation fully.

  124. Can I move on to the new bids which I think everyone here is interested in? Why did Equitable not manage to get a suitor before closing to new business in December, given that there was a considerable amount of interest?
  (Mr Headdon) That is quite a difficult question to answer because I expect the other organisations involved all had their own reasons for not ultimately pursuing the transaction but, from the discussions that I had with the relevant parties, the view was taken for a whole range of reasons. We are quite a large organisation: it would have been a major strategic investment for any acquiring company and people would have weighed up that investment against the other ways of spending their shareholders' money. Clearly the disagreement between the groups of policyholders and the GAR situation would have been a factor in that, but my understanding is that the decisions ultimately were taken for a whole range of strategic reasons.

  125. What changed between 7 December when the Prudential withdrew their bid and 5 February when the Halifax made their bid?
  (Mr Headdon) Over the summer period we were trying for, if you like, a full sale of the business including a demutualisation because we believed that that would achieve the highest value and the best outcome for policyholders. In December we effectively changed tack and said that we were prepared to consider rather more limited sale transactions and, of course, in the case of the Halifax, apart from a relatively small part of the business, what it has mainly bought is the operating side of the business, and the Society itself continues as a separate legal entity.

Mr Kidney

  126. Mr Headdon, I want to come back to the reassurance policy for a moment. You told Mr Davey that the circumstances under which a claim can be made had not yet arisen and when Mr Cousins pursued Mr Sclater about whether the eventual cost could be more than £1.5 billion, Mr Sclater I think thought so but he did not mention any possible capping of the liability because of the reassurance policy. We have heard that all the suitors walked away from buying your company. Is it a reasonable surmise from that that the reassurance policy is worthless?
  (Mr Headdon) I do not think it is worthless; it does protect in certain circumstances but your question is predicated on the assumption that it was purely the GAR situation that led suitors to walk away. As I said, I do not believe that is entirely the case but there could be a range of experience where the cost would be higher than £1.5 billion before the significant benefit would be achieved from the reassurance arrangement.

  127. What are those circumstances? Please tell us.
  (Mr Headdon) As I have said previously, economic circumstances where there are very low levels of final bonus being paid and there is a high take-up of these guaranteed annuities.

  128. Does that produce any kind of cap on liability though?
  (Mr Headdon) Ultimately it does, yes.

  129. At what level?
  (Mr Headdon) That is a very complex question to answer because it will depend on the set of financial circumstances at the time. If one had a situation of low interest rates but favourable equity performance so there was still substantial final bonuses, the cost could go higher and there may not be a reinsurance claim in those circumstances, so it is really quite a complicated matrix of different economic circumstances. There is no one simple answer to say that, at one sum of money, the reassurance will kick in.

  130. Was the reassurance just a sham to satisfy the regulator that you had adequate reserves to be able to pay future claims, and that you never expected there to be such claims?
  (Mr Headdon) As I said earlier, the regulations require the assumption really of quite adverse sets of circumstances. In those circumstances, there would be a transfer of risk to the reassurer and that is reflected in the reserve position.

  131. So if 80 per cent of the GAR holders made claims, is that when the reassurance kicks in?
  (Mr Headdon) There would certainly be a claim then if there was very little final bonus being paid.

  132. I am bound to say that it is not a very useful reassurance policy because they just recovered the cost that they paid to your GAR holders out of your future profits.
  (Mr Headdon) It comes back, I think, to the previous points I made about how the assets within the fund are used for policyholders. A reassurance arrangement which produced a claim in much less onerous circumstances would be much more expensive, and you would be paying the premiums of that out of policyholders' funds now for some benefit in the future. It is a question of degree of what level of protection you think it is appropriate to purchase.

  133. So, for a reasonable premium, the terms you have are that you give them the money back later from reducing everybody else's profits. That is what the terms say, is that not right?
  (Mr Headdon) The terms are that, once there has been a claim, if there is then surplus in future years above that needed to support the statutory reserves, there is a recovery to the reinsurer, yes.

  134. It makes you do after the event what the Chairman said you should have done in 1993—use everybody's profits in order to make proper provision?
  (Mr Headdon) It is a way of spreading the cost over a number of years, yes.

Mr Cousins

  135. Mr Sclater, did the board of Equitable Life receive any approaches from potential bidders or purchasers or partners in the period between 1993, when the guaranteed annuity liabilities started to become an issue, and 1998 when the regulator intervened with the effects that we have just discussed?
  (Mr Sclater) There were never any formal approaches. There were people occasionally who approached us and said something like, "We would very much like to team up with the Equitable and if you were ever to decide to abandon your mutual status we would very much like to be considered as the prospective buyer, or as a prospective bidder, for the Society", but at that time the view was taken by the board that the Society was doing well and was in good order and above all that the members of the Society, we firmly believed, had joined it particularly because it was a mutual society, and nobody wanted us to change that. Formal approaches—no; suggestions that if we were to change our status they would like to be there—yes.

  136. I would just like to be clear about this, Mr Sclater. I am talking about the period between 1993 and 1998. You say that you did not receive formal approaches—only informal approaches—but you have also told us that the board took a decision not to pursue any of those informal approaches, and that those were board decisions.
  (Mr Sclater) If ever anything was said to me or to another director about another organisation being interested in doing a transaction of some sort with the Equitable, that was always reported to the board; the board would then discuss the matter and the board took the view on each occasion that, at that stage, in the light of the information and circumstances we then had, it was not appropriate to offer the Society for sale.

  137. So we are talking about board level decisions, albeit that the approaches might have been informal? These were explicit, minuted board decisions.
  (Mr Sclater) I do not have board minutes in my head but I can assure you that any approach of that sort was certainly reported to the board and discussed by the board.

  138. When the board was taking the decision not to engage or respond to these informal approaches that were being made to it between 1993 and 1998, did the issue of guaranteed annuities ever figure in the board's decisions on that matter?
  (Mr Sclater) No.

  139. Was there ever any discussion about where you might get to, or what this might mean?
  (Mr Sclater) No.

previous page contents next page

House of Commons home page Parliament home page House of Lords home page search page enquiries index

© Parliamentary copyright 2001
Prepared 30 March 2001