Examination of witnesses (Questions 140
THURSDAY 15 FEBRUARY 2001
SCLATER, CVO, MR
(Mr Sclater) That matter was not discussed, as I recall,
on those occasions.
141. It is true, is it not, Mr Sclater, that
the negotiating position of the board and potentially the position
of the policyholders, might have been very much better in that
period between 1993 and 1998 than it now is?
(Mr Sclater) Between 1993 and 1998 we had absolutely
no idea that the events that subsequently unfolded in the House
of Lords were remotely on the cards.
142. Mr Sclater, my question was whether the
position of the board and the policyholders is weaker now than
it was between 1993 and 1998, when you were receiving these informal
(Mr Sclater) Clearly the judgment of the House of
Lords posed a very heavy burden on the Society so it would be,
as was recently demonstrated, much harder to sell the Society
post the House of Lords judgment than would have been the case
143. But is the position of the board and the
policyholders weaker now than it would have been had you pursued
these approaches between 1993 and 1998?
(Mr Sclater) I just said that our position was seriously
144. I am trying to get you to say "Yes"?
(Mr Sclater) I said our position was seriously weakened
by the House of Lords judgment in July 2000.
(Mr Martin) Mr Cousins, I would like to encourage
my Chairman to say "No" for this reason: in those years,
and for many years previously, mutuality was very much an article
of faith with us and, accordingly, we resisted those approaches
principally because we were determined, as we thought it was in
the interests of our members, to remain a mutual, and all those
approaches would have involved demutualisation.
145. Were you the source of the advice to the
board on these occasions?
(Mr Martin) Certainly not. It was a matter of discussion
146. It was a matter of discussion but you were
not particularly the source of advice on that?
(Mr Martin) Certainly not. I have never been the Society's
solicitor; I happen to be a solicitor on the board. These matters
were entirely a matter for discussion of the board and what we
were determined to do, to the best of our ability, was to remain
147. Speaking as a solicitor who "happened
to be on the board", in retrospect do you not think it is
a bit unfortunate that, in the context of these discussions with
people making informal approaches, in that period the issue of
guaranteed annuity liabilities and how they might turn up was
never ever raised?
(Mr Martin) Let's suppose
148. Was it unfortunate or not?
(Mr Martin) I do not think it was. Let's suppose that
John Sclater had reported to us a very attractive sounding approach
and we had decided to take it up in a serious way. We would have
put ourselves into the hands of investment bankers and also the
bidder to discuss the kind of deal that might be made and, in
the course of that, there would have been the fullest disclosure
of all these matters. A decision would then have been taken in
the light of that disclosure.
149. Mr Martin, why is it that not all the policyholders
have a vote on the Halifax deal?
(Mr Martin) There are two reasons really, Mr Cousins.
The first is it was a matter of timing. Our sales force in particular
but the administrative office as well in Aylesbury was likely
to have been a wasting asset if we had not very quickly been able
to secure a deal with the Halifax because the uncertainty affected
our people very badly, so we were under great pressure. If we
had gone to the members that would have taken weeks and possibly
longer, and there might have been a continuing uncertainty and
the disappearance of the sales force which it was important for
us to be able to sell. We had the powers under the articles, we
believed as a board of directors, to deal with that matter ourselves;
we took the most comprehensive legal advice given the circumstances
we were in; we were advised that we were under an even greater
duty to act in the best interests of the members on our own, given
the circumstances. That is why we made that deal with the Halifax
which has been wrongly described, I think, as "hasty".
Sir Michael Spicer
150. Can I just pursue this question of the
future for the with-profits policyholders if the Halifax deal
goes through? As I understand it, there is only a certain £500
million to be put into the with-profits funds if it does go ahead,
and there will be no restoration of the lost seven months of bonuses.
In those circumstances, what is the incentive for people to stay
with the Society?
(Mr Headdon) I think it is the features I referred
to in response to quite an early question. There is new money
coming into the fund; it will help to strengthen it and improve
investment freedom and, compared to a closed fund situation, we
have secured cost-effective administration for policyholders going
forward, whereas closed funds typically begin to suffer rising
151. But if everything was hunky dory, as I
think you are implying, you would not have needed to have raised
the penalty? You have doubled the penalty for leaving the Society.
(Mr Headdon) The adjustment we made to surrender terms
was made back in December to ensure the principle that I described
earlierthat those leaving the fund should take away a fair
amount but should not prejudice the interests of those continuing.
152. There are two reasons why you might have
raised the penalty; one is to prevent people leavingis
that the main reason?
(Mr Headdon) The main reason is to ensure that the
funds that they take away do not prejudice the interests of continuing
members. It is to have the matter at a fair level. A significant
reason for the penalty was the fact that the stock market fell
by 8 per cent over the last year.
153. So is your present judgment that doubling
the penalty has, in fact, achieved the second objective, which
was to enable the Society to stay afloat?
(Mr Headdon) Well, the level of withdrawals has not
been at a level which would have threatened the Society one way
or the other. I believe it has achieved the objective for those
that have wanted to go that they have received a fair payment
but one that has not left the remaining policyholders in a weaker
position than if those people had not surrendered.
154. But are you quite clear that, with the
present penalty level, if there was to be a mass exodus, the resulting
situation because of the penalties that they would leave behind
would keep the Society afloat? Are you absolutely certain about
(Mr Headdon) We believe the adjustment is correct
for current financial conditions.
155. But it must be just a matter of mathematics,
must it not? It cannot be a matter of uncertainty?
(Mr Headdon) As I say, we believe it is at the right
level for current conditions. In different economic conditions,
it could need to be higher or lower to achieve that same result.
156. What sort of different economic conditions?
(Mr Headdon) Principally significant falls in asset
157. Equity asset values?
(Mr Headdon) Yes.
Chairman: Thank you very much for the
way you have answered our questions.