Select Committee on Treasury Appendices to the Minutes of Evidence


Memorandum by Equitable Policyholders Action Group


  In representing over 6,300 members of the Equitable Life Assurance Society who have expressed support for us as an Action Group, Equitable Policy Holders Action Group (EPHAG) has been active in gaining two meetings with representatives of the Equitable Board of Directors and one meeting with the Financial Services Authority in order to gauge the extent and nature of declared problems as well as to learn how these have come about. In this process we have collected information on the Society's treatment of different classes of member.

  It has emerged that "With Profits" policyholders, especially those with Retirement Annuities and Personal Pension contracts have been placed in the invidious position of having funds, such as bonus distributions, at least temporarily denied to them in order to enable the Society to meet its obligations to other policyholders who have annuity rates guaranteed by contract. The latter entitlements were re-affirmed by a House of Lords ruling in 2000 following previous class actions in the High Court and Court of Appeal.

  EPHAG has found that the conditions which have produced the situation whereby the Society's Directors believe that the Society must be sold to preserve its viability are long standing. It has further emerged that Annuity Conversion Rates were granted to investors with Retirement Annuity Contracts for a long period and that the rates guaranteed far exceed present and recent market rates thus creating a shortfall in funding for which no, or little, provision has been made. This previously unknown aspect has caused many members without guaranteed elements to feel aggrieved and this has been exacerbated by the news that it is the "with profits" policyholders that are being penalised by subsidising other members. Previously, this liability was not known to members. The written evidence which follows covers the facts we have uncovered in meetings as well as what we regard as outstanding and unanswered questions.

  Consequently, this submission generally highlights our lack of information in our quest to protect members' interests particularly those of the most vulnerable group, the "with profits" policyholders, who bear the risk in a mutual assurance society.


  For the purposes of this submission, the Equitable Life Assurance Society is referred to as ELAS, the Equitable Policyholders Action Group as EPHAG and the Financial Services Authority as FSA.

1.   Formation and purposes of EPHAG

  1.1  The EPHAG Committee is comprised of members of the Accountancy, Actuarial, Assurance, Legal and Pensions professions, who supply their professional expertise on behalf of EPHAG members in a voluntary capacity. The Chairman, and several other members, have experience of Directorships of UK public companies and all members of the committee have been Equitable Life Assurance Society (ELAS) members (ie with profits policyholders) for many years. The Committee aims to represent the interests of 6,300 ELAS members and this number is growing.

  1.2  EPHAG was formed subsequent to the House of Lords ruling which upheld the claim of those policyholders who hold Retirement Annuity contracts with Guaranteed (minimum) Conversion Rates included. This coincided with the declaration by the ELAS Board that ELAS was up for sale as a chosen priority.

  1.3  The original aim of EPHAG was to monitor the decisions, recommendations and actions of the Board up to the point of sale of the Society but when a sale failed to materialise, EPHAG's aim was adjusted to that of representing the interests of Non-Guaranteed Annuity holding members.

  1.4  Henceforth, the initials GAR refer to Guaranteed Annuity Rate holders with guaranteed conversion rates included and Non-GARs to Annuity Rate Holders without guaranteed conversion rates included. This change in aim demonstrates how the Action Group has found it necessary to alter its purposes in the light of facts seemingly to the detriment of certain categories of membership being uncovered in a quest for fair and equitable treatment of members.

  1.5  Fundamentally, we wish to stress that the facts in our possession are sparse. As each different and new situation obtaining at ELAS has recently emerged indicating potential disadvantage to one or more categories of policyholder, some previously covert facts have likewise emerged with consequent concern to ELAS members. It is the pre-eminent need for information and the disquiet arising which has caused EPHAG to be formed with the aim of influencing future events in the protection of members' interests and entitlements as well as to limit disadvantage to "With Profits" (Non-GAR) policy holders who have now been identified as the most vulnerable group.

2.   Events leading to the present crisis obtaining within ELAS and the identification of factors known to EPHAG

  2.1  In setting out the facts as known to us we realise that we may state matters that are obvious or known to the Committee. However, we are unaware of the extent of their information and seek to err on the side of caution but apologise in advance for any unnecessary burdening of the Committee. The facts as we know them are:

    A  The Society wrote guaranteed annuities (GAR's) from 1956 to 1988.

    B  By 1993 a gap between market rates and the rates guaranteed in the annuities began to appear this divergence increased as interest rates fell.

    C  By 1999 ELAS had encouraged some holders of guaranteed annuities (GARs) to bring a class action in order to establish their guaranteed entitlement. They were successful in the Court of Appeal and the House of Lords.

    D  The outcome was that the Society estimated that this would give rise to a deficit of £1.5 billion in the With Profits Fund and reversionary bonuses were suspended for seven months in order to make good this shortfall.

    E  In order to overcome further deficit, the Society put itself up for sale, but failed to find a buyer.

    F  Thereafter ELAS closed to new business and has sought to sell parts of its operations. At the time of writing these efforts have resulted in only partial success.

    G  Alan Nash, as Managing Director and Appointed Actuary, resigned. The Chairman and other Non-Executive Directors also offered their resignation.

  2.2  EPHAG has met representatives of the Board of ELAS on two occasions and the following points emerged.

    A  The Board has claimed that it was only the decision of the House of Lords that gave rise to the massive shortfall.

    B  Whilst this possible judgement of the House of Lords had been previously addressed by the Society the chances of its occurring were considered to be remote.

    C  Prior to the above decision the Society's reserves had apparently been considered adequate.

    D  There was some (unspecified) reinsurance in place but insufficient to cover all GAR liabilities.

    E  Efforts were being made to cap the open-ended liability to the guaranteed annuitants (GARs).

    F  The 10 per cent deduction as Market Value Adjustment applicable to those members prematurely leaving the Society reflected the proportion of loss which otherwise would be carried by those Non-GAR policyholders who remained.

    G  The guaranteed annuities (GARs) only applied to single lives, and were further restricted by compliance with other conditions, thus the uptake was relatively low.

    H  The figure of £1.5 billion was the best estimate of the increase in Reserves necessary to meet the liability to GAR's established in the Courts.

    I  The Board was satisfied that it had interpreted the decision of the House of Lords correctly.

3.   Factors specific to ELAS and its directors, appointed actuary and auditors

  3.1  As the oldest mutual society in the UK, ELAS enhanced its reputation in modern times through having efficient administrative systems and a generous bonus policy. Both of these, together with a rapid rate of expansion, especially in pensions, earned it great and justified respect over several decades.

  3.2  ELAS ceased selling GAR Pensions in 1988 and, for the following ten years, the Annual Report prepared for members, coupled with Bonus declarations and other statements gave members no reason to suspect that investor confidence in ELAS was in any way likely to be unprogressive or the basis of misplaced trust.

  3.3  The ELAS Board of Directors was believed to be competent and efficient in pursuing the principles of stewardship vested in it; independent Auditors regularly stated Annual Accounts represented a true and fair view of the Society's financial situation without qualification and, as is normal practice, the Appointed Actuary played a vital role in the valuation of future phased forward liabilities such as the GARs entitlements.

  3.4  In the light of subsequent events and declared problems, the foregoing must now be viewed with suspicion. The problems admitted recently cannot be described as short-term, immediate or small but rather long term, increasing in intensity, fundamental and very serious indeed. The facts now speak for themselves and very transparently.

  3.5  Indisputably, a substantial number of members who are relying on the Society for retirement income have been misled or betrayed and are likely to suffer loss. This state of affairs is specific to the Equitable, which closed its funds to new business on 8 December 2000.

  3.6  Significantly, it would also seem that those investors who took out a "With Profits" Personal Pension policy between the date of the House of Lords judgement and the ELAS closure to new business may well have a very transparent case of "mis-selling" for resolution. These investors were effectively contributing to a fund ostensibly to benefit themselves but actually also to subside GAR entitlements. No warnings nor explanations of this feature were prominent, thus providing new investors with less than the full picture, and obviously not, in consequence, fair dealing and honest disclosure of disadvantageous product features.

  3.7  Owing to uncapped liabilities to GAR members being set to continue as a drain on the Society's resources for many years to come and the probable exercise of annuity conversion rates well above market rates, ELAS has achieved the unique position of setting one category of member (non-GARs) the responsibility of subsidising another category of member (GARs), whilst some members hold both GARs and non-GARs, of course. Additionally, certain members may seek to bring actions based on the facts, matters and circumstances of their own individual position.

  3.8  It seems that ELAS could have prevented, or limited, this situation through adequate reinsurance treaties being contracted. EPHAG does not know what future market annuity rates were assumed by ELAS as part of a plan or whether indeed there was a plan based on some stated assumptions. What is abundantly clear is that the various Rates of Annuity guaranteed at conversion have proved very substantially above market rates yet seemingly substantially lower than that required to activate one or more reinsurance treaties in favour of ELAS.

4.   Consequences for the UK life assurance and pensions industry and effects on investor confidence

  4.1  As ELAS has been such a respected pensions provider the "knock on" effect on other pension providers and life assurers in the UK is difficult to predict. However, the "bigger they are, the further they fall" runs the proverb, so it is reasonable to believe that failure of the fourth biggest of the UK life and pensions providers has shattered investor confidence severely, not only because substantial numbers of members are affected but also because the associated publicity has highlighted the disturbing aspects of its decisions and its high profile disclosure.

  4.2  Potentially, the more the failure is analysed the more damaging it might be to Mutal Assurance Societies. The situation of member subsidising member in order to honour guarantees granted by the management is viewed with extreme concern and it needs to be recognised that this situation could scarcely have arisen in a public limited company since the shortfall caused by guarantees would have had to have been met by its shareholders.

  4.2  Government (no matter what its political colour) is a pension provider albeit at a basic level. Consequently, Government exhortation for the public to make provision for privately funded pensions under the banner of "Self Reliance" must be at least temporarily damaged by the ELAS experience. Trust and Investor confidence could be at least partially restored and perhaps fully restored by government compensation making good the shortfall at ELAS. The case for this will, hopefully, become clear when the Committee has reported its findings to the House.

5.   The role of regulatory bodies in providing investor protection since 1986

  5.1  The Financial Services Act (1986) was intended to provide, first and foremost, investor protection—this has been the fundamental and vital overall objective of much effort and organisation. Various bodies, both statutory and self-regulatory, have been employed in providing higher security expectations for investors owing to these agencies being charged with financial supervision of pension providers such as ELAS. Latterly, this duty has passed to the FSA.

  5.2  It is clear that the FSA has failed to safeguard the interests of the Non-GARs in ELAS despite the fact that HM Treasury had sent a memorandum to the FSA (or its predecessor) in or about November 1998 in which concern was expressed about ELAS liabilities.

  5.3  Many EPHAG members are aggrieved that no intervention or action appears to have been taken at that time or with urgency afterwards, so extending the perceived deception by those in authority with responsibilities to members concerning investor protection.

  5.4  EPHAG has met representatives of the FSA on one occasion and the following points emerged:

    A  There was larger provision shown in the Statutory accounts when compared with the Annual Company accounts produced for the Members.

    B  The FSA wished to be pro-active in seeking to stimulate a scheme for capping the liability to the Guaranteed Annuitants. (GARs)

  5.5  Up to the time of the decision to close to new business, the Society was aggressively advertising and soliciting new business. These efforts included large advertisements in the press and mailshots without any mention of liabilities either actual or contingent to potential investors.

6.   Outstanding questions

  6.1  EPHAG Committee remain interested in several outstanding questions and as it is clear that we are woefully short of facts, we set out below some matters which may be relevant to the Committee's inquiry.

  6.2  On an annual basis what steps did the ELAS Board take to:

    A  Investigate the position of the growing shortfall in general, assess the liability and obtain all necessary and relevant professional advice?

    B  Place reinsurance and/or bolster reserves?

    C  Make provisions in the fund and show this in the Accounts included in the Annual Report to Members?

    D  Make other disclosures to Members and potential members?

  6.3  Of equal concern are the following questions.

    A  What were the reasons for the failure of the sale of the Society as a going concern?

    B  What will be the impact of movements in interest rates?

    C  What would be the impact of capping the liabilities of the guaranteed annuitants (GARs) on the remaining policyholders (Non-GARs)?

    D  What effective steps did the Treasury take, when and what were they?

    E  What effective steps did the Regulator take, when and what were they?

  6.4  We wish the Committee of Inquiry to draw inferences from the following:

    A  Why was little or no provision made when the shortfall first emerged and why was no effective provision made prior to the House of Lords decision? This suggests at least negligence if not misfeasance.

    B  Immediately the House of Lords decision was known, why was it stated by Mr Nash that there was a shortfall of £1.5 billion and that the Society would have to be put up for sale. This indicates that this contingency had been identified and quantified.

    C  The lack of disclosure to policyholders from 1993 onwards of the growing liability appears to be at least negligent, but could perhaps also be regarded as misrepresentation or even fraudulent.

2 February 2001

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