Select Committee on Treasury Appendices to the Minutes of Evidence


A Paper Prepared by Mr Jack Denbin


  1.  The Equity Policy Holders Group (hereinafter for ease of reference called "EPHAG"), was formed subsequent to the decision of the House of Lords upholding the claim of the policy holders who have guaranteed annuities. The original aim was to monitor the sale of the Society on behalf of the members. When the sale fell through, the aim was changed to monitoring the Society on behalf of the non-GAR policyholders.

  2.  EPHAG has in excess of 6,000 members, and the number is growing.

  3.  We wish to qualify our submissions by explaining:

    (1)  The Authors have never before prepared a submission to be placed before the Treasury Committee or indeed any Committee of the House of Commons;

    (2)  The facts which are in our possession are sparse;

    (3)  We respectfully seek to draw inferences and to invite the Committee to include in their enquiries such of the points that we have raised as they consider appropriate.

  4.  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 and apologise, in advance, for any burdening of the Committee of matters well known to them or which they consider obvious. The facts as we know them are:

    (1)  The Society wrote guaranteed annuities from 1956 to 1988;

    (2)  In 1993 a gap between interest rates and rates guaranteed in the annuities began to appear, this divergence increased as interest rates fell;

    (3)  In about 1998, some holders of guaranteed annuities brought a class action in order to establish their entitlement; they were successful in the Court of Appeal and the House of Lords;

    (4)  The upshot was that the Society has estimated that this will give rise to a deficit of £1.5 billion in the With Profits Fund;

    (5)  In order to overcome this deficit the Society put itself up for sale, but failed to find a buyer;

    (6)  Alan Nash and the Board resigned;

    (7)  Thereafter it closed to new business and has sought to sell parts of its operations; at the time of writing these efforts have only resulted in partial success;

    (8)  We have met representatives of the Board of the Society on two occasions. The following points emerged:

      (a)  The Board claimed that it was only the decision of the House of Lords that gave rise to the massive shortfall;

      (b)  Whilst the result of the House of Lords had been previously identified by the Society the chances of it occurring were considered to be remote;

      (c)  Prior to the above decision the reserves had been considered adequate;

      (d)  There was some reinsurance in place;

      (e)  Efforts were being made to cap the open-ended liability to the guaranteed annuitants;

      (f)  The 10 per cent deduction on those leaving the Society reflected their proportion of loss which otherwise would be carried by those policyholders who remained;

      (g)  The guaranteed annuities 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 liability;

      (i)  The Board were satisfied that they had interpreted the decision of the House of Lords correctly.

    (9)  It emerged that a memorandum from the Treasury to the FSA (or its predecessor), that it had identified in about 1998 a deficit in the funds of the Society;

    (10)  We have met representatives of the FSA on one occasion and the following points emerged:

      (a)  There was a large provision shown in the statutory accounts when compared with the accounts produced for the Members;

      (b)  They were pro-active in seeking to stimulate a scheme for capping the liability to the guaranteed annuitants.

    (11)  Up to the decision to close to new business the Society was aggressively advertising and soliciting new business, which efforts included large advertisements in the press and mail shots, without any mention of liabilities either actual or contingent.

  5.  It is clear that we are woefully short of facts and we set out some matters which may be relevant to their Inquiry:

    (1)  On an annual basis:

      (a)  What steps did the Board take to;

      (i)  Investigate the position of the growing shortfall in general, assess the liability, obtain all necessary and relevant professional advice;

      (ii)  Place reinsurance;

      (iii)  Make provisions in the fund and show this in the accounts;

      (iv)  Make disclosures to Members and potential members;

    (2)  What were the reasons for the failure of the sale of the Society as a going concern;

    (3)  What will be the impact on the Fund of movements in interest rates;

    (4)  What would be the impact of capping the liabilities of the guaranteed annuitants on the remaining policyholders;

    (5)  What effective steps did the Treasury take, when and what were they;

    (6)  What effective steps did the Regulator take, when and what were the effects;

  6.  The inferences which we seek to make are:

    (1)  Little or no provision was made when the shortfall first emerged, nor was any effective provision made prior to the House of Lords decision, which is at least negligent if not misfeasance;

    (2)  The statement of Mr Nash immediately after the decision that, there was a shortfall of £1.5 billion and that the Society would have to put itself up for sale indicates that this contingency had been identified and quantified;

    (3)  The lack of disclosure to policyholders from 1993 of the growing liability is at least negligent, but could be regarded as misrepresentation or even fraudulent;

    (4)  Various individuals may well seek to bring actions based on the facts, matters and circumstances of their own individual case;

    (5)  The Treasury and the Regulator have failed to safeguard the interests of the non-guaranteed annuitants;

    (6)  A substantial number of members who are relying on the Society have been misled or betrayed, and will or have, suffered loss.

  7.  We respectively invite the Committee to enquire into those matters that they consider to require investigation which are set out in paragraphs five and six herein.

  8.  We shall be happy to provide such amplifications and explanations as we can if requested by the Committee to so do.

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