Equitable Life - Public Administration Committee Contents

Examination of Witnesses (Questions 1-35)

Ann Abraham and Iain Ogilvie

14 October 2010

Q1 Chair: Welcome to this meeting of PASC, the Public Administration Select Committee. I wonder if you could identify yourselves for the record please.

Ann Abraham: Yes, of course. I am Ann Abraham, and I am the Parliamentary and Health Service Ombudsman.

Iain Ogilvie: I am Iain Ogilvie and I led the Ombudsman's investigation into Equitable Life.

Q2 Chair: Our purpose in this inquiry is to try to elucidate what are the areas of agreement and disagreement between you, Ms Abraham, and Sir John Chadwick's Report and the Government in order to try and resolve this according to some, we hope, fairly simple principles. Is there any comment you would like to make before we start?

Ann Abraham: Chair, I know that there is limited time and you have my written submission, so I will not read that to you. If I may just summarise, you asked me to explain why I considered Sir John's proposals were not compatible with the Government's commitment to implement my recommendation to pay fair compensation to Equitable Life policyholders for their relative loss as a consequence of regulatory failure. In response to that request, I explained that Sir John starts from a different place to my report, proceeds on a different basis, takes a different view of what would have happened in the absence of regulatory failure, takes a narrower approach to redress, and takes a very different approach to the calculation of compensation.

I tried in my written submission to anticipate at least some of your questions, but of course I am happy this morning, with my colleague, to assist in any way I can with the Committee's enquiries. Certainly, simplicity and clarity would be the principles I would like to go with.

I want to say just a few words about this issue of fairness, which I think has been discussed in all the submissions I have seen, and that is about fairness to the taxpayer, and about fairness to Equitable Life policyholders. As I see the position now, it is quite simple. We have a calculation of relative loss; I know that is subject to some refinement, but I think that puts us in a very strong starting position and leaves, in my view, only one legitimate debate to be had. That debate is not about whether the Ombudsman's recommendation should prevail or whether Sir John Chadwick's advice should prevail. The Government did not give a commitment to implement Sir John's proposals; it gave a commitment to implement the Ombudsman's recommendation. That legitimate debate now is about how to balance fairness to Equitable Life policyholders with the impact that paying compensation would have on the public purse.

Sir John has made his own contribution to that debate. He says that, in order to be fair to the taxpayer, the amount of compensation should be capped at the level of absolute loss. The cap he proposes would almost halve the amount of compensation payable. There is, however, one significant problem with Sir John's view, which is this: you cannot cap the level of compensation at absolute loss unless you reject the Ombudsman's recommendation to pay compensation for relative loss, and the Government has made a commitment to implement the Ombudsman's recommendation to pay compensation for relative loss. I don't think that gets us very far, and that brings me back to fairness.

This is not only about fairness to the taxpayer, it is about striking the right balance between fairness to the taxpayer and fairness to Equitable Life policyholders. It is a debate that needs to be had in those terms with all the arguments aired and considered, and a decision made at the end of the debate about what is fair, what is affordable and where the balance should lie.

Q3 Robert Halfon: Good morning. You state in your evidence that the Towers Watson figure of between £4 billion and £4.8 billion appears to be a credible estimate. Do you accept this figure as the best estimate of the quantum of relative loss?

Ann Abraham: I am not sure I would use the words "best estimate" because I don't think I'm in a position to say that. I have described it as a credible figure, and again this morning I have said that I think it gives us a very useful starting point. I know that there are debates about start dates in relation to the calculation—the bottom-up calculation of loss—and there are people who know a lot more about that than I do. If I may replace your words "best estimate" with mine, "credible", that is the word I would use.

Q4 Robert Halfon: Given that Equitable Life broadly accepts this figure too, do you think that this needs to be adjusted to reflect your description of the relative loss, and if so, how should it be adjusted, in what way?

Ann Abraham: It doesn't need to be adjusted to reflect my description of relative loss. The adjustments as I understand them are about the date at which these calculations begin. In terms of, "Has this figure of relative loss been calculated in a way that is compatible in broad terms with what I was saying in my report?", the answer to that is yes.

Q5 Chair: If we look at the Chadwick Report itself, and you quote him in your evidence, do you think that if you had been addressing the same question you would have arrived at a similar outcome?

Ann Abraham: I don't know the answer to that, and I suppose it's a question you may well want to pose to Sir John himself. The fact is, we weren't, and we didn't. Sir John undertook the work that he did, commissioned by the previous Government, to do something that was based on a rejection of my recommendation, and that is one of the reasons why I say he started from a different place. I have talked about my report being misinterpreted; the previous Government misinterpreted my report and then built that into Sir John's terms of reference. If he had been the Ombudsman, if he had conducted a four-year investigation into these matters, would he have come to the same point that I did? I don't know the answer to that. The Ombudsman's jurisdiction is a personal jurisdiction. All I can say is, having done the work, those are the conclusions I reached and that is the recommendation that I made, and that is the recommendation that the new Government committed to implement.

Q6 Chair: Why did you only write to MPs to complain about the remit of Sir John Chadwick after he had reported?

Ann Abraham: I don't think that's right. In May 2009 I made my second Equitable Report to Parliament, "Injustice Unremedied", talking about the Government's response on Equitable Life. In that report, I set out why I considered the injustice I had identified had not been and would not be remedied, and one of the reasons for that was Sir John Chadwick's remit. I don't think I said anything new when I wrote to Members in July this year.

Q7 Mr Walker: I just seem to recall that the last Public Administration Select Committee expressed a number of concerns about the appointment of Sir John Chadwick from the outset. Do you remember that? That was with Ian Pearson, the then minister.

Ann Abraham: I do.

Q8 Chair: Thank you for that correction. The Government has attempted to establish a repayment scheme on principles analogous to legal principles, trying to shadow what the courts might have decided the liability would be. What principles did you use?

Ann Abraham: I used principles of good administration and principles for remedy, which are my published principles, the Ombudsman's principles.

Q9 Chair: But you use the term "injustice".

Ann Abraham: I do

Q10 Chair: And then you have to measure injustice; how have you measured injustice?

Ann Abraham: I have described injustice.

Q11 Chair: Injustice is a legal concept, isn't it?

Ann Abraham: It's a legal concept in the legislation under which my office operates because the concepts of injustice and maladministration clearly are two key concepts in that legislation. It is what we do; these are bread and butter terms for the Ombudsman. They are, of course, terms that are not defined in that legislation and that the courts have shied away from making any attempt to define. My own view was that 40 years' experience of the office gave the office a very good foundation to actually codify those principles and publish them, which I did some years ago now in the "Principles of Good Administration", and set out in there also the principles for remedy. I would actually say these are Ombudsman concepts rather than legal concepts and therefore concepts that the Ombudsman is absolutely familiar with and works with all the time.

Q12 Chair: In your response to Chadwick you say, "In essence, the view expressed in my report is that absent the serial maladministration I determined from July 1991 onwards, no reasonable investor would have joined or remained with Equitable Life throughout the period, going instead to another life insurance company." Where in your original report did you say that?

Ann Abraham: I am very conscious of what Sir John has said about this. I do find it very difficult to hear an interpretation of my report after the event by somebody who is now saying that the Ombudsman didn't say that. I was asked to help Sir John with his work, and he asked me a number of questions and I set that out in a letter, so it is hard to then be told that that is not what my report says.

Q13 Chair: But it doesn't say that, does it?

Ann Abraham: If I can just come to your question. If my report is read in its entirety, if my findings are read in their entirety, then it is very clear, it seems to me, to any reader, that the message that I, in an attempt to be helpful, summarised in that letter, in effect am saying is that without this maladministration nobody would have gone anywhere near this insurance company. I cannot point you to two sentences in that report. I can ask anybody to read that report, I can ask anybody to read the findings and recommendations in their entirety, and I think one of the problems we have had with this report is that it has been picked over, it has been selectively quoted, it has been turned around, it has been analysed. If the same amount of analysis had gone into the very simple explanation of what I meant by "relative loss", as has gone into all the words that preceded it, I think we would be in a much clearer, simpler place by now. What I have said about relative loss is that this is the loss that policyholders would not have suffered if they had saved or invested elsewhere: a loss relative to what would have transpired had those people saved or invested with a comparable with-profits fund.

Q14 Chair: We will come to affordability later, but you also say that you recognise that the Government will only pay what is affordable and is fair to other taxpayers. How is the Government to decide how to ameliorate the liability on the Government unless they use some rational basis such as recourse to a judge who is looking at it from a legalistic point of view? How is the Government meant to do this?

Ann Abraham: I would point the Government to my "Principles of Good Administration" and what they say about good decision making. I think there is a balancing act to be done here, as I tried to say in my opening remarks. The point for me is that any good decision making, as I am sure everybody here is well aware, must take account of relevant considerations and ignore irrelevant considerations. It seems to me that, in terms of fairness to the taxpayer, there are a number of relevant considerations. The overall state of public finances is of course a relevant consideration. I think it is probably relevant to bring into play that no compensation scheme for pensions, financial services, makes good 100% of loss. If you look at the parallels elsewhere, the financial assistance scheme for example has a 90% of core pensions approach, so what would be different here? I think that is a relevant consideration. I think that, in terms of fairness to policyholders, it is relevant that policyholders are also taxpayers. But then I would bring into play, as relevant considerations, the nature of the injustice, and the fact that it is resulting from serial regulatory failure. It is not about bad luck, or about poor investment decisions.

Q15 Chair: So what particular bits of injustice does the Chadwick Report not recognise?

Ann Abraham: Which bits? Relative loss.

Q16 Chair: Relative loss is a moveable feast, is it not? You said yourself, it is a balancing act.

Ann Abraham: No, affordability is a balancing act. I think relative loss is described in my report very clearly and simply, and I have described it again this morning.

Q17 Chair: But you are basically treating the regulators' failure as a negligence claim.

Ann Abraham: No, I am not. I am absolutely not.

Q18 Chair: Or a tort claim, as a claim of tort.

Ann Abraham: There is a whole chapter in my report about the legal approach to the recommendations--which the Treasury did advance in its response to my draft report, and I dealt with that at great length in the final report--as to why those legal principles were not appropriate here. I think that, for me, there is a very clear difference between unlawfulness and maladministration. If that were not the case then I think my office could shut up shop and simply leave it all to the courts. There is a job here that the Ombudsman does that operates in territory beyond the courts and outside of the courts. Therefore, I think, to try and apply legal principles of negligence or tort or whatever it may be will not help us here.

Q19 Chair: But what principles are you applying apart from some vague notion of injustice?

Ann Abraham: Is it a vague notion of injustice when it has been in operation in the world at large for 200 years, and in this country for over 40? It is a notion of injustice that is highly developed in ombudsman schemes throughout the UK and certainly in my office. I suppose what I would say, Chair, is this is perhaps an interesting discussion to be had but it does seem to me to be beside the point—the point for me being that the Government has made a commitment to implement the Ombudsman's recommendation.

Q20 Kevin Brennan: Can I take it from what you said earlier, with the analogy or the comparison with the financial assistance scheme, that a settlement that compensated for 90% of relative loss, which was not index-linked in any way and related to the core benefits, would be something that you regard as a fair outcome to this?

Ann Abraham: What I am saying is that something which was less than 100% has precedent, in relation to compensation schemes. Sir John has said in the foreword to his Report that it is not his place to make decisions about the public purse. It is not my place either. What I have done here is to say that the public purse is a proper consideration in all of this, and the overall state of public finances is something that clearly the Government and Parliament will know more about than I do. What I am saying is, it's something that you can bring into the mix.

I would also say--if we are balancing fairness and what is relevant in the balancing act of fairness to taxpayers, fairness to policyholders--is that there is quite a lot that also plays in the scale for policyholders that should be brought into play. For example, the length of time they have waited; it is not their fault that we are sitting here 10 years after this decade of regulatory failure. We need to consider the position that they are in, the exposure that they have: these are people's pensions; they don't have a lot of time to make these things good. I suppose I would add the rollercoaster ride that people have been on. So those are all things that play in terms of fairness to policyholders. I think in terms of fairness to taxpayers, yes I would say that something less than 100% would not be unreasonable. I would also say, I don't know the overall state of the public finances in the way that the Government does at the moment.

Chair: Can we come back to fairness on the policyholders and the taxpayer in a minute?

Q21 Charlie Elphicke: One thing that is slightly troubling me is, a person in the Treasury who may think about these things will say there are two measures of damages known to English law for this sort of thing: contractual and tort. Clearly it is not contractual, tort is the right way. And here we have the Ombudsman saying that there is a new measure of quantum calculation, which is some concept of injustice, and they would say you are just making it up as you go along. How do you answer that charge which they will inevitably make against you?

Ann Abraham: I suppose I would say that I would ask that person--and indeed I had this conversation with the Permanent Secretary at the Treasury at the time--to read the chapter in my full report which deals exactly with those issues. He and I did discuss that at the time after he had read it. In terms of the Treasury official, I think that piece of work has been done.

Q22 Charlie Elphicke: But what would you say to the ordinary person who asks this question outside the Treasury—anyone? Do you make it up as you go along, or is there a method and formula?

Ann Abraham: There is a method; there isn't a formula. Again, I would point people to my principles for remedy, and our approach in the office. This is not new territory for me, it is not new territory for me or for the Committee, it is not new territory for all of my predecessors who have held this role, and indeed ombudsmen across the UK and across the world. It is not that Ann Abraham has suddenly entered into this place and started making up the Abraham version of how to do maladministration and injustice. I have lots of distinguished predecessors and lots of distinguished colleagues in the ombudsman world. But the starting point for this is always: what would have happened if this maladministration had not occurred? That is what the report does, and what the report says, what I say, is if the regulator had been doing their job properly, then the information about this insurance company, which was a vessel holed below the water line, should have been in the public domain, should have been available to policyholders and potential policyholders and to their financial advisers. If it had been, as it should have been, nobody would have gone near this insurance company.

Q23 Chair: I think what you are saying is that Parliament has charged you with an obligation to try and remedy injustice, which is in the Act, and you have a broader, more political notion of injustice than is definable in law, which is why you can use the term "justifiable outrage" in your report, and that it is up to Parliament to then decide how to respond to what you say.

Ann Abraham: I think that is entirely right. The only thing I would add is that the word "outrage" was actually used in the courts as an example of injustice.

Chair: Any other questions on this section? Shall we move on? Nick.

Q24 Nick de Bois: Thank you, Chairman. One of the main areas of contention between yourself and Sir John was over the compensation scheme, where you refuted Sir John's interpretation as you set out your approach as to how the compensation scheme should be designed. You also say that you are open-minded on possible approaches, which begs the question, do you consider Sir John's approach one such option?

Ann Abraham: It depends what you mean by Sir John's approach, because obviously there are a series of steps to Sir John's approach, and I have set out in my written submission the steps that my approach takes and the steps that Sir John's approach takes, and the fact that there are additional steps in his approach that I say are incompatible with mine. If you look at it just in those terms then I am saying no, you cannot follow Sir John's approach and implement my recommendation to pay compensation for relative loss.

Q25 Nick de Bois: The terms of reference of the independent commission refer to the work undertaken by Sir John on the methodology for calculating that relative loss. Given your views, are you content with that?

Ann Abraham: I think there are two things in play there and I think it is important to distinguish them. The calculation on relative loss is the bottom-up calculation done by the actuaries. I know there are some concerns around the edges of that, but in terms of where that figure is pitched I have said it is credible. The relative loss component, I have to say I have no difficulty with; I think it's credible. I think where it gets difficult—in fact, where it becomes impossible—and this is what I was trying to say in my opening remarks—is the cap that Sir John introduces at the absolute loss level; that is the point at which our paths absolutely divide and cannot be brought back together, because in order to introduce that cap, as I have already said this morning, you have to reject the Ombudsman's recommendation to pay compensation for relative loss.

Q26 Nick de Bois: Clearly you are not content with that.

Ann Abraham: No.

Nick de Bois: Thank you, Chairman.

Q27 Chair: On the compensation scheme, in my predecessor's Committee's Report on 11 December 2008, we published a comment from the Chief Executive of Equitable Life, then Charles Thomson, about how a compensation scheme would work. I won't read the whole paragraph, because it is too long, but very simply it is about deciding a lump of money and then allocating it according to the class of policy, the dates money was paid in, the dates money was paid out, working out a matrix on the basis of those parameters, and so on. Is that the sort of compensation scheme you would consider?

Ann Abraham: I think in broad terms, yes.

Chair: Moving on, Paul Flynn.

Q28 Paul Flynn: Can I declare a financial interest first of all? Did you ever expect a government to pay out £4 billion in compensation?

Ann Abraham: It has been done before.

Q29 Paul Flynn: Was your judgment influenced by the fact that the only body that can compensate on that scale is government? I am thinking of the previous reports--the Baird Report, the Penrose Report, the first Ombudsman's Report--that came out clearly in saying that the responsibility for this lay with Equitable Life, the authors of their own misfortune. There was also an element of responsibility that all those who were clients of Equitable Life gained by leaving as early as possible. Those who delayed the time they left lost money increasingly, so there is an element of judgment there. But your conclusion was that the entire responsibility is government's, because, I suggest to you, government are the only people who can come up with £4 billion.

Ann Abraham: I think I will go back to your question. I think the simple answer to it is no. I didn't amend my judgment because the Government was potentially writing the cheque. What my report did, after a four-year investigation, was find serial maladministration over a very long period, leading to injustice. I did what I always do in those circumstances, which is to consider what would be an appropriate remedy. My view was that compensation for relative loss was the appropriate remedy. Then I did something unusual, which is to say, "That's a very large sum of money, and I absolutely understand that considerations of the public purse can legitimately come into play." That is the amendment, or difference, or distinction, that I drew here in relation to the particular level of potential compensation and the number of people involved. I think back to other things that my office has done over the years where the remedy was a large sum of money. The inherited SERPS work that my predecessor did, for example, certainly involved--in terms of opportunity costs for government--much bigger numbers than this. I would not find it appropriate for the Ombudsman to somehow scale down the remedy because the injustice was so huge.

Q30 Paul Flynn: What I am going to suggest to you is that there is a fashion to blame those who regulate systems rather than those who perpetrate offences. We tend to blame the policeman who investigates a crime rather than the burglar. What I am suggesting to you here is that it is very strange that there is this long period of maladministration that was not obvious in 2003, and when Penrose's and Baird's Reports were produced, and has become obvious now. It is similar to the report you made, the one we got on the steelworks compensation, where those who perpetrated the shortfall in pensions were not blamed, but government was blamed for a leaflet that might have been misleading. Is this an approach that can be sustainable in the future, where we blame regulators and we ignore those who are responsible--through the judgments made by Equitable Life's accountants and actuaries, and the judgments made by individual pension people, whether they were in the scheme or whether they got out at a certain stage--and let everything come back to the Government? Is that reasonable and sustainable?

Ann Abraham: I think it's a side debate, if I may say so, because my report is not on trial here—at least I didn't think it was. I thought what we were trying to do was to get clarity and simplicity in order to end this very lengthy saga and find a good and proper way to compensate policyholders for maladministration, which is admitted by government. I think that, for me, the balancing act of fairness should be centre stage.

I would just like to say one thing. I was impressed listening to President Pinera of Chile being interviewed on the television this morning at the end of the events that I am sure we have all followed with interest. The question that the journalist put to him was whether, if this mining company was operating a mine that was not safe, the Government was at fault for allowing that to happen, and he just said "yes".

Q31 Paul Flynn: What I am suggesting to you is that your report had the result of building up expectations among the pensioners that could never be fulfilled.

Ann Abraham: I would say that the Coalition Government's commitment to pay compensation in accordance with my recommendation has built up expectations, and I remember again how my own expectations were raised when I read the Coalition Government's commitment, and how delighted I was to see not only the respect for my office but the respect for the policyholders in all of that. I would also say that I heard the Deputy Prime Minister recently say that these policyholders had been "shamefully betrayed".

Q32 Mr Walker: I would say that that respect is being continued, because I, too, in the run-up to the general election was enormously excited about my party's position on these matters. I am slightly less excited now, as I think many people are. But is your office still being held in high regard, or do you feel disappointed as well in the way that you have been treated?

Ann Abraham: I spent some time earlier this week with a number of colleague ombudsmen discussing issues of common interest. One of things we all decided was a necessary characteristic of ombudsmen was something we described as "naïve optimism"; however long you did the job you should never let go of your naïve optimism. I would say two things. I am not disappointed—yet. I have welcomed much that the new Government has done, and I think these are very difficult challenges. What I have been trying to do this morning, I think, is focus those discussions where I think they need to be focused, which is about affordability and fairness.

I think Sir John's work has actually given us some things we didn't have before. It has given us some bottom-up estimates of relative loss, which we did not have. I understand that the Treasury now has, through the Chadwick process, a database of Equitable Life policyholders which we did not have before. So we are a lot further on. What I think we must not do is get sucked into irrelevant considerations in the next bit of the decision making. I have been saying that to the minister, and I am saying that to the Committee this morning. I would say that the dialogue I have had with the minister in the new Government has been more open and constructive than any dialogue I had previously.

Q33 Robert Halfon: I just wanted to ask you a more general question. What are the lessons to be learnt from this if such an issue occurs again?

Ann Abraham: In my report, I--and as I remember the Committee also in one of its reports on these events--talked about how important it was if we ever found ourselves here again to have the sort of inquiry, the sort of investigation that would cover all the ground. We have heard about all of the partial investigations, the particular perspectives, not covering all of the ground. Penrose did that to some degree, and the Baird Report certainly did that. It is about making sure that there is an inquiry and investigation that establishes the facts, allocates responsibility, deals with remedial action and does it in the round. Again, I did an investigation of the role of the prudential regulators here. I could do nothing else; that was my remit. I think certainly I and the Committee have had things to say about how it would have been better to establish at the outset an inquiry that could look at all of these events in the round.

Q34 Chair: Supposing the Government junks Chadwick, which is what you want them to do, but then they conclude they can only afford to pay 20% or 30% of the relative losses defined by Towers Watson, but they take the responsibility and say, "Look, we accept the liability, but this is all that can be fairly afforded in the current economic circumstances." Would you accept that?

Ann Abraham: I think I would accept that with one proviso, and my proviso goes back to the principles of good administration and good decision making. In my office we look at a lot of decisions made by government bodies which are discretionary decisions that they are entitled to take, and whether they take them having brought into their consideration all relevant considerations and ignored irrelevant considerations.

Q35 Chair: So what you really object to is them bringing in a different notion of justice that challenges the basis of your report—it is not about the level of the compensation.

Ann Abraham: Yes, absolutely.

Chair: I think that is extremely helpful. Thank you very much indeed. You have been a very helpful witness.

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