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 calculationthe
bottom-up calculation of lossand 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 pointthe
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 Treasuryanyone? 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 difficultin fact, where it becomes
impossibleand this is what I was trying to say in my opening
remarksis 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 hereat 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 disappointedyet. 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 reportit 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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