Written evidence from Equitable Members
Action Group
SUMMARY AND
INTRODUCTION
1. The expectations of 40,000 EMAG members
and thousands more who are victims of the Equitable Life scandal
were high when in May the new Parliament included 380 MPs who
had signed an election pledge to "…support and vote
for proper compensation for victims of the Equitable Life scandal………
as recommended by the Parliamentary Ombudsman." They
also welcomed the formation of the new Coalition Government whose
agreement states "that it will implement the Parliamentary
Ombudsman's recommendation to make fair and transparent payments
to the Equitable Life policyholders for relative loss as a consequence
of regulatory failure". EMAG thought a positive relationship
with the Treasury could be cultivated but, despite our best endeavours
and good intentions, EMAG has continued to be treated as the enemy.
2. We met the Financial Secretary, Mark
Hoban, on 24 May. He had already agreed to a seven week extension
to Sir John Chadwick's timetable, despite no changes to the remit.
Mr. Hoban refused EMAG's request to set aside the "Chadwick
Process" and asked instead for EMAG to re-engage, which EMAG
refused point blank. He glossed over the glaringly obvious mismatch
between Chadwick's unchanged terms of reference and the Coalition
Government's new promise to implement the Parliamentary Ombudsman's
recommendations. Subsequently, and at great length Mr Hoban introduced
the Chadwick report to the House on 22 July 2010, stating that
it was a "building block" for assessing compensation.
No other "building blocks" were described. Unsurprisingly,
the Parliamentary Ombudsman wrote to all MPs on 26 July to denounce
the Chadwick report as an "unsafe and unsound" basis
for compensating policyholders.
3. EMAG was appalled by the Chadwick report,
which by breathtaking sophistry reduced the sum of £4.8 billion
for relative loss to between £400 million and £500 million—giving
a new meaning to decimation. We analysed the report in detail
and published a Critique (on our website at: www.emag.org.uk).
4. As the Parliamentary Ombudsman, Ann Abraham,
wrote in her letter to Sir John 27 November 2009, "In
essence, the view expressed in my report is that, absent the serial
maladministration I had determined from July 1991 onwards, no
reasonable investor would have joined or remained with Equitable
Life throughout that period—going instead to another life
insurance company." We believe that the "Chadwick
Process" was kept in situ by the Treasury as a device to
justify minimising compensation, to retain the £1 billion
already allocated in the forward plan (as confirmed by ex-Chief
Secretary to the Treasury, Liam Byrne) for payments only to those
"disproportionately impacted".
So, the Treasury has, by sleight of hand, proposed
simply taking the same sum already pencilled in, temporarily and
expediently cut it by 50%, and sought to repackage it as somehow
meeting the Parliamentary Ombudsman's recommendation for fair
compensation. Sir John explains the divergence between his views
and those of the Parliamentary Ombudsman in his report thus: "We
have reached different answers because we have addressed different
questions." (Para 7.1.1). But in our opinion he was seeking
excuses for cuts while she was seeking justice.
5. At the meeting we had with Mr. Hoban
24 May, and subsequently in a series of letters sent to him from
28 May to 27 August, we have asked without success for a detailed
breakdown of Towers Watson's estimate of "aggregate stage
two loss" in the range of £4.0 billion-£4.8 billion,
which is similar to the "relative loss" recommended
by the Parliamentary Ombudsman. When we eventually met Towers
Watson in September we discovered that they have made material
assumptions based on Sir John's specified template with which
we do not agree. Regrettably, the Treasury have been very reluctant
to provide the necessary information to EMAG which might allow
us to verify or otherwise comment upon the figures provided by
Towers Watson. It is clear to us that, 20 months after the commencement
of the "Chadwick Process" Towers Watson have still not
been instructed by the Treasury to prepare a comprehensive figure
for "relative loss" arising from all the cumulative
findings of maladministration by the Parliamentary Ombudsman.
This figure should form the basis from which government and MPs
view the quantum of compensation for Equitable policyholders.
The true "relative loss" figure, if the material omissions/corrections
EMAG has identified are incorporated, will certainly exceed £5
billion.
6. The Equitable scandal has dragged on
for a decade. Over this period some 50,000 policyholders have
died and many more have not enjoyed the comfort in retirement
for which they saved. We must perforce accept the financial position
of the country, but EMAG does not accept that after all these
years Equitable policyholders should be expected to bear a disproportionate
share of the burden. If the public sector as a whole is bearing
an average cut of 20%, we see no reason why Equitable policyholders
should bear any higher proportion.
We also see no reason why the quantum should
be announced as part of the Comprehensive Spending Review (CSR)
cuts on 20 October. This just looks like more Treasury chicanery
to deliberately plan very bad news for Equitable's victims to
be announced on the year's optimum "Jo Moore" day. We
believe that, having waited so many years, there should be a proper
informed debate on the quantum to build upon the excellent Equitable
Life debate that took place in the Commons on 14 September, when
so many backbenchers expressed disquiet at the prospect of their
integrity being impugned by the Treasury seeking to make a derisory
settlement based on the irrelevant and discredited "building
block" of the Chadwick report.
7. The main part of our report comprises
four sections:
1. The Coalition's promise and the Chadwick Report.
2. Transparency and our quest for a sound figure
for "relative loss".
3. The independent Payment Commission.
Annexes: A. Sir John Chadwick's revised terms
of reference
B. The revised TOR for Chadwick in the light
of the Labour Government's acceptance/non-acceptance of findings
and the significance of the omissions
C. Decimating "relative loss"
8. We suggest the Committee might enquire
of Mr. Hoban :
(These questions are also interspersed into
the body of this submission)
(i) Precisely which of the Parliamentary Ombudsman's
findings does the Coalition Government not accept? (Given that
Towers Watson only quantified those ones accepted by the previous
Labour Government.)
(ii) If the answer is "none", why
does he see value in Chadwick's report, given that it was prepared
to terms of reference which were rendered incompatible by the
Coalition Government's promise in May?
(iii) What is the purpose of elevating the
Chadwick report if not to justify minimising compensation?
(iv) What are the other "building blocks"
and, if there are any, why are they not in the public domain?
(v) What is meant by "transparency"
(because EMAG's experience is just more Treasury obfuscation)?
(vi) Why, 20 months after initiation of the
"Chadwick Process" and the expenditure of £3 million,
is there is no comprehensive figure for "relative loss"
as recommended by the Parliamentary Ombudsman upon which MPs and
government can base a decision?
(vii) Given the way EMAG have been fobbed
off and not provided with information about Towers Watson's calculation
of "relative loss", what is HMT trying to hide?
(viii) Exactly what is meant by the Independent
Payment Commission's terms of reference instruction to "findings
accepted by the Government"?
(ix) Why has the Commission been instructed
to even consider the Chadwick report and address "disproportionate
impact", which should now be irrelevant?
THE COALITION'S
PROMISE AND
THE CHADWICK
REPORT
9. Following EMAG's judicial review, the
Treasury was instructed to reinstate some (but not all) of the
key findings of injustice, and it set Sir John Chadwick revised
terms of reference. They stated, crucially, that he was to disregard
findings by the Parliamentary Ombudsman which the Government did
not accept and instructed that he should reconstruct how Equitable
might have performed absent maladministration (see Annex A).
In March 2010 EMAG very publicly disengaged
from the "Chadwick Process" (and informed MPs why) for
three reasons:
— Following the revised terms of reference
it became clear that he was working on contrived and counterfactual
methodologies based on the Reconstruction of Equitable Life (REL),
without an enquiry into any evidence, to arrive at an actuarial
formula to slash payments.
— Although the Government had claimed that
Chadwick's inquiry was "independent", the secretary
Simon Bor was seconded from the Treasury; in his career as a QC
Chadwick has frequently acted for the Government.
— It became obvious, on the publication
of the Third Interim Report, that Chadwick was taking no notice
of representations that we and others were making—the alleged
process of consultation was a charade. He was demonstrably in
thrall to the Treasury and was anything but "independent".
Just how partisan Chadwick has been, can be
seen from the correspondence exchanges between Sir John and the
Society, Dr Andrew Goudie, Michael Josephs and others, all made
in good faith after the publication of Interim 3. These are to
be found in "Supplementary Material (sections VIII to XII)".
There are 343 damning pages which demonstrate unequivocally that
Sir John Chadwick took not a blind bit of notice of anyone's reasonable
points and he ALWAYS favoured those arguments advanced by the
Treasury.
10. On 24 May 2010 EMAG had a meeting with
Financial Secretary Mark Hoban. In Parliament on 21 October 2009
Hoban had stated that "if the Ombudsman found that there
was maladministration owing to regulatory failure and that compensation
was required, we would accept those findings". In consequence,
we were thus hopeful that we would find a responsive ear for our
views, but this was not to be. Mr. Hoban astonished those EMAG
Directors present by asking us to re-engage with Chadwick, which
we refused point blank.
We asked for Chadwick's work to be sidelined,
apart from the work by Treasury-appointed actuaries (Towers Watson)
on "relative loss". We gave as our reason that Chadwick's
terms of reference were not compatible with the Coalition's commitment
to honour the Parliamentary Ombudsman's findings. In Annex B we
set out what findings the previous Government did not accept,
and the significance of the latter for Chadwick's study. At that
time we were not aware that Chadwick had further taken it upon
himself (no doubt at the request of the Treasury) to "retry"
and effectively to dismiss the one finding of injustice which
the Government had originally accepted in January 2009—namely
the one relating to the valueless reinsurance treaty which the
FSA had accepted to cover up Equitable's parlous financial condition
in 1998.
11. On 2 September, EMAG board Directors
Colin Slater and Chris Carnaghan met with Ms. Anne Macadam who
is the Treasury's Head of Policy, Equitable Life Payment Scheme.
They were surprised that she still talked in terms of "those
aspects of the Parliamentary Ombudsman's report which the Government
had accepted". When Mr. Slater pointed out that the present
Government had accepted ALL of the Parliamentary Ombudsman's findings,
she seemed to think this was not so.
12. We suggest the Committee might care
to enquire of Mr. Hoban:
(i) Precisely which of the Parliamentary Ombudsman's
findings does the Coalition Government NOT accept (given that
Towers Watson only quantified those ones accepted by the previous
Labour Government).
(ii) If the answer is "none", why
does he see value in Chadwick's report, given that it was prepared
to terms of reference which were rendered incompatible by the
Coalition Government's promise in May?
(iii) Why one of his senior Treasury officers
dealing with Equitable was failing to act on the Coalition's stated
intention?
13. On 22 July Mr. Hoban published Chadwick's
report together with the associated work by Towers Watson—a
total of more than 2,000 pages.[2]
EMAG was appalled by the report, which contrived through actuarial
alchemy to reduce the sum of £4.8 billion "relative
loss", to £400 million-£500 million. We analysed
the report in detail and published a Critique which is on our
website (www.emag.org.uk). Chadwick indulged in a slicing and
dicing exercise which began by disregarding the earliest and latest
periods of maladministration with injustice.
Instead of taking the Parliamentary Ombudsman's
accepted start date for maladministration of 1 July 1991, Chadwick
used data shortcomings to shift the start date 18 months to 31
December 1992, which cut the estimated "relative loss"
by of the order of a very material £700m. Chris Wiscarson,
Chief Executive of Equitable Life, has expressed the view that
it would be reasonable for an actuary to extrapolate the total
data back for the valuable but missing 18 months with reasonable
accuracy. Sir John Chadwick took it upon himself to re-try and
reject the Parliamentary Ombudsman's major finding of maladministration
relating to the valueless reassurance treaty.
14. Next, with extraordinarily tortuous
logic, chopping and obfuscatory narrative[3]
he reinterpreted the Parliamentary Ombudsman's crystal clear concept
of "relative loss" by capping it with a contrived concept
of "absolute loss" and calling it "external relative
loss". He then made the specious claim that this was what
the Parliamentary Ombudsman really meant by "relative loss"!
This process reduced the sum apparently lost to £2.3 billion-£3.0
billion, a reduction of about 45%. The steps that followed were
even more extraordinary: Chadwick took the request by the Treasury
to reconstruct how Equitable might have performed "as
if the maladministration accepted by the Government had not occurred"
and asked Towers Watson to create a hypothetical simulation.
Chadwick/Towers Watson made carefully selected assumptions of
minimal changes in the Reconstruction Equitable Life (REL) so
that the bonus declarations and overbonusing would have been little
different from what they were in reality. And thus, as in real
life, Equitable would have had to close to new business when it
actually did.
Presumably Roy Ranson, Equitable's Chief Executive
for the early part of the 1990s, would similarly have been expelled
from the Institute of Actuaries (as he in fact was) for not maintaining
a smoothing fund, which was non-existent in the REL as in reality.
Chadwick's interpretation of regulation without maladministration
would still have wrecked Equitable—not in any way a credible
scenario or one which the Treasury has in the past talked up as
a strength of British regulation.[4]
This exercise reiterates the attempt to look only at the form
of each event in the best light to the regulators and to ignore
the substance of them and the effect of their accumulation.
Chadwick used the marginal difference between
reality and REL to pretend that not many policyholders would have
left Equitable if it had been properly regulated without maladministration.
Hence the loss due to maladministration was apparently not that
significant. He then devised a meretricious concept which he called
"internal relative loss" which, because of Chadwick's
assumptions, are deemed trivial. Indeed according to Towers
Watson the aggregate of "internal relative losses" is
actually a profit! What Chadwick is asking readers to believe
is that proper regulation would have produced a worse result for
policyholders than the failed regulation described by the Parliamentary
Ombudsman. Without any foundation, he insinuated that the Parliamentary
Ombudsman did not think of this concept because her terms of reference
precluded her from considering the actions of other than the public
bodies. Chadwick used the concept in an economically meaningless
equation to cut his assessment of losses by a further 80%!
15. To report that 75%-80% of the money
injected in the 1990s would still have been deposited even had
investors had known the true state of the Society is unsubstantiated
poppycock. Of the £20 billion of new funds injected in the
period, the vast majority was from new investors who would not
have touched Equitable with a bargepole if the regulator had exposed
its financial frailty. We show in Annex C the steps by which Chadwick
decimated apparent loss.
We believe that the reason for persevering with
the "Chadwick Process", which Mr. Hoban claims is only
a "building block" and that "is not necessarily
accepted", has been to use it as a cruel blunt instrument
for depressing expectations based on a supposedly "independent"
and reputable legal figure. It does no credit to the Coalition
Government that the Treasury persists in peddling it, resulting
in grossly misleading "cookie cutter" letters that go
to enormous length to explain the Chadwick Report's seemingly
plausible but highly questionable sophistry. EMAG has copies of
dozens of such letters and even four which Coalition MPs sent
after the debate on 14 September—the latest being dated
23 September. After extensive explanation of Chadwick's report,
these letters continue:
"[Chadwick] therefore proposes that policyholders
should receive 20-25% of their capped external relative loss.
This results in a figure of £600 million. I understand this
is a concept which EMAG supports, but EMAG believes a smaller
proportion of investors would have made the same investment decision."
16. We suggest the Committee might care
to enquire of Mr. Hoban:
(iv) What is the purpose of elevating the
Chadwick report?
(v) What are the other "building blocks"
and, if there are any, why are they not in the public domain?
TRANSPARENCY AND
EMAG'S QUEST FOR
"RELATIVE LOSS"
17. At the meeting five EMAG Directors held
with Mr. Hoban on 24 May, and subsequently in a series of letters
sent to Mr. Hoban between 28 May and 27 August (which can be supplied
on request), we asked without success for detailed explanation
of Towers Watson's estimate of "aggregate stage two loss"
in the range of £4-4.8 billion included in their letter of
21 July to Mr. Hoban. This estimate is similar in concept to evaluating
loss relative to investment elsewhere in the manner recommended
by the Parliamentary Ombudsman. It is the main item worth salvaging
from the "Chadwick Process" but it is still understated
in respect of omissions described earlier.
On 5 August Mr. Hoban invited EMAG to "come
forward with ideas that are robust, evidence-based and workable"
by the end of August. Given the Treasury's refusal to part with
any of the detail repeatedly asked for in writing, this was, to
say the least, disingenuous of him. We were prevented from meeting
Towers Watson until 2 September.
At the meeting we discovered that Towers Watson
had made an incorrect assumption in their calculation of "relative
loss". They took the actual net financial return policyholders
achieved from investing in Equitable, which for many included
incurring a penalty "market value adjuster" or exit
fee on taking a non-contractual exit to leave a stricken fund.
To calculate the return they would have achieved from investing
in a portfolio of other reputable funds (which EMAG calls "Elsewhere
Life"), Towers Watson were instructed to assume that policyholders
would have incurred an exit fee there too. But this is not reasonable:
Policyholders would have had no reason to leave "Elsewhere
Life" to mitigate losses on a non-contractual date and would
not have incurred those penalties. The consequence of this
assumption is to understate the estimate of "relative loss"
by several hundred million pounds. The Towers Watson estimate
is deficient in three further respects:
(i) It does not include the first year and a
half of the maladministration period (July 1991-December 1992)
since Chadwick chose to exclude this (para 13). Towers Watson
has refused to provide an estimate of the sum involved. EMAG's
estimate is in the order of £750 million.
(ii) The calculation purports to include the
losses of those that had already invested in the fund at the start
date. However, since these are included on the basis of Chadwick's
supposedly "properly regulated" Equitable Life (REL),
the amount so included is trivial or negative. The effect is to
exclude those already invested from the "relative loss"
calculation, so reducing the estimated "relative loss".
(iii) Losses attributable to with-profits annuities
are reported by Towers Watson as being only in direct proportion
to those of other policyholders. However, EMAG estimates them
to be significantly larger, prima facie. But, as we have not been
provided with the data, we cannot do more than speculate that
this is incorrect, to the disadvantage of all with-profits annuitants.
18. The Treasury and Towers Watson have
been very reluctant to provide any of the information to EMAG
which might allow us to verify or otherwise comment upon the aggregate
range provided by Towers Watson. For example, they have refused
to provide the information for individual sample policies. In
response to questions raised, EMAG's Colin Slater received an
inadequate reply on 9 September, to which he responded on 15 September
asking for more information, which has not been provided.
We would not be surprised if the Treasury or
Towers Watson produces a limited response right at the 11th hour.
It is clear to us that Towers Watson has not, despite EMAG's explicit
written demand of 3 September in our formal response to HMT, been
instructed to prepare a revised and inclusive recalculation of
"relative loss" to accommodate the three large items
not yet factored in (first 18 months losses, removal of exit fee
penalties from "Elsewhere Life" comparison and provision
for those already invested at July 1991), which would then without
doubt revise "relative loss" to a sum well in excess
of £5 billion.
19. The Committee might wish to enquire
of Mr. Hoban:
(vi) What is meant by "transparency"
(because EMAG's experience has been just more Treasury obfuscation)?
(vii) Why, 20 months after initiation of the
"Chadwick Process" and an expenditure of £3 million,
is there is no reliable figure for "relative loss" as
recommended by the Parliamentary Ombudsman upon which MPs and
government can base a decision?
(viii) In view of the way EMAG have been fobbed
off and not provided with information about Towers Watson's calculation
of "relative loss", what is HMT trying to hide?
THE INDEPENDENT
COMMISSION
20. We have concerns about the Independent
Commission set up to allocate compensation. Its terms of reference
explicitly refer to the discredited Chadwick report.
For example at Point 3: "The Commission
will have regard to the work undertaken by Sir John Chadwick on
the methodology for calculating relative loss and base its allocation
to policyholders on the relative loss figures provided to HM Treasury
by Towers Watson."
And also, there's a reference at Point 1 to:
"as a result of accepted government maladministration".
It is apparent that the Treasury continues to believes that
"accepted" embraces ONLY those Parliamentary Ombudsman
findings that were accepted by the Labour Government (ie only
within the "Chadwick Process" terms of reference) and
they do not embrace ALL the Parliamentary Ombudsman's findings,
as implied in the Coalition's promise.
21. If the Government accepts the Parliamentary
Ombudsman's findings, the Committee might ask Mr. Hoban:
(ix) Why the Independent Commission's terms
of reference refer to: "findings accepted by the Government"?
(x) Why it has been instructed to consider
the Chadwick report for its work?
CONCLUSION
22. The Equitable scandal has been going
on for a decade. Over this period some 40,000 policyholders have
died and many more have not enjoyed the comfort in retirement
for which they saved. They wrongly imagined that "regulated
by Her Majesty's Government" was a gold seal of approval
that they could rely upon. In the bigger picture, the integrity
of the Government and trust in politicians has diminished, and
the cause of encouraging people to save for their old age has
been badly damaged. It is time to draw the matter to a close,
but to an honourable close without the need for further litigation.
23. We had hoped that we would be entering
a new and constructive phase in our relations with the Treasury.
Regrettably, this has not been the case and we are left with no
alternative other than to express our profound distrust of the
Treasury. Its dirty tricks have continued unabated. There is a
grave danger of damaging the reputation of the Coalition Government.
Many backbenchers, having been encouraged to sign a personal pledge,
are now concerned that their personal integrity may be impugned
by a derisory proposed settlement.
24. EMAG believes that the Chadwick report,
written to a deliberately restricted and now obsolete brief, executed
with actuarial alchemy and legalese, should be summarily binned
as "not fit for purpose". The Coalition's commitment
is to honour the Parliamentary Ombudsman recommendation. That
is unequivocal—compensate for "relative loss".
The Parliamentary Ombudsman considered and dismissed the idea
of a percentage reduction for the behaviour of others and she
rejected that argument. The way forward is to agree a comprehensive
figure for "relative loss" (which would exceed £5
billion) and to apply a transparent percentage "haircut"
in line with average cuts elsewhere. We believe a possible way
to maximise the fair payment due, but mitigate the impact on the
nation's finances, is to phase payments over the life of this
Parliament.
25. Equitable's victims must perforce accept
the financial position of the country, but they do not accept
that they should be expected to bear a disproportionate share
of the burden. They argue that they have, effectively, lent the
Government £5 billion for the last decade and forgone the
opportunity to spend or invest it elsewhere. Payback is long overdue.
If the public sector as a whole is bearing a cut of 20%, EMAG
doesn't accept why Equitable policyholders should bear any higher
proportion. We also see no reason why the quantum should be announced,
and doubtless be buried, as part of the CSR cuts to be announced
on 20 October. There should surely be a further debate in the
Commons on the quantum?
September 2010
Annex A
SIR JOHN CHADWICK'S REVISED TERMS OF REFERENCE
He was instructed to "disregard [the Parliamentary
Ombudsman's] Findings which are not accepted by the Government".
In relation to the Findings accepted, Chadwick was asked to advise
the Treasury on:
— "The extent of relative losses suffered
by different classes of policyholder in respect of each case of
maladministration, taking account of, among other things, wider
market conditions during the period under consideration, and comparable
insurance products available over the same period.
— The proportion of those losses which
it would be appropriate to apportion to the public bodies investigated
by the Parliamentary Ombudsman, as opposed to the actions of Equitable
Life and other parties.
— The classes of policyholders which have
suffered the greatest impact as a result of maladministration.
— Factors, arising from this work, which
the Government might wish to take into account when reaching a
final view on determining whether disproportionate impact has
been suffered.
— The nature and extent of the finding
of maladministration and injustice in relation to Finding 5 and
the nature and extent of the finding of injustice in relation
to Findings 2 & 4 so far as those Findings are now accepted"
The Treasury also asked Chadwick to consider
"the extent to which the regulatory returns in each of the
years for 1990 to 1996 would have been different if the maladministration
accepted by the government had not occurred".[5]
He was not asked "how would Equitable have performed if it
had been effectively regulated".
Annex B
THE REVISED TERMS OF REFERENCE FOR CHADWICK
IN THE LIGHT OF THE LABOUR GOVERNMENT'S ACCEPTANCE/NON-ACCEPTANCE
OF FINDINGS AND THE SIGNIFICANCE OF THE OMISSIONS
| Ombudsman's findings of maladministration
| Government's response | Revised terms of reference for Chadwick setting out the Government's acceptance of injustice[6]
| Comment |
1. | The DTI failed to insist in 1991 when approving Ransom as chief executive that he should relinquish his role as Appointed Actuary.
| Not accepted the maladministration. |
| This allowed Chadwick to claim no change in management or business strategy.
|
| 2. | GAD failed to scrutinize regulatory returns for each year from 1990 to 1993 re:
(i) the valuation rate of interest for discounting liabilities
(ii) the affordability and sustainability of bonus declarations.
| Accepted maladministration but not injustice. Forced by Court to accept injustice.
| Accepts maladministration re (i) and (ii). In relation to injustice accepts that returns for 1990 to 1993 might have looked different if no maladministration. Seeks Chadwicks' advice on how different the returns might have looked "if the maladministration accepted by the Government had not occurred".
| |
| 3. | GAD failed when ELAS introduced its differential bonus policy in 1993
(i) to inform DTI
(ii) to raise the issue with ELAS
(iii) to understand the rationale for the policy and how it was communicated to policyholders.
| Accepted part of maladministration but none of injustice. The Court did not require acceptance.
| | This allowed Chadwick to delay reserving for GARs.
|
| 4. | GAD failed to scrutinize regulatory returns for each year from 1994 to 1996 re:
(i) the strength of the valuation rate of interest for discounting liabilities
(ii) the affordability and sustainability of bonus declarations
(iii) changes to assumed retirement ages
(iv) holding of no explicit reserves for capital gains tax, pension mis-selling costs, and GARs.
| Accepted maladministration but not injustice re (i) and (ii). Accepted maladministration but not injustice re (iii). Accepted maladministration and injustice re (iv) relating to the GAR reserve but not the other parts of (iv). Qualified acceptance of injustice by claiming that the GAR reserve should be "of a modest amount". Blamed inadequate returns by ELAS which did not disclose GAR situation fully in years following 1990. Did not accept maladministration re reserves for CGT and mis-selling.
| Accepts maladministration that led to injustice, in respect of (i) and (ii).
Regarding (i) (ii) and (iv) the Government seeks Chadwick's advice on how different the returns might have looked "if the maladministration accepted by the government had not occurred".
| |
| 5. | GAD failed in relation to regulatory returns for 1995:
(i) to check that ELAS's valuation was greater than the minimum required by Regulations
(ii) to do anything when aware that Standard & Poor's was misconstruing the returns and overstating the financial strength of ELAS.
| Government initially accepted part of maladministration but none of injustice. Forced by Court to accept injustice in respect of both parts. Asked Chadwick to advise re its "nature and extent".
| Accepts maladministration and injustice in respect of (i) and (ii).
Seeks Chadwick's advice on how different the returns might have looked "if the maladministration accepted by the Government had not occurred".
| |
| 6. | The FSA failed to ensure that a reinsurance treaty credited as nearly £1 billion in the returns for 1998
(i) was not taken into account in the 1998 returns without a concession.
(ii) did not reflect the "economic substance of the treaty"—it was valueless.
| Accepted finding of maladministration and injustices, but claimed ELAS could have explored other options. (In fact they were unrealistic).
| Accepts "In relation to injustice… because the regulator permitted credit to be taken for the reinsurance treaty, Equitable Life's returns gave a materially misleading picture as to its insolvency".
| Although the Government accepted the finding Chadwick "retried" it and rejected it.
|
| 7. | The FSA failed to ensure proper disclosure in the returns for 1998 and 1999 of the potential consequences of losing the Hyman litigation.
| Accepted maladministration but on a more limited basis in any event no finding of Parliamentary Ombudsman of injustice.
| | Parliamentary Ombudsman considered this was covered by £6, so no additional finding of injustice.
|
| 8. | The FSA failed to record its decision to permit ELAS to remain open.
| Accepted maladministration. |
| Not relevant. |
| 9. | That decision was unsound following the loss of the Hyman case.
| Accepted maladministration with caveats. Did not accept that any injustice could have resulted from the maladministration.
in any event no finding of Parliamentary Ombudsman of injustice.
| | Parliamentary Ombudsman considered covered by £6, so no additional finding of injustice.
|
| 10. | The FSA provided optimistically misleading information about ELAS's solvency position after it closed for new business.
| Accepted maladministration and injustice with caveats. The Government indulged in word play to provide slimy slither room.
| Accepts the finding of injustice but believes the numbers affected are small.
| |
| |
| | |
Annex C
DECIMATING "RELATIVE LOSS"
The table below shows an example of a typical policyholder
who invested £10,000 in an Equitable pension policy at the
beginning of 1995. By December 2000 the total policy value had
grown to £16,531. On 16 July 2001 it was cut by 16% (£2,645)
leaving £13,886, which was taken on a contractual exit without
suffering any penalty. If the person had invested in Elsewhere
Life, the fund would have been worth £18,668. The rows 1
to 6 show how Chadwick got from relative loss to his advice figure
for the policyholder. The two right hand columns show Towers Watson's
aggregate amounts provided in their letter to Mark Hoban of 21
July 2010 and how they got from their under-estimate of relative
loss of £4.0-4.8 billion to Chadwick's advice figure of £4-500
million.
| Typical
Example
| Towers Watson Aggregate Range
|
| | From
| To |
| £ | £m
| £m |
The Ombudsman's concept of "Relative Loss"
| | | |
| What (s)he would have got from Elsewhere Life
| 18,668 | |
|
| What s(he) did get | 13,886
| | |
| | |
|
| 1. Relative Loss | 4,782
| 4,000 | 4,800 |
| |
| Chadwick's concept of "Absolute Loss"
| | | |
| What (s)he would have got if the 16% cut had not occurred
| 16,531 | |
|
| What s(he) did get | 13,886
| | |
| | |
|
| 2. Absolute Loss | 2,645
| 2,900 | 3,700 |
| | |
|
| Chadwick's concept of "External Relative Loss"*
| | | |
| 3. The lesser of stage 1 and 2 | 2,645
| 2,300 | 3,000 |
| | |
|
| 4. Application of Chadwick's discount (approx 79%) derived from the Reconstruction.
| 529 | 475 | 650
|
| | |
|
| 5. Chadwick's concept of "Internal Relative Loss", which was actually a profit.
| (134) | (124) | (162)
|
| | |
|
| 6. Include an "allowance" for "Internal Relative Loss" to give Chadwick's advice.
| 421 | 400 | 500
|
| |
| |
A full explanation of the meretricious concepts of Absolute
Loss, External Relative Loss, Chadwick's discount, and Internal
Relative Loss are provided in our Critique.
2
According to a letter to us from the Treasury dated 20 September
2010 the "Chadwick Process" cost £3.1 million,
of which Chadwick received £309,075 and Towers Watson £2.5
million. Back
3
EMAG sets out an example of his style in Annex 5 of the Critique
titled The Semantic travails and travels of "Absolute Loss"
and "Relative Loss". Back
4
Treasury evidence to Treasury Select Committee, Supplementary
Memorandum from HM Treasury, 16 October 1998. Back
5
Conflated request under findings 2, 4 and 5 taken from Annex A
of Chadwick's Advice. Back
6
Annex A of Chadwick's advice. Back
|
