Equitable Life - Public Administration Committee Contents

Written evidence from Mark Hoban MP, Financial Secretary to the Treasury

  Before my appearance in front of the Public Administration Select Committee, and following your letter of September 2010, I thought it would be helpful if I set out for the Committee the differences as I understand them between the approach of the Parliamentary Ombudsman and that of Sir John Chadwick. I will also set out my strategy for achieving a fair resolution on Equitable Life and the framework that is guiding the decisions that the Government will take on Equitable Life at the Spending Review.

  In our programme for Government, we stated that we would "implement the Parliamentary and Health Ombudsman's recommendation to make fair and transparent payments to Equitable Life policy holders, through an independent payment scheme, for their relative loss as a consequence of regulatory failure."


  When I took on my role as Financial Secretary to the Treasury, this was one of the most complex and pressing issues that I was responsible for. My approach to this issue is guided by the principles that the Parliamentary Ombudsman set out in her report—namely that the scheme should be independent, transparent and simple. I have been faced with a series of decisions about how to take forward this issue given that over two years has passed since the Ombudsman published her report.

  The Ombudsman herself recognised that her report could not be directly translated into the design of a payments scheme, so she proposed that a tribunal be set up for "assessing the individual cases of those who have been affected by the events covered in this report and providing appropriate compensation".[7] The previous Government decided not to take this route and instead commissioned Sir John Chadwick to undertake work on determining the extent of relative losses suffered by policyholders.

  From the beginning, there were calls from various parties asking me to either dismiss the Chadwick process entirely, or amend Sir John's Terms of Reference from those set by the previous administration. I considered these options carefully and decided to allow Sir John to continue his work as planned. If I had followed this advice to either scrap Sir John's work and establish the tribunal or revise Sir John's terms of reference I believe this would have created an unacceptable delay in resolving this issue.

  Although the Ombudsman set out a way forward, her report did not provide a detailed basis for calculation of loss. She envisaged that the tribunal would do this, but in its absence, Sir John's work has helped to address some of the issues which needed to be resolved so that there was a sound basis for the calculation of individual losses. Elements of Sir John's work enabled our actuaries to produce the first bottom-up calculation of losses. To disregard Sir John's work in its entirety, therefore, would mean that it would have had to have been undertaken once more from scratch.

  Sir John also devised an alternative approach to calculating loss. Using an extensive database provided by Equitable Life, this approach looks at policyholder classes to determine how to calculate loss rather than trying to ascertain at an individual level whether policyholders relied on regulatory returns, as the Ombudsman envisaged (in the absence of the Equitable Life database available to Sir John). Regardless of whether Sir John's work is used, there was always the need to gather the detailed information needed for the scheme and interpret it into a functional scheme.

  On 22 July 2010, I published Sir John Chadwick's advice on calculating losses, the extensive actuarial advice underpinning it, and all the representations he has received from interested parties.


  I think it would be helpful for me to give a brief overview of Sir John's methodology.

  Sir John sought to establish the payment required to "put those people who have suffered a relative loss back into the position they would have been in, had maladministration not occurred", as the Ombudsman recommended.[8] He understood the Ombudsman to have meant, by "relative loss", whether "complainants suffer[ed] a loss that they would not have suffered had they saved or invested elsewhere".[9]

    1. In order to assess relative loss, Sir John first assesses the loss which policyholders actually suffered ("absolute loss"). Having regard to the Parliamentary Ombudsman's report, where she states:

    "…the fact that those who are, or were at the relevant time, members of the Society underwent the series of policy value and bonus cuts during the period after it closed to new business…is sufficient evidence in my mind to persuade me to conclude that…financial loss has been sustained…",[10]

    Sir John assesses absolute loss as the reduction in the amount which Equitable Life had promised to policyholders, which was imposed as a consequence of the reduction in policy values in July 2001.

    The actuaries, Towers Watson, have estimated this as £2.9-3.7 billion.

    2. Sir John then goes on to identify what he calls external relative loss—that is the difference between the returns that policyholders actually received from their Equitable Life policies and the returns they would have received if they had invested in a comparable product in an alternative life assurance company. This step produces a figure of £4-4.8 billion.

    There is considerable consensus around the main tenets that produce this loss figure. That is not to say that all interested parties are signed up to every detail and assumption underlying it, but they have generally recognised the comparators chosen to reach it as being appropriate. The figure produced represents the actual financial loss suffered by policyholders as well as loss of opportunity to realise gains elsewhere.

    3. For some policyholders, their external relative loss is greater than their absolute loss. This is because of the strong performance of comparable companies. Sir John has proposed that external relative loss should be capped at the absolute loss. The principle behind this is to deliver fairness for the taxpayer. Sir John argues that it would be unfair to the taxpayer for policyholders to be paid more through redress than they have actually lost. As he states in his report, this approach:

    "…would restore to the policyholder (in whole or in part) the loss which he has suffered as a result of the post-closure policy value cuts; but it would not give him the full benefit of gains that he would (or might) have made, had he made his investment elsewhere".[11]

    This step produces a figure of £2.3-3 billion.

  I am aware that there are some disagreements over the start date used to reach these figures due to the availability of data. However other than that issue, the steps outlined above and the figures that stem from those steps are not reliant on the acceptance or rejection of the Ombudsman's individual findings, as they stem from factual calculations, not judgements based on her findings.

  At this point, we move onto the more subjective and controversial elements of Sir John's advice. These areas are based on the partial acceptance of the Ombudsman's findings by the previous Government and they form the basis of Sir John's Terms of Reference.

    4. Sir John believes that had Equitable Life been properly regulated, some policyholders would have invested elsewhere, but some would have not. The Equitable Members Action Group has agreed with this general concept. However, it is not possible to know at an individual level exactly which policyholders would have invested elsewhere and who would have stayed.

    Quantifying how much investment would have fallen by is therefore a matter of judgement. From his detailed analysis and the expert actuarial support he has received, Sir John concludes that the majority of policyholders would have made the same investment decision, even if Equitable Life had been properly regulated. He therefore proposes that policyholders should receive 20-25% of their capped external relative loss. This results in a figure of £475-650 million.

    This has proven to be very controversial. Representations I have received have shown that many people feel that the majority of policyholders would not have made the same decision in staying with Equitable Life and/or investing new money in the Society.

    5. Finally, Sir John looked at the returns which those policyholders who would have stayed with Equitable Life would have received if it had been properly regulated. He called this internal relative loss. Including this in the calculation brings the aggregate relative loss figure according to Sir John's methodology to £400-500 million.

    This reduction in losses reflects the fact that during the relevant period, some policyholders suffered both losses and gains as a result of the maladministration, in particular through the payment of high bonuses in the early 1990s. Sir John has argued that these should be offset against each other where possible.


  Following publication of Sir John's advice, I announced that I would carefully consider the report and listen to representations from interested parties on the next stage of the process.

  While parts of Sir John's advice are contentious, it is clear to me that there are parts of his work and that of Towers Watson that are essential to establishing this scheme. Sir John's alternative approach provides a mechanism to establish a scheme that is administratively simple, and the bottom up loss figures are important for us to have regardless of the shape of any scheme.

  I can understand why there has been disagreement by some parties with regard to steps 4 and 5. These are the steps that are influenced by Sir John's restricted terms of reference, are most based on subjective judgement and where there is room for the greatest disagreement. Sir John carried out his analysis and evidence-gathering and came to the view he did while others have undoubtedly come to a different conclusion. Step 4 in particular has been one which representations I have received have been most forthright in criticising.

  As the Ombudsman noted in her report, it is appropriate to consider the impact of the payment scheme on the public purse. The scheme will be a significant spending commitment for this Government and as such, I felt that it would be best to consider the amount affordable for the scheme as part of the Spending Review. It is important, particularly in these times when difficult decisions need to be made with respect to the country's finances, that we carefully balance, in the Ombudsman's words "fairness both to those affected and to taxpayers generally".[12]

  I have always made it clear that I would not just blindly follow Sir John's advice. I have stated that it is a building block in our approach and I stand by this. We have taken other steps towards finding a resolution to this issue. A good example of this is the establishment of the Independent Commission on Equitable Life Payments Scheme to provide advice on the best way to allocate payments and this reflects the Ombudsman's call for any scheme to be independent of Government. The Commission—comprised of Brian Pomeroy, John Tattersall and John Howard—has begun work and is meeting with interested parties to listen to their views on the principles to be applied in fairly allocating funds and any prioritisation of payments. To enable payments to begin as soon as possible, I have asked the Commission to report in early 2011.

  Since this Government was formed, we have also introduced and had the Second Reading of the Equitable Life (Payments) Bill. This Bill authorises the Treasury to incur expenditure, and make payments to those adversely affected by the Government's maladministration of Equitable Life Assurance Society. This is an important and necessary step in resolving this matter. The fact that we have taken it so swiftly shows just how important this issue is to us.

  Further, we have made good progress on understanding the losses suffered at a policyholder-by-policyholder level, to understand the distribution of losses and where they have had greater impact on individuals. Over the summer, Towers Watson have been carrying out work to further refine the figures provided on 20 July to include data from 2009. This will allow updated figures to be provided at the Spending Review.

  The Equitable Life issue is a complex one and there are no simple answers on how best to resolve this matter. The Parliamentary Ombudsman has provided the overall guiding principles of independence, transparency, and simplicity which I have put at the heart of my approach to finding a resolution. In recognition of the long wait policyholders have had I have also added swiftness to those principles. I did not believe when I took on my current role that starting from scratch was an option, so I think it is important to use elements from Sir John's work which develop the thinking underpinning the Ombudsman's recommendations. There has been some disagreement over aspects of his work, in particular areas that have required a subjective judgment. This is to be expected in a matter as emotive as this. However, my job is to be objective with the views and information that I been provided and find a way forward that is fair to both taxpayers and policyholders alike.

October 2010

7   Ombudsman's report, Chapter 14, paragraph 138 Back

8   Ombudsman's report, Chapter 14, paragraph 395 Back

9   Ombudsman's report, Chapter 14, paragraph 33 Back

10   Ombudsman's report, Chapter 14, paragraphs 31, 32 Back

11   Sir John Chadwick's report, Part 1, paragraph 1.24 Back

12   Ombudsman's report, Chapter 14, paragraph 143 Back

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