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
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 reportnamely 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".
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
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.
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".
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
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 lossthat 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".
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
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
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
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
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".
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 Commissioncomprised
of Brian Pomeroy, John Tattersall and John Howardhas 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
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
7 Ombudsman's report, Chapter 14, paragraph 138 Back
Ombudsman's report, Chapter 14, paragraph 395 Back
Ombudsman's report, Chapter 14, paragraph 33 Back
Ombudsman's report, Chapter 14, paragraphs 31, 32 Back
Sir John Chadwick's report, Part 1, paragraph 1.24 Back
Ombudsman's report, Chapter 14, paragraph 143 Back