Written evidence from Equitable Life Trapped
At the request of Mr Bernard Jenkin, Chairman
of PASC, and in light of the timescale involved, this submission
is confined solely to the most unsatisfactory headline issues
in respect of the current position and a brief outline of the
unique aspects of the With-Profits Annuitants (WPAs).
1. CHADWICK REPORT
1.1 It is a widely held view that the Chadwick
Report is a product of his restricted Terms of Reference rather
than a basis to implement the Parliamentary Ombudsman's recommendations.
This is recorded clearly in his Report and within the Actuarial
Advice provided to him by Towers Watson. It is also recorded that
Sir John Chadwick set further parameters on Towers Watson to govern
the actuarial advice that they supplied to him.
The Ombudsman's letter to Sir John dated 20 August
2009 stated "As I see it, any limitations that you might
feel constrained to impose regarding eligibility for the payments
to be made to those affected by the Equitable Life affair do not
derive from the nature of my findings and recommendations. Any
such imitations instead derive directly from the limited approach
adopted by the Government in its response to my report."
1.2 It is clear as a result that generally (and
in particular due to those restricted Terms of Reference) the
outcome of Sir John's Report does not reflect the intention of
the Parliamentary Ombudsman who has commented most damningly:
"In light of the new Government's commitment
to implement that recommendation in full, the approach embodied
in the Chadwick report... cannot provide a basis for the implementation
of my recommendation." (Parliamentary Ombudsman in letter
to Members of Parliament 26 July 2010)
1.3 Further, she has stated that Sir John's
proposals "if acted upon, would not in any sense enable fair
and transparent compensation to be delivered." (ibid)
1.4 Additionally, she has recorded that
the Chadwick report "misinterprets central parts of the conclusions
outlined in my July 2008 report and has ignored others" and
"the Chadwick proposals seem to me to be an unsafe and unsound
basis on which to proceed". (ibid)
1.5 It is also clear that the Coalition Government
has repeatedly stated that it is committed to the implementation
of the Parliamentary Ombudsman's recommendations:
"We have been clear in our support for the
Ombudsman's recommendations. That is our position today and would
be our position if elected at the next general election."
(Mark Hoban MP in the Opposition Day Debate 21 October 2009)
"We are committed to implementing the
Parliamentary Ombudsman's recommendation." (Mark Hoban
MP 22 July 2010)
1.6 In contrast, an implementation of the
Chadwick Report and the resulting discounted compensation levels
set out in Towers Watson's letter to the Treasury dated 21 July
2010 will not bring matters to any form of satisfactory conclusion
and will be challenged as a clear failure to implement both the
Parliamentary Ombudsman's recommendations and the Government's
pledge to do so.
It must surely be in the interest of the
Coalition Government to bring this matter to a close. The advice
set out in the Chadwick Report will not meet that fundamental
2. POSITION OF
2.1 As at 31 December 2000, it is recorded that
there were 68,000 With-Profits Annuity policies out of a total
of over 1.3 million. This appears a small number but the position
of the WPAs is important firstly because of the unique nature
of their purchase and secondly the size of their losses (which
is referred to below under Headline figures).
2.2 There are specific issues related to With-Profits
Annuity policies. The purchase of such a policy was an irreversible
transaction with retirement monies intended to produce a level
of income for the balance of the WPA's life in circumstances where
ordinarily there would be no opportunity to supplement any shortfalls
in income from future employment. The WPAs are all elderlywith
the significant majority in their mid to late 70's and older.
2.3 Sir John Chadwick accepts that the WPAs
have been disproportionately affected and that their position
is particularly compellingsee the references in his report
for instance at point 4.80 (page 130), point 7.71 (page 186),
point 9.8 (page 196), point 9.13 (page 197), point 9.15 (page
198), point 10.26 (page 207) and footnote 936 (page 207).
2.4 The disproportionate impact and their unique
position surely must be beyond serious contention. The idea of
"shaving" their true relative loss as has been done
in the Chadwick Report by the adjustment of the parameters of
the Parliamentary Ombudsman's recommendation cannot be acceptable
to any fair minded personparticularly in light of their
irreversible position and the importance of Equitable's financial
status to them.
The WPA's occupy a special and unique position
amongst the policyholders of Equitable Life and merit special
and unique treatment to address their losses.
3. HEADLINE LOSS
3.1 Towers Watson provide a headline loss figure
of £4 to £4.8 billion. This is the only worthwhile figure
provided. All other figures are a consequence of the adjustments
in the Chadwick Report. It is understood that the WPAs component
of that figure is around £650 to £750 million.
3.2 Indeed, the insanity of the restrictions to which
Chadwick has been working result in around 30% of With-Profits
Annuity policies (19,490 pre-dating the 1992 cut off) not being
included in that figure and not getting any compensation at all.
It must be remembered that the Parliamentary Ombudsman advised
Sir John Chadwick that:
"In essence, the view expressed in my
report is that, absent the serial maladministration I had determined
occurred from July 1991 onwards, no reasonable investor would
have joined or remained with Equitable Life throughout that periodgoing
instead to another life insurance company." (Parliamentary
Ombudsman in letter to Sir John Chadwick 20 August 2009)
3.3 Further the WPAs who purchased With-profits
Annuity policies pre-dating 1991 have also suffered significant
losses as a result of the maladministration (as illustrated by
relative performance against the Prudential with-profits annuity
in the relevant later years) because they were trapped within
the product and could not escape the effect of that maladministration.
Therefore adjusting for those policies omitted
as a result of the Chadwick process produces a headline figure
(assuming that the Towers Watson calculations are correct) of
approx. £1 billion.
3.4 According to these figures, the WPA's represent
approx 6% of the policyholder community but approx 25% of the
relative losses. This clearly illustrates the significance of
With-Profits Annuitants and why it can be stated that they are
disproportionately impacted by the maladministration. It must
be recalled that the Parliamentary Ombudsman has made it entirely
clear that the interpretations that she intended to omit some
policyholders from her recommended compensation are entirely misplaced.
3.5 Towers Watson have provided some sample
calculations to ELTA's representatives following our recent meeting.
However, there are queries outstanding on various assumptions
that TW have to make which would allow those sample calculations
to be considered more fully. These include:
(i) Mortality assumptions;
(ii) the critical assumptions that have to be
made about the Future Bonus rate declarations by the Prudential,
both for the ELAS sub-fund (within which the ex ELAS annuities
are held.) and the Prudential With Profits fund and similarly
for the Scottish Widows; and
(iii) What discount rates that should be applied
to future losses.
3.5 Even apparently small changes in the
assumptions of these values have a profound impact on the loss
3.6 The methodology adopted to headline loss
appears reasonable subject to further consideration but the final
position cannot be judged until that further information is supplied.
Clearly, this cannot be a fair and transparent process unless
and until sufficient detail is supplied to truly judge the calculations
It cannot be considered fair or reasonable
that some WPA's who purchased their annuities before the so-called
cut off date and who have suffered equally with all other WPA's
should be denied any share of the compensation payment.