Equitable Life
Encyclopedia
The Equitable Life Assurance Society (Equitable Life), founded 1762, is a life insurance
company in the United Kingdom
. The world's oldest mutual insurer, it pioneered age based premiums based on mortality rate
laying “the framework for scientific insurance practice and development”
and “the basis of modern life assurance upon which all life assurance schemes were subsequently based”.
At its peak, Equitable had 1.5 million policyholders with funds worth £26 billion under management, but it had allowed large unhedged liabilities
to accumulate in respect of guaranteed fixed returns to investor
s without making provision for adverse market changes. Following a July 2000 House of Lords ruling, and failure of attempts to find a buyer for the business, it closed to new business in December 2000 and reduced payouts to existing members. The 2004 Penrose report found that the company had made over-generous payouts leading it to be under-funded. A 2007 European report concluded that regulators had focused on solvency margins and failed to consider the increasing risk of accrued terminal bonuses.
The October 2010 Spending Review by the coalition government announced compensation of £1.5Bn - above the level recommended by the review conducted by Sir John Chadwick and below the £4-4.8Bn loss calculated by consultants Towers Watson.
in September 1762 with the name of the “Society for Equitable Assurances on Lives and Survivorships” offered both whole life and fixed term policies. Premiums which were constant for the duration of the policy, were based on a method devised by the mathematician James Dodson
using mortality figures for Northampton and the amount payable on death, the basic sum assured was guaranteed, a major advantage at the time.
As Dodson had died 5 years earlier, Edward Rowe Mores
became its chief executive officer with the title of actuary
, the first use of the term though he was an administrator rather than a statistician.
The first modern actuary, William Morgan
was appointed in 1775 serving until 1830. In 1776 the Society carried out the first actuarial valuation of liabilities and subsequently distributed the first reversionary bonus (1781) and interim bonus (1809) among its members. It also used regular valuations to balance competing interests. Its products therefore met the description of a modern With-profits policy
.
The Society sought to treat its members equitably and the Directors tried to ensure that the policyholders received a fair return on their respective investments. Throughout the Society’s history, the annual allocation of bonuses was a carefully thought through decision based on actuarial advice designed to promote fairness and equality between current policyholders and
between different generations of policyholders.
Its method were successful enough for it to be able to reduce its premiums by 10% in 1777 and a further reduction was forthcoming in 1781. By 1799 the Society had assets of £4m and its 5,000 membership subsequently doubled to 10,000 in 1810.
Famous 19th Century policyholders included Samuel Taylor Coleridge
, William Wilberforce
and Sir Walter Scott.
In 1870, the Life Assurance Companies Act was passed "requiring all life offices to publish financial data on the lines so long followed by the Equitable."
In the 20th Century, Henry Manly devised the concept and theory of staff pensions which the Society marketed from 1913. Pensions became available to the self employed in 1957 when the Society launched the Retirement annuity plan
. Corporate pension scheme members included the NHS
, Unilever
and the Post Office
.
In 1893 the Memorandum and Articles of Association
was adopted, incorporating the Society as ‘The Equitable Life Assurance Society’ and transferring power to the directors. The 1816 membership and bonus restrictions were removed.
The Society moved to Mansion House St in 1863, Coleman St in 1924 and to new offices in Aylesbury
in January 1983. The archives of the Society from 1762 -1975 are held by the Institute of Actuaries
.
The Society acquired the University Life Assurance Society and the Reversionary Interest Society in 1919 and the Equitable Reversionary Interest Society in 1920.
pension for the policyholder on retirement” and the lump sum available for annuity purchase depended on the sum assured, the reversionary bonuses and the larger terminal bonus. Both types of bonus were allocated at the discretion of the directors in accordance with Article 65 of the Articles of Association, the total being intended to reflect the investment return over the lifetime of the policy, subject to smoothing.
Between 1956 and the advent of Personal Pension Schemes
in July 1988, Equitable sold policies with an option to select either a Guaranteed Annuity Rate (GAR) or the Current Annuity Rate (CAR). The latter reflected the anticipated investment return on the lump sum over the annuity holder's lifetime and could change with interest rates or longevity.
No additional premium was charged in respect of the guarantee.
In 1979 legislation allowed the lump sum to be transferred to another annuity provider. As a result, communications with policyholders increasingly focused on the lump sum rather than annuity benefits.
The GAR assumed 4% interest until 1975 when it was increased to 7%. By May 2001, of Equitable's 1.1m policyholders about 16% held a GAR option.
During the 1980s and 1990s Equitable experienced a further period of rapid growth. It developed market leading personal pension and additional voluntary contribution plans while maintaining its record of operating with one of the lowest expense ratios in the industry. Its success
was "partly based on its reputation, its strategy of paying no commissions to insurance agents or independent advisers and its tactic of always keeping reserves low and returning to its
members more money than other companies.".
In 1993 the CAR fell below the guarantee prompting GAR policyholders to exercise their rights. According to actuary Christopher Headdon, policies issued from 1975 to 1988 were worth approximately 25% more than CARs, a cost if paid of £1B -£1.5B.
Based on an affidavit sworn by Christopher Headdon, on 28 June 1999 “from the 1980s onwards, Equitable was aware of the GAR risk. ... At no time did
Equitable ever hedge or reinsure adequately against the GAR risk to
counteract it. The reason for this was Equitable's belief that it could
...neutralise the potential effect of the GAR risk through the exercise of its
discretion to allocate final bonuses under Article 65.
In 1994 Equitable exercised its discretion under Article 65 to reduce the terminal bonus of policies with Guaranteed Annuity Rates, negating any benefit from the guarantee but preserving the assets of non GAR policyholders.
By July 1998 there were a number of complaints to the Personal Investment Authority Ombudsman
and it was decided to seek a declaratory judgement. Alan Hyman was selected as the representative GAR. Hearings started in July 1999 and in September, the High Court ruled in its favour but this was reversed by the Appeal Court in January 2000. Equitable now sought a ruling by the House of Lords
.
Even before that stage, Equitable, which had long claimed to be more transparent than its rivals, had assets worth £3B less than communication with policyholders had indicated.
On 8 December 2000 it closed for new business and immediately set a Market Value Adjustment of 10% peaking at 15%.
On 19 December the Treasury announced a review of the Financial Services Authority
(FSA)‘s regulation of Equitable. The following day, Equitable announced that their President and seven non executive directors would step down. Vanni Treves
became Chairman in March 2001 with Charles Thomson as Chief Executive.
On 4 February 2001 the Halifax agreed to buy Equitable's operating assets, sales force and non-profit business for a payment of up to £1 billion into the with-profits fund -subject to policyholder agreement. On 20 September 2001 the Compromise proposals were published offering 17.5% increase for GARs in exchange for the guarantee and 2.5% for non GARs in exchange for abandoning any legal claim. The deal was accepted by 98% of GAR policyholders and was sanctioned in the High Court in February 2002.
Both policyholders and pensioners received further bad news. In July 2001 policyholders were angered to be told their savings had been reduced by 16%. whilst in November 2002 pensioners were told that,“with-profits annuities, like yours, are now out of line by about 30%. “
50,000 Annuitants suffered a 20% reduction in income.
In February 2007 Equitable completed the transfer of £4.6B of annuities to Canada Life and in November transferred £1.8 billion with-profits annuity policies to Prudential, a deal accepted by 98% of members voting at a meeting.
In November 2008 Equitable announced that the process of the sale of the Society would be put on hold and that the Board would instead review the arrangements to run off its existing business.
Gross assets as of December 2008 were £8,754 million, around 25% of the value in 2000.
on behalf of the Financial Services Authority
. This concluded that there was an arguable case that the Equitable had breached the rules of its former regulators, the Life Assurance and Unit Trust Regulatory Organisation (Lautro) and the Personal Investment Authority (PIA) in failing to disclose the risk of the existing GAR policies in the Product Particulars, Key Features and With-Profits Guide to new non-GAR policy holders.
This was followed in September by the Corley Report
on behalf of the Institute of Actuaries which recommended amongst other things that the Appointed Actuary should require that there is a
process for reviewing communications to policyholders, should resist holding a dual role as Chief Executive and that his work should be subject to peer review.
In October, the Baird report was published. This covered the FAS regulation of Equitable from 1 January 1999 to 8 December 2000 when the Society closed to new business and was produced by the FSA's director of internal audit with the help of independent accountants and lawyers. The review found that - with hindsight - there had been some "deficiencies" on the part of FSA in the discharge of their regulatory responsibilities, but also stated that "the die had been cast" by the time the FSA had assumed regulatory responsibility for the Society in relation to those who had already invested in Equitable.
in August 2001 and expected in 2002, was finally published in March 2004 after delays due to vetting by Treasury lawyers.
His 818-page report
found that the company had made over-generous payouts to policyholders, reaching the stage where "The Society was under-funded to the extent of £4½ billion in the summer of 2001.” (Penrose Report, Chapter 19. parag 82). Penrose stated: "Principally, the Society was author of its own misfortunes. Regulatory system failures were secondary factors". He also accused the former Equitable management team of "dubious" practices and nurturing a "culture of manipulation and concealment".
The Penrose Report was debated in parliament on 24 March 2004.
Its fifteen month investigation followed the implementation in July 2004 of EC Directive 92/96/EEC (the “Third Life Directive” or 3LD) which governs the single market in life insurance. This directive required the UK where Equitable’s headquarters were based to supervise its “entire business” and the curtailed the supervisory power of other EU countries where Equitable operated.
The EU Parliament’s remit was to investigate without prejudice, alleged breaches of Community law in relation to the collapse, to assess the UK regulatory regime in respect of Equitable Life and to look at the adequacy of remedies available to policyholders including the 15,000 non UK members. The 22 member committee heard evidence from 38 witnesses and analysed 92 public documents and its report is the only one completely independent of HMG influence. Whilst a detailed summary of the full document is well outside the scope of this article, an examination of the effectiveness of the supervision of Equitable is given below and closely follows the wording.
The evidence suggests the regulator focused exclusively on solvency margins and took little or no account of accrued terminal bonuses in its overall analysis of the financial health of the company. It quotes Penrose as saying that the Policy Holders reasonable Expectation (PRE) would have included terminal bonus even if the amount was not defined, however the Government Actuary's Department
(GAD) and the Treasury deny PRE existed as the terminal bonus was not guaranteed.
The report goes on to say that if it is considered that these types of bonuses are an integral part of the company's ‘entire business', the regulatory authorities should have taken them into account. Although the Regulator was given the option of not forcing Equitable to build reserves for discretionary bonuses, that did not absolve the authorities from their duty of financial supervision covering the “assurance undertaking's entire business”.
Though the Appointed Actuary (AA) is not a role required by the directive, it is an essential part of the UK national insurance. One of the AA’s missions was to act partly as a guardian of policyholders' interests but the overall evidence suggests “the UK regulator did not fulfil its obligation ..in that Roy Ranson became CEO without relinquishing his role as the Appointed Actuary.” HMT rejected this claim as the 3LD does not mention the AA.
The overall evidence received suggests that by not taking swift action on this matter, the UK regulator did not fulfil its obligation to require from ELAS sound administrative and accounting procedures and adequate internal control mechanisms, as demanded explicitly.
The UK had the legal power to supervise Equitable. The Baird report states that in January 1999, the total number of staff involved in the prudential regulation of approximately 200 insurance companies was less than 135.
The Penrose report also states that "the DTI insurance division was ill equipped to participate in the regulatory process. It had inadequate staff and those involved at line supervisor level in particular were not qualified to make any significant contribution to the process. For all practical purposes, scrutiny of the actuarial functioning of life offices was in the hands of GAD until the reorganisation under FSA was in place".
More evidence also strongly suggests that the regulator adopted a conscious and deliberate ‘hands-off’ approach with regards to the ELAS case. If this were proven to be the case, it would constitute a breach of the regulators’ obligation to ensure the respect of PRE and therefore a breach of the letter and aim of Article 10 of the 3LD. Both the Baird and Penrose reports contain criticisms of the regulator’s lack of a "pro-active approach".
In its conclusion on P117, the report says the powers bestowed on the Secretary of State (as prescribed by Section 68 of the ICA
1982) to waive the application of prudential regulations appear to be
incompatible with the letter and the aim of the Directive and were used inappropriately.
(particularly when granting authorization on numerous occasions to include future profits
in the solvency margin), and that therefore ..there are serious concerns that the 3LD was not correctly transposed in full.
The committee is of the opinion that the application of the 3LD by the UK in respect of
the ELAS case was deficient and that UK regulators and authorities did not adequately
respect the ultimate purpose of the Directive.
Simultaneously it started a £3.3B claim against former directors claiming that they failed in their duties to policyholders. This claim was abandoned in December 2005, the costs of the two cases being around £40m.
completed a 4 year investigation, described by Equitable's chief executive as the "best chance of compensation". Her 2,819-page report accused the regulators, i.e. the DTI, GAD, and FSA of "comprehensive failure", found the Government guilty of ten counts of maladminstration and called for a compensation scheme "to put those people who have suffered a relative loss back into the position that they would have been in, had maladministration not occurred". Equitable’s chairman estimated that 30,000 policy holders had already died without compensation. In December, the European Parliament issued a press release describing the regulatory failure as an outrage.
In January 2009 the Government issued their response and appointed retired judge Sir John Chadwick as an independent advisor to design an ex-gratia scheme for some policyholders.
The PO accused the government of twisting the findings of her report by suggesting that whatever the regulators had done, it would have made no difference to the events which followed. She also said it had failed to give "cogent reasons" for rejecting some of her findings, mandatory since the Pensions Action Group Judicial Review. In March, the Public Administration Select Committee
issued a second report in which it described the government response as "morally unacceptable", and repeated the PO's criticism that it had acted as judge on its own behalf.
In May, the PO issued a supplementary report to the government's reply.
In August 2009 Sir John Chadwick issued an interim report.
Sir John is designing a scheme to help the “hardest hit” by measuring the losses suffered in agreed cases of maladministration with those of a comparable company.
government, the Equitable Life (Payments) Bill was announced. The bill will secure compensation for nearly a million policyholders (UK-wide) hit by the near collapse of the insurer Equitable Life.
The Government also announced that the final report from Sir John Chadwick in relation to Equitable Life would be received by mid July. A statement on the HM Treasury website confirmed two elements of the design of the scheme: that there should be no means testing; and that the dependents of deceased policyholders should be included in the scheme.
The July 2010 announcement by Mark Hoban
, the Financial Secretary to the Treasury
offered compensation, starting by mid 2011 to 1.5m savers. However policyholder compensation would be limited to the "absolute loss they suffered" estimated by Sir John Chadwick at a total of £2.3-£3B, compared with the £4B-£4.8B returns that similar companies produced. Sir John, whose report was designed to compensate those who suffered "disproportionately" recommended a payment cap for each policyholder which would reduce total compensation to £400m - £500m. Hoban said compensation would follow recommendations of the Parliamentary Ombudsman report and would take Sir John's findings into account but might be affected by public spending cuts. Total compensation would be announced in the public spending review
in October.
Equitable life pressure group EMAG were unhappy with the announcement but the Ombudsman said she would inform Parliament of her views once she had had time to consider the statement.
Although Equitable’s management initially welcomed the announcement, they were concerned that compensation would be based on Sir John’s report, written on the premise that only five of the Ombudsman’s findings of maladministration were valid. In opposition, Hoban had promised that all ten counts would be considered. Equitable's Chief executive, Chris Wiscarson wrote to Hoban saying that they could not support Chadwick’s recommendations which would only cover about 10% of losses. Compensation should be based on a total figure of £4.8B.
On 20 October 2010, the Chancellor of the Exchequer
announced in his Spending Review Statement that the compensation package would be around £1.5billion.
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
company in the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
. The world's oldest mutual insurer, it pioneered age based premiums based on mortality rate
Mortality rate
Mortality rate is a measure of the number of deaths in a population, scaled to the size of that population, per unit time...
laying “the framework for scientific insurance practice and development”
and “the basis of modern life assurance upon which all life assurance schemes were subsequently based”.
At its peak, Equitable had 1.5 million policyholders with funds worth £26 billion under management, but it had allowed large unhedged liabilities
Liability (financial accounting)
In financial accounting, a liability is defined as an obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or other yielding of economic benefits in the future.A liability is defined by the...
to accumulate in respect of guaranteed fixed returns to investor
Investor
An investor is a party that makes an investment into one or more categories of assets --- equity, debt securities, real estate, currency, commodity, derivatives such as put and call options, etc...
s without making provision for adverse market changes. Following a July 2000 House of Lords ruling, and failure of attempts to find a buyer for the business, it closed to new business in December 2000 and reduced payouts to existing members. The 2004 Penrose report found that the company had made over-generous payouts leading it to be under-funded. A 2007 European report concluded that regulators had focused on solvency margins and failed to consider the increasing risk of accrued terminal bonuses.
The October 2010 Spending Review by the coalition government announced compensation of £1.5Bn - above the level recommended by the review conducted by Sir John Chadwick and below the £4-4.8Bn loss calculated by consultants Towers Watson.
History
The Society, established via a Deed of TrustTrust instrument
A trust instrument is an instrument in writing executed by a settlor used to constitute a trust...
in September 1762 with the name of the “Society for Equitable Assurances on Lives and Survivorships” offered both whole life and fixed term policies. Premiums which were constant for the duration of the policy, were based on a method devised by the mathematician James Dodson
James Dodson
James Dodson FRS was a British mathematician, actuary and innovator in the insurance industry.-Life:Matthew Maty, in his Mémoire sur la vie et sur les écrits de M. A. de Moivre, wrote that Dodson was a pupil of Abraham de Moivre. He worked as an accountant and teacher...
using mortality figures for Northampton and the amount payable on death, the basic sum assured was guaranteed, a major advantage at the time.
As Dodson had died 5 years earlier, Edward Rowe Mores
Edward Rowe Mores
Edward Rowe Mores, FSA was an English antiquarian and scholar, with works on history and typography...
became its chief executive officer with the title of actuary
Actuary
An actuary is a business professional who deals with the financial impact of risk and uncertainty. Actuaries provide expert assessments of financial security systems, with a focus on their complexity, their mathematics, and their mechanisms ....
, the first use of the term though he was an administrator rather than a statistician.
The first modern actuary, William Morgan
William Morgan (scientist)
William Morgan, FRS was a Welsh physician, physicist and statistician, who is considered the father of modern actuarial science....
was appointed in 1775 serving until 1830. In 1776 the Society carried out the first actuarial valuation of liabilities and subsequently distributed the first reversionary bonus (1781) and interim bonus (1809) among its members. It also used regular valuations to balance competing interests. Its products therefore met the description of a modern With-profits policy
With-profits policy
A with-profits policy or participating policy is an insurance contract that participates in the profits of a life insurance company. The company is often a mutual life insurance company, or had been one when it began its with-profits product line...
.
The Society sought to treat its members equitably and the Directors tried to ensure that the policyholders received a fair return on their respective investments. Throughout the Society’s history, the annual allocation of bonuses was a carefully thought through decision based on actuarial advice designed to promote fairness and equality between current policyholders and
between different generations of policyholders.
Its method were successful enough for it to be able to reduce its premiums by 10% in 1777 and a further reduction was forthcoming in 1781. By 1799 the Society had assets of £4m and its 5,000 membership subsequently doubled to 10,000 in 1810.
Famous 19th Century policyholders included Samuel Taylor Coleridge
Samuel Taylor Coleridge
Samuel Taylor Coleridge was an English poet, Romantic, literary critic and philosopher who, with his friend William Wordsworth, was a founder of the Romantic Movement in England and a member of the Lake Poets. He is probably best known for his poems The Rime of the Ancient Mariner and Kubla...
, William Wilberforce
William Wilberforce
William Wilberforce was a British politician, a philanthropist and a leader of the movement to abolish the slave trade. A native of Kingston upon Hull, Yorkshire, he began his political career in 1780, eventually becoming the independent Member of Parliament for Yorkshire...
and Sir Walter Scott.
In 1870, the Life Assurance Companies Act was passed "requiring all life offices to publish financial data on the lines so long followed by the Equitable."
In the 20th Century, Henry Manly devised the concept and theory of staff pensions which the Society marketed from 1913. Pensions became available to the self employed in 1957 when the Society launched the Retirement annuity plan
Retirement annuity plan
A retirement annuity plan is a UK pension plan designed to build a lump sum for retirement. Part of the lump sum must be used to buy an annuity and part can be taken a tax free lump sum....
. Corporate pension scheme members included the NHS
National Health Service
The National Health Service is the shared name of three of the four publicly funded healthcare systems in the United Kingdom. They provide a comprehensive range of health services, the vast majority of which are free at the point of use to residents of the United Kingdom...
, Unilever
Unilever
Unilever is a British-Dutch multinational corporation that owns many of the world's consumer product brands in foods, beverages, cleaning agents and personal care products....
and the Post Office
Post office
A post office is a facility forming part of a postal system for the posting, receipt, sorting, handling, transmission or delivery of mail.Post offices offer mail-related services such as post office boxes, postage and packaging supplies...
.
Organisation
The Society’s first offices were in the parsonage of St Nicholas Acons in Nicholas Lane, moving to Blackfriars in 1774. Approval of policies, the main business of the Society, was undertaken by the Court of Directors whilst resolutions had to be approved at two meetings of the General Court which all members were entitled to attend. From 1786 this court also dealt with grievances and there was early tension between initial subscribers wanting a return on investment and those wanting to recruit new members. In 1816 a waiting period was introduced for new members and only the oldest 5000 policies were entitled to bonuses.In 1893 the Memorandum and Articles of Association
Articles of Association (law)
The term articles of association of a company, or articles of incorporation, of an American or Canadian Company, are often simply referred to as articles . The Articles are a requirement for the establishment of a company under the law of India, the United Kingdom and many other countries...
was adopted, incorporating the Society as ‘The Equitable Life Assurance Society’ and transferring power to the directors. The 1816 membership and bonus restrictions were removed.
The Society moved to Mansion House St in 1863, Coleman St in 1924 and to new offices in Aylesbury
Aylesbury
Aylesbury is the county town of Buckinghamshire in South East England. However the town also falls into a geographical region known as the South Midlands an area that ecompasses the north of the South East, and the southern extremities of the East Midlands...
in January 1983. The archives of the Society from 1762 -1975 are held by the Institute of Actuaries
Institute of Actuaries
The Institute of Actuaries was one of the two professional which represented actuaries in the United Kingdom . The Institute was based in England, while the other body, the Faculty of Actuaries, was based in Scotland...
.
The Society acquired the University Life Assurance Society and the Reversionary Interest Society in 1919 and the Equitable Reversionary Interest Society in 1920.
Guaranteed Annuity Rates, Article 65 and the Hyman case
“Many of Equitable's with-profits policies were designed to provide apension for the policyholder on retirement” and the lump sum available for annuity purchase depended on the sum assured, the reversionary bonuses and the larger terminal bonus. Both types of bonus were allocated at the discretion of the directors in accordance with Article 65 of the Articles of Association, the total being intended to reflect the investment return over the lifetime of the policy, subject to smoothing.
Between 1956 and the advent of Personal Pension Schemes
Personal pension scheme
A Personal Pension Scheme , sometimes called a Personal Pension Plan , is a UK tax-privileged individual investment vehicle, with the primary purpose of building a capital sum to provide retirement benefits, although it may also be used to provide death benefits.These plans first became available...
in July 1988, Equitable sold policies with an option to select either a Guaranteed Annuity Rate (GAR) or the Current Annuity Rate (CAR). The latter reflected the anticipated investment return on the lump sum over the annuity holder's lifetime and could change with interest rates or longevity.
No additional premium was charged in respect of the guarantee.
In 1979 legislation allowed the lump sum to be transferred to another annuity provider. As a result, communications with policyholders increasingly focused on the lump sum rather than annuity benefits.
The GAR assumed 4% interest until 1975 when it was increased to 7%. By May 2001, of Equitable's 1.1m policyholders about 16% held a GAR option.
During the 1980s and 1990s Equitable experienced a further period of rapid growth. It developed market leading personal pension and additional voluntary contribution plans while maintaining its record of operating with one of the lowest expense ratios in the industry. Its success
was "partly based on its reputation, its strategy of paying no commissions to insurance agents or independent advisers and its tactic of always keeping reserves low and returning to its
members more money than other companies.".
In 1993 the CAR fell below the guarantee prompting GAR policyholders to exercise their rights. According to actuary Christopher Headdon, policies issued from 1975 to 1988 were worth approximately 25% more than CARs, a cost if paid of £1B -£1.5B.
Based on an affidavit sworn by Christopher Headdon, on 28 June 1999 “from the 1980s onwards, Equitable was aware of the GAR risk. ... At no time did
Equitable ever hedge or reinsure adequately against the GAR risk to
counteract it. The reason for this was Equitable's belief that it could
...neutralise the potential effect of the GAR risk through the exercise of its
discretion to allocate final bonuses under Article 65.
In 1994 Equitable exercised its discretion under Article 65 to reduce the terminal bonus of policies with Guaranteed Annuity Rates, negating any benefit from the guarantee but preserving the assets of non GAR policyholders.
By July 1998 there were a number of complaints to the Personal Investment Authority Ombudsman
Ombudsman
An ombudsman is a person who acts as a trusted intermediary between an organization and some internal or external constituency while representing not only but mostly the broad scope of constituent interests...
and it was decided to seek a declaratory judgement. Alan Hyman was selected as the representative GAR. Hearings started in July 1999 and in September, the High Court ruled in its favour but this was reversed by the Appeal Court in January 2000. Equitable now sought a ruling by the House of Lords
Judicial functions of the House of Lords
The House of Lords, in addition to having a legislative function, historically also had a judicial function. It functioned as a court of first instance for the trials of peers, for impeachment cases, and as a court of last resort within the United Kingdom. In the latter case the House's...
.
House of Lords ruling on the Hyman case
On 20 July 2000 the House of Lords upheld the Appeal Court ruling. They concluded that GAR policies required that the guaranteed rate was applied to calculate the contractual annuity. The effect of the differential bonus scheme was that the annuity was calculated at current annuity rates, not at the guaranteed rate, and was not lawful. “The self-evident commercial object of the inclusion of guaranteed rates in the policy is to protect the policyholder against a fall in market annuity rates... The supposition of the parties must be presumed to have been that the directors would not exercise their discretion [in Article 65] in conflict with contractual rights.”Even before that stage, Equitable, which had long claimed to be more transparent than its rivals, had assets worth £3B less than communication with policyholders had indicated.
Aftermath of the Hyman case, sale of business and current trading
Having not insured against loss of the case and with no other way to make provision for the immediate £1.5B increase in long term liabilites, Equitable put itself up for sale. By the end of July, about 10 companies including the Prudential had considered -but rejected a bid. Equitable had intended using money from the sale to allocate bonuses for the first 7 months of 2000 but now this was not available.On 8 December 2000 it closed for new business and immediately set a Market Value Adjustment of 10% peaking at 15%.
On 19 December the Treasury announced a review of the Financial Services Authority
Financial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
(FSA)‘s regulation of Equitable. The following day, Equitable announced that their President and seven non executive directors would step down. Vanni Treves
Vanni Treves
Vanni Treves is a former Chairman of Channel 4, former Senior Partner of City law firm Macfarlanes and former Chairman of Equitable Life....
became Chairman in March 2001 with Charles Thomson as Chief Executive.
On 4 February 2001 the Halifax agreed to buy Equitable's operating assets, sales force and non-profit business for a payment of up to £1 billion into the with-profits fund -subject to policyholder agreement. On 20 September 2001 the Compromise proposals were published offering 17.5% increase for GARs in exchange for the guarantee and 2.5% for non GARs in exchange for abandoning any legal claim. The deal was accepted by 98% of GAR policyholders and was sanctioned in the High Court in February 2002.
Both policyholders and pensioners received further bad news. In July 2001 policyholders were angered to be told their savings had been reduced by 16%. whilst in November 2002 pensioners were told that,“with-profits annuities, like yours, are now out of line by about 30%. “
50,000 Annuitants suffered a 20% reduction in income.
In February 2007 Equitable completed the transfer of £4.6B of annuities to Canada Life and in November transferred £1.8 billion with-profits annuity policies to Prudential, a deal accepted by 98% of members voting at a meeting.
In November 2008 Equitable announced that the process of the sale of the Society would be put on hold and that the Board would instead review the arrangements to run off its existing business.
Gross assets as of December 2008 were £8,754 million, around 25% of the value in 2000.
Reports by the Actuarial Profession and FSA
In May 2001 Ian Glick QC and Richard Snowden published their joint opinionon behalf of the Financial Services Authority
Financial Services Authority
The Financial Services Authority is a quasi-judicial body responsible for the regulation of the financial services industry in the United Kingdom. Its board is appointed by the Treasury and the organisation is structured as a company limited by guarantee and owned by the UK government. Its main...
. This concluded that there was an arguable case that the Equitable had breached the rules of its former regulators, the Life Assurance and Unit Trust Regulatory Organisation (Lautro) and the Personal Investment Authority (PIA) in failing to disclose the risk of the existing GAR policies in the Product Particulars, Key Features and With-Profits Guide to new non-GAR policy holders.
This was followed in September by the Corley Report
on behalf of the Institute of Actuaries which recommended amongst other things that the Appointed Actuary should require that there is a
process for reviewing communications to policyholders, should resist holding a dual role as Chief Executive and that his work should be subject to peer review.
In October, the Baird report was published. This covered the FAS regulation of Equitable from 1 January 1999 to 8 December 2000 when the Society closed to new business and was produced by the FSA's director of internal audit with the help of independent accountants and lawyers. The review found that - with hindsight - there had been some "deficiencies" on the part of FSA in the discharge of their regulatory responsibilities, but also stated that "the die had been cast" by the time the FSA had assumed regulatory responsibility for the Society in relation to those who had already invested in Equitable.
The Penrose report
The Penrose report, commissioned by the TreasuryHM Treasury
HM Treasury, in full Her Majesty's Treasury, informally The Treasury, is the United Kingdom government department responsible for developing and executing the British government's public finance policy and economic policy...
in August 2001 and expected in 2002, was finally published in March 2004 after delays due to vetting by Treasury lawyers.
His 818-page report
found that the company had made over-generous payouts to policyholders, reaching the stage where "The Society was under-funded to the extent of £4½ billion in the summer of 2001.” (Penrose Report, Chapter 19. parag 82). Penrose stated: "Principally, the Society was author of its own misfortunes. Regulatory system failures were secondary factors". He also accused the former Equitable management team of "dubious" practices and nurturing a "culture of manipulation and concealment".
The Penrose Report was debated in parliament on 24 March 2004.
European Parliament investigation
In June 2007,the European Parliament issued a 385 page report on Equitable LifeIts fifteen month investigation followed the implementation in July 2004 of EC Directive 92/96/EEC (the “Third Life Directive” or 3LD) which governs the single market in life insurance. This directive required the UK where Equitable’s headquarters were based to supervise its “entire business” and the curtailed the supervisory power of other EU countries where Equitable operated.
The EU Parliament’s remit was to investigate without prejudice, alleged breaches of Community law in relation to the collapse, to assess the UK regulatory regime in respect of Equitable Life and to look at the adequacy of remedies available to policyholders including the 15,000 non UK members. The 22 member committee heard evidence from 38 witnesses and analysed 92 public documents and its report is the only one completely independent of HMG influence. Whilst a detailed summary of the full document is well outside the scope of this article, an examination of the effectiveness of the supervision of Equitable is given below and closely follows the wording.
- Financial supervision covering the Assurance undertaking's entire business.
The evidence suggests the regulator focused exclusively on solvency margins and took little or no account of accrued terminal bonuses in its overall analysis of the financial health of the company. It quotes Penrose as saying that the Policy Holders reasonable Expectation (PRE) would have included terminal bonus even if the amount was not defined, however the Government Actuary's Department
Government Actuary's Department
The Government Actuary’s Department is a department of the Government of the United Kingdom responsible for providing actuarial advice to public sector clients....
(GAD) and the Treasury deny PRE existed as the terminal bonus was not guaranteed.
The report goes on to say that if it is considered that these types of bonuses are an integral part of the company's ‘entire business', the regulatory authorities should have taken them into account. Although the Regulator was given the option of not forcing Equitable to build reserves for discretionary bonuses, that did not absolve the authorities from their duty of financial supervision covering the “assurance undertaking's entire business”.
- Every Company is required to have sound administrative and accounting procedures and adequate internal control mechanisms.
Though the Appointed Actuary (AA) is not a role required by the directive, it is an essential part of the UK national insurance. One of the AA’s missions was to act partly as a guardian of policyholders' interests but the overall evidence suggests “the UK regulator did not fulfil its obligation ..in that Roy Ranson became CEO without relinquishing his role as the Appointed Actuary.” HMT rejected this claim as the 3LD does not mention the AA.
The overall evidence received suggests that by not taking swift action on this matter, the UK regulator did not fulfil its obligation to require from ELAS sound administrative and accounting procedures and adequate internal control mechanisms, as demanded explicitly.
- Ensure that the competent authorities have the powers and means necessary for the supervision of assurance undertakings.
The UK had the legal power to supervise Equitable. The Baird report states that in January 1999, the total number of staff involved in the prudential regulation of approximately 200 insurance companies was less than 135.
The Penrose report also states that "the DTI insurance division was ill equipped to participate in the regulatory process. It had inadequate staff and those involved at line supervisor level in particular were not qualified to make any significant contribution to the process. For all practical purposes, scrutiny of the actuarial functioning of life offices was in the hands of GAD until the reorganisation under FSA was in place".
More evidence also strongly suggests that the regulator adopted a conscious and deliberate ‘hands-off’ approach with regards to the ELAS case. If this were proven to be the case, it would constitute a breach of the regulators’ obligation to ensure the respect of PRE and therefore a breach of the letter and aim of Article 10 of the 3LD. Both the Baird and Penrose reports contain criticisms of the regulator’s lack of a "pro-active approach".
In its conclusion on P117, the report says the powers bestowed on the Secretary of State (as prescribed by Section 68 of the ICA
1982) to waive the application of prudential regulations appear to be
incompatible with the letter and the aim of the Directive and were used inappropriately.
(particularly when granting authorization on numerous occasions to include future profits
in the solvency margin), and that therefore ..there are serious concerns that the 3LD was not correctly transposed in full.
The committee is of the opinion that the application of the 3LD by the UK in respect of
the ELAS case was deficient and that UK regulators and authorities did not adequately
respect the ultimate purpose of the Directive.
Legal actions by Equitable Life
In April 2005, in the light of Penrose's findings, Equitable started a £2B High Court action against auditors Ernst & Young, reduced 3 months later to £0.7B, claiming they had failed to inform the board of the seriousness of its position. However lawyers advised they could not prove correct advice would have changed the outcome and the case was dropped in September. Ernst & Young described the case as "ill conceived".Simultaneously it started a £3.3B claim against former directors claiming that they failed in their duties to policyholders. This claim was abandoned in December 2005, the costs of the two cases being around £40m.
Government response and the Parliamentary Ombudsman
In July 2008, the Parliamentary and Health Service OmbudsmanParliamentary and Health Service Ombudsman
The Parliamentary and Health Service Ombudsman comprises the offices of the Parliamentary Commissioner for Administration and the Health Service Commissioner for England...
completed a 4 year investigation, described by Equitable's chief executive as the "best chance of compensation". Her 2,819-page report accused the regulators, i.e. the DTI, GAD, and FSA of "comprehensive failure", found the Government guilty of ten counts of maladminstration and called for a compensation scheme "to put those people who have suffered a relative loss back into the position that they would have been in, had maladministration not occurred". Equitable’s chairman estimated that 30,000 policy holders had already died without compensation. In December, the European Parliament issued a press release describing the regulatory failure as an outrage.
In January 2009 the Government issued their response and appointed retired judge Sir John Chadwick as an independent advisor to design an ex-gratia scheme for some policyholders.
The PO accused the government of twisting the findings of her report by suggesting that whatever the regulators had done, it would have made no difference to the events which followed. She also said it had failed to give "cogent reasons" for rejecting some of her findings, mandatory since the Pensions Action Group Judicial Review. In March, the Public Administration Select Committee
Public Administration Select Committee
The Public Administration Select Committee is a Select Committee appointed by the British House of Commons to examine the reports of the Parliamentary and Health Service Ombudsman and to consider matters relating to the quality and standards of administration provided by civil service departments,...
issued a second report in which it described the government response as "morally unacceptable", and repeated the PO's criticism that it had acted as judge on its own behalf.
In May, the PO issued a supplementary report to the government's reply.
In August 2009 Sir John Chadwick issued an interim report.
Sir John is designing a scheme to help the “hardest hit” by measuring the losses suffered in agreed cases of maladministration with those of a comparable company.
Government response after May 2010 general election
In the Queen's Speech, following the formation of a Conservative-LibDem coalitionCameron Ministry
David Cameron is Prime Minister of the United Kingdom, after being invited by Queen Elizabeth II to form a new government after the resignation as Prime Minister of Gordon Brown on 11 May 2010. Leading a coalition government formed by the Conservative Party and the Liberal Democrats, the coalition...
government, the Equitable Life (Payments) Bill was announced. The bill will secure compensation for nearly a million policyholders (UK-wide) hit by the near collapse of the insurer Equitable Life.
The Government also announced that the final report from Sir John Chadwick in relation to Equitable Life would be received by mid July. A statement on the HM Treasury website confirmed two elements of the design of the scheme: that there should be no means testing; and that the dependents of deceased policyholders should be included in the scheme.
The July 2010 announcement by Mark Hoban
Mark Hoban
Mark Gerard Hoban MP is a British Conservative Party politician and the Member of Parliament for Fareham, and the Financial Secretary to the Treasury.-Early life:...
, the Financial Secretary to the Treasury
Financial Secretary to the Treasury
Financial Secretary to the Treasury is a junior Ministerial post in the British Treasury. It is the 4th most significant Ministerial role within the Treasury after the Chancellor of the Exchequer, the Chief Secretary to the Treasury, and the Paymaster General...
offered compensation, starting by mid 2011 to 1.5m savers. However policyholder compensation would be limited to the "absolute loss they suffered" estimated by Sir John Chadwick at a total of £2.3-£3B, compared with the £4B-£4.8B returns that similar companies produced. Sir John, whose report was designed to compensate those who suffered "disproportionately" recommended a payment cap for each policyholder which would reduce total compensation to £400m - £500m. Hoban said compensation would follow recommendations of the Parliamentary Ombudsman report and would take Sir John's findings into account but might be affected by public spending cuts. Total compensation would be announced in the public spending review
Spending Review (United Kingdom)
A Spending Review or occasionally Comprehensive Spending Review is a governmental process in the United Kingdom carried out by HM Treasury to set firm aditure limits and, through public service agreements, define the key improvements that the public can expect from these resources.Spending Reviews...
in October.
Equitable life pressure group EMAG were unhappy with the announcement but the Ombudsman said she would inform Parliament of her views once she had had time to consider the statement.
Although Equitable’s management initially welcomed the announcement, they were concerned that compensation would be based on Sir John’s report, written on the premise that only five of the Ombudsman’s findings of maladministration were valid. In opposition, Hoban had promised that all ten counts would be considered. Equitable's Chief executive, Chris Wiscarson wrote to Hoban saying that they could not support Chadwick’s recommendations which would only cover about 10% of losses. Compensation should be based on a total figure of £4.8B.
On 20 October 2010, the Chancellor of the Exchequer
Chancellor of the Exchequer
The Chancellor of the Exchequer is the title held by the British Cabinet minister who is responsible for all economic and financial matters. Often simply called the Chancellor, the office-holder controls HM Treasury and plays a role akin to the posts of Minister of Finance or Secretary of the...
announced in his Spending Review Statement that the compensation package would be around £1.5billion.
External links
- Equitable Life – important next steps (HM Treasury 22 July 2010)
- The Office of Sir John Chadwick
- Equitable Life Members Support Group
- Equitable Members Action Group (EMAG)
- Memorandum by Cazalet Financial Consulting to the House of CommonsBritish House of CommonsThe House of Commons is the lower house of the Parliament of the United Kingdom, which also comprises the Sovereign and the House of Lords . Both Commons and Lords meet in the Palace of Westminster. The Commons is a democratically elected body, consisting of 650 members , who are known as Members...
(2001)