Wickham's musings from Chalke

The Penrose Report has been published recently. He only had a brief to find out who did what and make recommendations; he was not allowed to apportion blame.

The various government departments and regulatory authorities have been busy denying all responsibility for the problems that caused Equitable Life to over-bonus and under-reserve for the guarantees in some policies.

However, Penrose reports that the government regulators during the early 1990s were aware of the lack of reserves and had meetings with Equitable Life’s chief executive (who was also their appointed actuary). He was an aggressive character and basically told them to shove off. They stayed silent and probably hoped that everything would turn out alright as equities rose during a bull market. Over-bonusing meant that the society was building up a black hole in the early 1990s, long before two problems made everyone aware of the problems.

The first blow was the House of Lords decision that Equitable Life could not pay a low final bonus to a person who chose to take the guaranteed annuity or a normal one (the same as for policies without a guaranteed annuity) if he decided not to take the guaranteed annuity (many people did choose not to as the guaranteed annuity was usually only for the policyholder, if he wanted a spouse’s annuity he had to forego the guarantee and take a current annuity). They had to pay the same bonus whether or not a person chose to take the guarantee.

As interest rates fell the guarantee suddenly made annuities two or three times more valuable than the current market annuity so a lower final bonus if the guarantee was chosen was designed to equalise the guaranteed and current annuity available to a policyholder.

The society might have been able to set a much lower bonus for all guaranteed annuity policies and a higher one for non-guaranteed annuity policies but this would have meant lower guaranteed annuities for important policyholders such as barristers, judges and other professional people who were Equitable’s main clients and who were coming up to retirement. It would have been a loss of face and would have looked bad in the performance statistics so the society decided to carry on regardless and hope that income from new policies would keep them solvent. The regulator knew this and allowed the society to continue to trade.

The next blow was the equity market downturn in 2001.

The Parliamentary Ombudsman has said that the regulation was only supposed to be “light touch” regulation. Many policyholders assumed that regulation meant that life assurance companies were under careful scrutiny and told in no uncertain terms to get their house in order and are appalled at the attempt to avoid responsibility.

One policyholder group, Equitable Members Action Group, is requesting £2 million of assistance from the society to see whether a claim against the government for misfeasance is possible. The society's new board of directors does not think there is much chance of a successful action against the government and suggests that individuals or groups complain again to the Financial Ombudsman Service which has not been any help so far.