News Update January 19th 2012

Illustration of Historic Losses

There appears to be some confusion about Relative Losses and Gains.

This example, which is based on real data tries to show the net effect of the Equitable Life Compensation Scheme (ELCS) for one WPA. Whilst it is NOT possible to give precise Relative Loss figures for any individual without using their unique data, it is possible to show the general consequences of the scheme.

In general for Relative Historic Losses:

i)                   ALL WPAs will make a relative gain compared to the basket of comparators used by the ELCS until the 2002 cut backs.

ii)                  All WPAs will make a relative loss from 2002 onwards.

iii)                It is not possible to forecast if a WPA will make an overall Historic Loss or Gain.

The Chart shows the net effect of an early relative gain, plus the interest charged on that gain that is gradually offset by a later relative loss, post the 2002 reductions, and the interest paid on those losses.[1]

As must be evident from the chart, quite seemingly trivial amounts of relative gain plus the interest charged build up very quickly and take years to clear away.

The net effect is that by 2009 this WPA has just about made a Relative Historic Loss.

It is also implicit that a relatively small change in the starting conditions, a slightly higher ABR for example, would result in there being no Relative Loss before 2010.

In general all WPAS will make a Relative Future Loss.

The ELCS scheme is set out in considerable detail on the Treasury web site

http://www.hm-treasury.gov.uk/fin_equitable_life.htm