EQUITABLE LIFE MEMBERS

MICHAEL JOSEPHS' SUBMISSION TO ICELP

Last Updated: Friday, December 03, 2010 06:20 PM

[via email to secretariat@icelp.gsi.gov.uk ]

Further to my letter of 18th October, and following some informal discussions with Anne Macadam of the Treasury and your own Garry Siveyer, I have given further consideration to your objectives as set out in the Revised Terms of Reference. In particular your primary objective is defined as:

“ 5 The primary aim of the Commission is to recommend how best to fairly allocate funds provided for the Equitable Life Payments Scheme to those persons found to have suffered relative losses as a result of accepted Government maladministration, excepting WPAs and their estates.”

I have underlined the last phrase, as it is crucial. The Minister has created a number of significant precedents which pre-empt the work of the Commission by his prior rulings on WPAs. Standard administrative practice requires that you should apply these precedents to your own deliberations, unless there are overwhelming arguments to the contrary.

Precedent 1. That no premium paid before 30-9-1992 ranks for compensation, because it was not impacted by maladministration, and because a significant set of those premiums accrued a net gain, not a loss.

Precedent 2. That voluntary premiums paid after 30-9-1992 and all premiums in respect of policies incepted after that date rank fully for compensation, but at an average rate of about 3% of the policy values applying on 31-12-2000, immediately after the Society closed to new business. [i.e. only £775 Million is available to be allocated]

Precedent 3. That where there are losses and gains on the same policy, the latter should be set off against the former in calculating whether there is a net loss ranking for compensation. [This is implicit in the Minister’s rationale for excluding pre-92 premiums.]

Precedent 4. The heirs of a deceased policyholder are to be treated as being in the same degree of need as the policyholder if he or she were still alive.

Precedent 5. There is to be no “limit” on the amount of per capita compensation payable, or any reduction in the rate of compensation for larger than normal policies.

Precedent 6. That the treatment of later contractual premiums relating to pre-92 policies remains to be decided, but must be consistent with Precedents 1-5.

The primary open issue is: - What should be presumed to have happened subsequent to the disclosure of the Society’s compromised financial condition on 30-9-1992? Precedent 1 dictates that there should have been no further sales of WPA policies after that date, because of the high aversion to risk on the part of such policyholders.

Sir John Chadwick and Towers Watson have previously argued that business would otherwise have continued normally, if on a lower level of volume, but the Commission is not required to accept that scenario, which was in principle disavowed by the Coalition Government. It is obvious that the majority of group pensions business under the supervision of scheme actuaries would also have been transferred to other providers, especially the public sector schemes which made up a significant part of the whole. That means that some 30% of all WP business would have been lost.

The Society would have had to disclose its true financial position, which was masked by the fact that at the time (1991 Returns), liabilities and policy values were actuarially shrunken by about 45%.1 I reconstruct the realistic deficit then to have been £5.119 Billion against total assets of £7.547 Billion, or a deficit of 60% compared with the effective deficit of 25% at end 2000. The obvious presumption is that the Society would have been put into run-off at the end of 1992 as was actually the case eight years later.

In order to ‘balance the books’, we can assume (qua 2001) that all extant WP policies would have received a 45% reduction of their policy values and that Equitable would not have been given another eight years to try to work out the problem. That 45% cut would not have ranked for compensation from the Public Purse, because under Precedent 1 it is explicitly assumed that there was no prior maladministration contributory to their losses.

So, on the most basic assumptions, all premiums paid prior to 30-9-1992 would have incurred a 45% loss at that point, had there been no maladministration. So in reality the policies in question carried with them a gain of 45% of their notional policy value at end-91. This is the gain that should be offset against any subsequent losses. Note that I do not claim that this is the fairest possible outcome, but it does seem to be the fairest outcome consistent with the precedents already established in this matter.

You will already have noted that Precedent 5 precludes any caps/limits or rate reductions when calculating compensation for larger losses, so that you are confined to simple pro rata allocations of payment against net loss.

As far as priority of treatment is concerned, it seems clear that those already drawing benefits should receive compensation before deceased estates and those whose policies are still current, because that class are the most dependent on their immediate pension payments.

May I say that I do not agree at all with the Minister’s decisions, which seem both arbitrary and unjust, but as long as those decisions stand, these seems to be the consistent consequences.

1 Derived from information in the 1991 Insurance Return to the DTI, and confirmed by analysis from a

senior actuary that the differential valuation rate in the detailed valuation was 3%. EMAG have

previously pointed out that the average valuation life of pension policies was 18 years, weighted by

value.