EMAG

The independent action group for current and ex Equitable Life policyholders, funded by contributions.

Equitable Members Action Group

Equitable Members Action Group Limited, a company limited by guarantee, number 5471535 registered in the UK

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Best Media Stories: 08/03/2002 - Financial Adviser on Equitable by Paul Braithwaite

8 March 2002 - Financial Adviser on Equitable

What do you call four men who devastated the Equitable: Law Lords? No - actuaries

For more than a decade the Equitable Life has been autocratically run by a succession of just four men. Each progressed from being Appointed Actuary to Chief Executive. With hindsight, it seems that this esoteric, mathematical discipline doesn't provide suitable training for the wider skills needed for running any organisation. It does, however, appear to lead to an unwarranted sense of superiority and secrecy - certainly in the Equitable's case.

The Equitable has always been a very secretive Society. Charles Thomson, the current Chief Executive, has continued in this most unfortunate tradition. Is it any wonder that at least a quarter of policyholders have recently fled and many more are considering departure, when there's still so little up-to-date financial information? In the last year a staggering £9bn left, fully one third of the with profits fund. However, some relevant information has crept out, mostly from the small print of the Baird report and various external actuaries’ reports.

Let's start by looking at the GAR problem: The projected cost of "running off" was circa £1.3bn, based on the fund in the summer of 2000, valued at £27bn. So the "hit" represented broadly 5% of the assets. One should ask, what sort of business is brought to its knees by a 5% "hit"? I would suggest the answer is either a very new one (not Equitable Life then!) or one that has far over-reached itself.

A 5% "hit" - for example a big bad debt - might cause the average business to tighten its belt, but not force it to cease selling. However if that business were already over-extended by 15% when the 5% problem arose, it would probably not have sufficient strength to survive. This, I believe, is what happened to the Equitable.

Let's put the GAR problem aside and consider the other major risk that the Equitable ran: This is what was described as the "full and fair" bonus policy. Most traditional lifecos' with profits funds accumulate assets well in excess of what they allocate to policyholders - hence a degree of obfuscation. But it is these surplus assets, or estate, that cover declarations in the cyclical bad patches on the stockmarket.

Equitable's actuaries thought that they could exist without any such estate. They thought they could pay pensions out and vote bonuses, not only to match but to exceed rises in the stockmarket, and this is what they did throughout the late 90's. This was economics from the school of Charles Dickens's Mr. Micawber (annual outgoing twenty shillings and sixpence etc) - a folly bound to end in disaster.

Mike Arnold, the Independent Actuary to the Compromise Scheme, has reported that the aggregate of policy values exceeded available assets by about 10% at 31st December 2000. Of this, about 5% was attributable to the GAR cost which resulted from the adverse decision of the House of Lords in July 2000, leaving a general deficiency also of around 5%. Until its closure the Equitable was widely thought to have an accumulated goodwill value measurable in billions. During 2000, apart from the GAR cost, income and bonuses broadly balanced each other, so we can deduce that the general deficiency was also 5% at the end of 1999.

Readers will recall that that was about the high point for the stockmarket, after the long bull market from about 1991. This was therefore a time when all lifecos should have had "something in the kitty" for the inevitable downturn. It is now clear that the Equitable did not. It was actually 5% DOWN - not up.

What sort of buffer should they have had? One would have hoped that 10% or so would have been accumulated over the previous 8 years. So, I conclude that at the top of the bull market, Equitable were perhaps 15% "the wrong way" through systematic over-declaration over time by the Society's actuaries Ranson, Nash and Headdon. Add to that the unexpected 5% GAR hit in 2000, and we can see why the world's oldest mutual was brought to its knees and forced to close.

The Equitable for years bragged about its distribution policy. It was only because the Society was a direct-selling operation, without the safeguard of IFAs to highlight the dangers, that it succeeded in getting away with this most dubious policy. Whilst investors may have been aware that Equitable did not have a large estate, how many people would have kept on investing if they had known to what extent the Society was being over-stretched? 140,000 new, unlucky policyholders joined in the two years before closure and they, most of all, have a valid grievance. Regrettably, yet again, it looks like this will be slugged out in court - to the indulgence of the legal profession - which seems to be Equitable's chosen charity.

This brings us to the other culprits – the Regulators. The objective of "prudential regulation" is to ensure that insurance companies do not over-expose their policyholders. From the Baird report last October it is very clear that the Regulators were well aware of Equitable's problem of increasingly thin reserves, but took no action over a period of several years - this, at a time when the stockmarket was going up and the Society could have been saved.

It is the serial failure of Regulators and the Treasury's culpability which will now become the primary focus of my policyholders' group, the Equitable Members' Action Group (EMAG). We will also continue to try to persuade the Equitable to be much more open about the financial fundamentals of the Society. To this end, we will be seeking a special resolution at the May AGM to revise the utterly archaic articles of association, which render any policyholder influence in this mutual nigh impossible.

You may have been surprised by my inclusion of Charles Thomson in responsibility for the Equitable's devastation (but maybe not, after his letter to policyholders and adverts on February 11th). After all, he only joined the society in January 2001 and was not involved in the Equitable's GAR policy. But he was the Appointed Actuary who, one year ago, announced an entirely inappropriate interim bonus of 8%, which for the second year running was summarily withdrawn retrospectively for the first half of that year. EMAG has calculated that Charles Thomson's failure to devalue in the first half of 2001, when so obviously necessary, appears to have cost members more than £200m in excessive distribution to leavers taking more than their asset share. We believe that this may account for why last June's Financial Review has remained so firmly under lock and key.

Thomson, as the only Executive Director, has been in sole charge of running the Society for the last year. The service levels every single day were simply appalling. For this, much to policyholders' chagrin, the board proposes to reward him with a bonus of £275,000 (see: http://www.emag.org.uk/ottonreCT.25ja02.html). It is also Thomson personally who has steadfastly and rudely resisted over months and months every request - from academics, from EMAG, from policyholders - for more specific up-to-date financial data and substantiation. It is his and his board's insistence on secrecy that has fuelled the panic and made it so difficult last summer and today for IFAs and policyholders to make informed decisions, with absolutely no help forthcoming from the FSA.

A year ago, Equitable policyholders were promised in writing openness and transparency. Instead, they have continued to be served up that staple of actuaries - "smoke and mirrors". It seems unlikely that things will change with Thomson's actuarial "mind-set" at the helm. Having bullied us through "the war zone" it's time for Thomson to be replaced by someone more worldly and policyholder-friendly. More than anything, it a change in mentality at the top of the Equitable that is needed to turnaround confidence and begin to heal this stricken Society