EQUITABLE MEMBERS ACTION GROUP - Analysis of questions asked of Equitable and their replies

Circulated to EMAG members: 27 September 2000

Certain questions have arisen subsequent to our meeting with ELAS on 14 August 2000 and certain questions have been raised by members of EMAG. We should be grateful to ELAS for responses to members' questions.

A) Final Bonus Philosophy

Analysis

1. Prior to HOL decision, all policy-holders received benefits equal to their retrospective asset shares (RAS) - being the accumulated value of premiums allowing for smoothed investment returns attained less cost of expenses and mortality. An adjustment was made to the final bonus of GAR policy-holders to achieve this equality.
2. Post HOL, according to Mr Nash's letter after the House of Lords (HOL) decision, our understanding of the 'new' bonus philosophy is:-
   1. NON-GAR (NGAR) - no growth will be allocated over the seven months 1 Jan. to 31 July 2000 so an adjusted retrospective asset share (ARAS) - being a retrospective asset share ignoring the growth over these seven months - will be used as the basis of final bonus.
   2. GAR -no growth allocated over the seven months 1 Jan. to 31 July 2000 - ARAS (as above) will be used as the basis of final bonus and Guaranteed Annuity Rates applied to the whole of ARAS where the GAR option is selected but ARAS paid if the open market option selected.
   3. GAR and NGAR policies of the same age/term/premium will receive identical final bonus and the final bonus will be identical whatever option selected under a GAR policy.

QUESTIONS

1. Is the above analysis correct? If not please advise position.
   ANSWER: No specific answer.
2. Under the new bonus philosophy, the value of the maturity proceeds of NGAR policies is presumably reducing (from RAS to ARAS) and the value of the maturity proceeds of GAR policies increasing (from RAS to ARAS*1.25 assuming GAR's are 25% above current annuity rates)-
   1. will this be a smoothed reduction or a sharp reduction?
      ANSWER: Sharp reduction on 26 July 2000
   2. what is a typical level of reduction in maturity proceeds for an NGAR policy ( e.g. 5% )?
      ANSWER: Of the order of 5%
   3. what is a typical level of increase in the value of maturity proceeds for a GAR policy ( e.g. 20%)?
      ANSWER : No specific response
   4. will the increased value of the GAR maturity proceeds be compensated by the reduced costs of the NGAR maturities or will there be an overall net cost?
      ANSWER: No net overall cost- the increases for the GAR cases balanced by the reduction for the NGAR.
   5. what is the estimated additional cost on GAR policies until all the GAR policies (i.e.belonging to the 100,000 persons with GAR policies) have matured and how much will the corresponding saving on NGAR policies be?
      ANSWER: It appears that GAR policy benefits will gain £1bn and NGAR lose 1bn pounds. But it is not clearly stated whether this figure is for e.g. one year or until all the GAR policies have matured.
3. Is the future cost of the GAR maturity proceeds capped irrespective of reductions in interest rates or does the cost of GAR maturity proceeds go up and up as interest rates fall either increasing overall maturity benefit costs or, if maturity costs are to be capped, requiring a greater and greater cross-subsidy from NGAR to GAR?
   ANSWER: not specific but seems to imply that there is no cap on the cross-subsidy between GAR and NGAR which could rise and rise if interest rates were to continue to fall.
4. What is envisaged will be the 'post-sale' bonus philosophy? Mr Nash's letter envisages a restoration of the seven months growth after a putative sale. Is it therefore envisaged that the benefits on NGAR policies will be restored to a level based on full RAS and GAR policies based on full RAS applied at GAR rates?
   ANSWER: not specific but this appears to be the case. If so what is the likely cost of giving all existing GAR policies full RAS applied at GAR rates in future (i.e. until the last GAR policy matures) and does this depend critically on the future level of interest rates? Not answered
5. In respect of those GAR policies which have already matured (between around 1994 and the HOL decision) and which had their final bonus reduced to meet the cost of the GAR, is the Society now intending to make up their benefits to the level which would have applied had the final bonus not been reduced? This appears to be the case. If so what is the estimated cost of this?
   ANSWER: Not answered

B) Form of benefits on GAR policies still to mature

Analysis

We understand that about two-thirds of the GAR policies are still to mature. The GAR options may in many cases not offer annuities in the form that members would require e.g. if only single life offered or if annuity to be take at a given date or age.

Questions

1. Are the GAR options spot options (applying on only one date) or line options (applying any time between certain dates)?
   ANSWER: Most GAR policies contain a line option.
2. Has the Society considered the possibility of offering individual GAR policyholders alternative GAR terms (e.g. annuity plus a widows reversionary annuity but with the same current value as the single life GAR) should they so wish?
   ANSWER: Inappropriate to do this so can conclude not intending to do this.
3. Have ELAS and their advisers considered the possibility of asking GAR policyholders to voluntarily waive their GAR rights?
   ANSWER: No evidence to suggest that GAR members would waive their rights in sufficient numbers.

C) Statutory reserving position

Analysis

We were advised that the main reason for sale is that the Society's statutory reserving position has been adversely affected by the HoL decision to the point that the investment policy would have to be very significantly changed and ELAS would have to move substantially more funds from equities to fixed interest assets.

Questions

1. Is the above analysis correct?
   ANSWER: Not answered
2. Our understanding is that the regulatory liability valuation takes no account of future bonus additions. The regulatory value of liabilities relates only to already declared bonus. Could you please advise why the statutory reserving position is affected by the HoL decision?
   ANSWER: ELAS say HoL decision has impact on actuarial assumptions but do not explain what impact, so answer unsatisfactory.
3. Will a further DTI Return be available to members before the EGM which will consider a sale?
   ANSWER: Not intending to make anything public other than year-end Returns to Regulator. No further return is expected before the EGM.
4. Have ELAS ever modelled the run-off of the existing business under a variety of future financial scenarios until the last policy matures and see how much money is left at that end point? The 'run-off' could be done on the pre-HOL bonus philosophy and the new bonus philosophy to see the effect. It might be established whether any difficulties with the statutory reserving position were more apparent than real.
   ANSWER: Not answered.

D) Sale of the Society

Analysis

We were advised that ELAS is to be sold and that advisors have been appointed to help ELAS to seek buyers. We understand that a Memorandum of Sale has been issued to 15 interested parties under confidentiality terms. ELAS has advised that the sale will not necessarily go to the highest bidder. We were advised that the buyer will be expected to inject capital into the with-profits fund of ELAS (and may additionally pay some cash to members?). The buyer will expect a stream of income in return for this capital injection.

Questions

1. Is the above analysis correct? ANSWER: Not answered.
2. Who are the advisors to ELAS and what their terms of reference? Do the terms of reference of the advisors to ELAS fully reflect the interests of the members? ANSWER: Schroder Salomon Smith Barney (SSSB) are advisors appointed to assist in the sales process.
3. Have the advisors to ELAS been asked to take into account any other interests than those of the members? ANSWER: SSSB asked to assist Board in their role to protect and to advance interests of members.
4. Have the advisors to ELAS been asked to consider all means of protecting and advancing the members' interests? ANSWER: see above.
5. What means/options have ELAS and its advisers considered for continuing the business of the Society? ANSWER: No specific answer.
6. Why was the 'sale' option chosen from among the options? ANSWER: The sale option offered best prospects of a restoration of final bonus following 26 July reduction and prospect of protecting and enhancing the investment freedom of the with-profits fund.
7. Why is the Society being sold? ANSWER: Not really answered
8. Can you an indication of the criteria on the basis of which the preferred putative buyer will be selected? ANSWER: The offer which is in the best long-term interests of members. In particular expected to include the restoration of final bonus and the strengthening of the with-profits fund.
9. Will one of the criteria be the restoration of benefits as envisaged in Mr. Nash's letter. If this envisages restoring GAR benefits to the level of full RAS applied at GAR rates do you envisage the new buyer being able to promise this irrespective of what happens to interest rates? ANSWER: see above
10. 1. What is the income stream which is to go to the new buyer as shareholder? ANSWER: not answered
    2. Will the income stream for a putative buyer come from the existing policies or only from new policies taken out after sale? ANSWER: not answered
    3. Is it envisaged that the shareholder will effectively own, and be entitled to the investment returns on, any 'orphan' assets' that may exist? ANSWER: not answered
    4. If some of the income stream is to come from existing policies how will the existing policyholders be protected? ANSWER: not answered
    5. If the existing policyholders are protected does this effectively mean that the monies to restore the level of GAR and NGAR policy benefits (as envisaged in Mr. Nash's letter) will effectively come from new policies? ANSWER: not answered
    6. For those existing members with recurrent single premium policies will they have to surrender a slice of profits to the new shareholder in respect of future premiums or will the protection extend to future recurrent premiums? ANSWER: not answered
11. What figure is given in the Memorandum for Sale as the discounted value of the profits stream in respect of:-
    1. existing business? ANSWER: not answered
    2. new business? ANSWER: not answered