Documents: 11/06/2001 - Suggestions for compromise - Colin Slater
11th
June 2001 - SUGGESTIONS FOR COMPROMISE - COLIN SLATER
These
notes are a summary of more detailed proposals submitted to the Chairman and
currently subject to ongoing correspondence with Alistair Dunbar.
-
BONUSES
WERE TOO HIGH
The old Board did not provide
adequately for the guarantees built into the GAR policies. Nor did they re-insure
against that risk. When interest and annuity rates fell, they had nothing
set aside. Had they re-insured the risk or made provision for it themselves,
the Society's profits and the members bonuses would have been smaller, but
the funds would have been available to meet the cost. The members have to
face the unpalatable truth that policy bonuses were too high for a decade
or more.
-
BOTH
TYPES OF POLICYHOLDERS FEEL AGGRIEVED
GAR's because the old board
tried to deprive them of the protection from low annuity rates built into
their contracts and non-GAR's because they were sold policies based upon bonuses
that were declared out of profits that had not been earned. To achieve general
acceptance, any scheme must address both these factors.
- A REALISTIC ESTIMATE
OF THE DAMAGE
The
new Board needs a realistic estimate of how much it will cost to persuade
the GAR policyholders to give up their GAR rights now. This is not the same
as the actuarial cost of running off the with-profit fund over 40 years.
The members will not wait 40 years. This question needs to be approached
from the viewpoint of individual GAR policyholders rather than from the
viewpoint of the Society's actuaries, i.e. from 'bottom-up' rather than
the 'top-down'.
It
is also vital to include something for the mis-selling of non-GAR policies.
We surely do not need another trip to the House of Lords to see that non-GAR
policies were mis-sold upon the back of bonus rates that ignored the GAR
liabilities.
The new board has one opportunity
to put up a credible statement of damage. It cannot allow itself to get into
the situation of the old board, taking too optimistic a view and being forced
to revise it upwards.
- HOW MUCH HAVE WE GOT
TOWARDS THIS COST?
The proceeds of the Halifax sale (between £750 million and £1000
million) should be earmarked for this deal. Also whatever money the Society
has set aside for GAR costs. This should be at least the £200 million
provision made in the 1999 accounts.
- A FAIR WAY OF SHARING
THE BURDEN
Once we have arrived at the amount to be funded, we need a fair way of recovering
it from the members. Provisionally, the old Board froze everyone's bonuses
for 7 months in 2000. This had the effect of docking all funds by about 6%.
This is plainly unfair to more recent policyholders, overwhelmingly non-GAR,
who did not enjoy the excess bonuses in the first place. It should be reinstated
and replaced by a bonus reduction proportional to the bonuses declared in
the past. I suggest those for the period 1988 to 1999. This would spread the
cost fairly amongst those who benefited from excessive bonuses. Coincidentally,
but rightly, the GAR policyholders will shoulder a proportionately higher
share of the cost. The House of Lords did not outlaw an across the board bonus
reduction.
-
DISTRIBUTING THE NEW
RESERVE
Having created an adequate
reserve the Board can then distribute it to persuade the GAR's to give up
their contractual rights and to compensate non-GAR's for mis-selling.
The
policyholders will have every incentive to agree. It should be possible
to achieve the high approval rates required by S425 of the Companies Act
so as to make the compromise binding upon all parties.
-
RESULTS
The GAR's will get a fair
price for their lost rights, but based upon a lower capital value that reflects
their proper share of the cost of those rights. They will not have their cake
and eat it.
The
non-GAR's will lose very little.
The
GAR problem will be killed off, we will all know where we stand and can
look forward to a resumption of decent investment performance and the removal
of the Market Value Adjuster.
ILLUSTRATIVE
NUMBERS
EQUITABLE
LIFE - WITH PROFITS FUND
|
|
THE
DAMAGE |
|
£000,000's
|
£000,000's
|
|
GAR
Rights
|
|
|
|
|
Current
members
|
|
|
|
|
Current
cost of GAR rights
|
|
1,200
|
|
|
Loss
of future GAR rights
|
|
1,000
|
2,200
|
|
Mis-selling
|
|
|
|
|
Total
'Damage'
|
|
|
2,900
|
|
Halifax
Contribution
|
|
|
-
750
|
|
Already
reserved
|
|
|
-
500
|
|
Net
Damage
|
|
|
1,650
|
|
|
|
|
|
|
HOW
IT MIGHT BE SHARED
|
|
Total
Fund £000,000's |
GAR
Fund £000,000
|
Non
GAR Fund
£000,000
|
Fund
Sizes Dec 1999
|
A
|
25,250
|
7,575
|
17,675
|
Bonuses
1988-99 (as % of fund)
|
B
|
|
68%
|
33%
|
Bonuses
1988-99
|
C
|
10,984
|
5,151
|
5,833
|
Remainder
of Fund
|
D
|
14,266
|
2,424
|
11,842
|
Fund
Sizes Dec 1999
|
E
|
25,250
|
7,575
|
17,675
|
Damage
shared by % bonus 88-99
|
F
|
-
1,650
|
-
774
|
-
876
|
Reduced
Fund Sizes Dec 99
|
G
|
23,600
|
6,801
|
16,799
|
GAR
rights Current
|
H1
|
1,200
|
1,200
|
|
GAR
rights Future
|
H2
|
1,000
|
1,000
|
|
Mis-selling
compensation
|
I
|
700
|
|
700
|
Revised
Funds Dec 99
|
J
|
26,500
|
9,001
|
17,499
|
Percentage
change
|
J-A
|
|
19%
|
-1%
|
Uplift
Stage1
|
H1-G
|
|
18%
|
|
Uplift
Stage2
|
H2-G
|
|
15%
|
|
|