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

Media Stories: 20/11/2006 - Simon Bain’s expose on Drawdown scandal, prepared for EQUI

Whatever happened to principles?

SIMON BAIN in The Herald November 20 2006


The Financial Services Authority, at the end of last month, published what it called "radical proposals for a move to principles-based regulation".

But as long ago as 1990, its predecessor the Securities and Investments Board introduced its Statements of Principle, which applied to members of the Personal Investment Authority, including Equitable Life.

The first two principles are integrity – "a firm should observe high standards of integrity and fair dealing" – and "skill, care and diligence".

But the little-noticed story of how Equitable Life treated more than 20,000 customers, in the sale of a product called managed pensions, reveals a lack of integrity or care, and much self-interested skill.

The managed pensions scandal, which The Herald first warned of in February 1998, shows how the lack of supervision of Equitable Life allowed the insurer to create for itself a regulation-free zone.

Managed Pensions/ Income Drawdown

In the early 1990s, interest rates began to fall sharply. The government was under pressure from negative publicity over the falling value of annuities as people retired. Insurers who had large books of policies with guaranteed annuity rates also stood to see their liabilities increase dramatically. For Equitable, with its unique strategy of holding minimum reserves and making maximum pay-outs, this was a major issue.

It was Equitable which conceived the idea of new-style pension plans which would enable deferring an annuity, but drawing tax-free cash immediately and some income in the meantime. The attractions of "managed pensions" were powerful: (1) they could be sold on the basis that annuity rates might go up again; (2) they would create "new business" from selling a new pension product; (3) they would generate cash which could be invested in other products; and (4) policyholders with guaranteed annuity rates would lose their guarantees, offering potential significant reduction of liabilities.
Not surprisingly, Equitable was at the forefront of lobbying for the approval of managed pension or income drawdown plans, which it started selling in 1995 even before the Inland Revenue had given its formal approval.

Independent financial advisers in firms across the country were later to report the same story: Equitable's salesforce was approaching its affluent clients who were over 50, or as soon as they turned 50, and suggesting income drawdown.

The first technique was a scare story. They worried clients that an incoming Labour government might easily scrap the entitlement to tax-free cash from pensions – "better take it now, even if you don't really need a lump sum, and draw down income, even if you don't really need any income".

The insurance salesman's only obligation, under regulations at the time, was to show that he had offered the client "the most suitable product in the insurer's product range".

But the second technique was to withhold relevant information about drawdown – notably its tax status – and to ignore possible alternative products, in this case a "staggered vesting" or phased retirement plan. The third technique, once the drawdown sale had been clinched, was to suggest that the tax-free lump sum, and usually the income too, should now be invested in other Equitable products.

That, miraculously, created a triple sale, triple commission, and triple "new business" sales, often of substantial sums well into six figures – from what was actually old business.

The former salesman

In August 2000, Clive Hammond, an Equitable salesman from 1990 to 1995 turned IFA, put the following on record for the Press: "Equitable sold more drawdown than other providers because it paid considerably more bonus or commission to its salesforce for doing so."

He said salesmen were deliberately not provided with a comparative illustration system for Equitable's alternative phased retirement or staggered vesting plan. "The individual Equitable branches pushed drawdown because this plan generated far more 'sales figures' for the branch and individual representative."
He gave a worked example on a £100,000 fund: drawdown generated bonus/commission on the £25,000 of tax-free cash and the £75,000 of drawdown, whereas "phased" generated no "new business" sales at all, as it remained invested.

He summarised: "Substantial new business sales were generated by 'churning' existing contracts. When you consider the far superior tax implications for most clients if phased were used, you have to wonder who benefited more from the sales of the Equitable Managed Pension."

The regulation

In May 1997, the Personal Investment Authority had issued detailed guidance (G60) which made it clear that income drawdown was only suitable for a minority of people approaching retirement.
The Linlithgow-based IFA Alan Steel Asset Management, which handled the cases of 200 dissatisfied former Equitable clients, reported that every single one had featured lack of information and misrepresentation at point of sale. Alan Steel was convinced that for virtually all of these clients, doing nothing or taking a phased retirement plan had been the best advice. When Steel had the temerity to question Equitable's record in the Press in April/May 1997, he received an aggressive letter from Equitable's lawyers Denton Hall, demanding a retraction, substantial damages, and an undertaking not to repeat it.
Denton Hall wrote that phased retirement schemes were "sold by Equitable and recommended to its clients where appropriate", and that Equitable "makes every effort to explain the potential advantages and disadvantages of all its products both by means of discussion and written advice". This contrasts starkly with the salesman's later testimony.

Steel's detailed reply based on his cases was so effective that Denton Hall backed down significantly. However, Steel agreed not to repeat the criticisms. Instead, he voiced his concerns to the PIA.
The Herald first highlighted this brewing scandal in February 1998. Portfolio & Pension Management, the fee-based IFA based in East Kilbride, told us income drawdown was a complex option requiring proper advice, but when sold directly there was "substantial scope for commission abuse".

What was the regulator doing? The government minister responsible, Helen Liddell, told us: "I am aware of public concerns about these plans and have asked the PIA to keep me informed of the situation."

In February 1999, The Herald reported on publicly-available figures that ought to have set alarm bells ringing in the PIA.
Equitable's salesforce had already sold 11,600 income drawdown plans worth £1.35bn – almost twice the £750m sold by the next biggest player Scottish Equitable, through IFAs, and four times the industry average of £240m of business.

Moreover, Equitable had invested 95% of its drawdown money in its with-profits fund, whereas chief rivals Scottish Equitable (25% in with-profits) and Winterthur (very little) both said publicly that with-profits was not suitable for most investors. Why was Equitable so out of line with the rest of the industry?
Alastair Dunbar, Equitable's spokesman, told The Herald: "Because we are selling directly we can be confident about the advice that is being given, because it is our advice."

At last in May 2002, long after all sales had finished, the FSA announced its concerns: it had discovered that drawdown could earn salesmen commissions of "6% compared with 1.5% in annuities", and it was reviewing evidence of bias in sales.
Some 20,155 managed pensions were sold by Equitable, with typical funds of well over £100,000, affecting a minimum £2bn of the with-profits fund. Its salesforce sold an average 80 of these complex plans every week for five years – and they accounted for 97% of all the income drawdown plans sold directly to customers by company representatives.

Steel told Lord Penrose's inquiry: "We have seen highly- complex issues involving funds of at least £600,000 being dealt with in a page-and-a-half. At no stage were guaranteed annuity rates raised, critical yields mentioned, or advantages and disadvantages of products compared."
The Herald subsequently reported on cases such as that of Sir Michael Hirst, the former Conservative MP, who was approached as soon as he turned 50 and persuaded to swap a guaranteed pension which he did not know he had for a risky drawdown option which he did not need.

Thousands of pensions carrying valuable guaranteed annuity rates were wiped off the books, with customers typically not even informed that they had a guaranteed rate, let alone being offered an informed choice.
How did Equitable get away with these flagrant breaches of conduct of business rules, not to mention the overriding principles of integrity and diligence?

The complaints

Ray Walker, whose name we changed at his request, had pension plans with Equitable worth more than £500,000. We reported last year how in 1999 he was approached by a salesman and persuaded to buy an income drawdown plan, and thereby give up a pension with a guaranteed annuity rate of a massive 10% – just months before the House of Lords' ruling in July 2000 which forced Equitable to honour the real value of its guarantees.
Walker first complained of mis-selling in October 2001, and appealed to the ombudsman. After three-and-a-half years of obfuscation and delay, which saw most policyholders persuaded to sign away their legal rights to complain, Equitable largely exonerated in a "managed pension review", and thousands of other complaints either rejected or made derisory offers, with the tacit approval of the ombudsman, Walker received a "final offer" of £522.
When he objected that his loss had actually been over £70,000, Equitable wrote him another final letter in April 2005 saying income drawdown had "met your needs and was at least as suitable as any other product within the society's range".

But Walker said this was not the point. Like the 140,000 other people who bought Equitable products after September 1998, he had not been alerted to its true financial position, and in his case to the real potential value of his guaranteed annuity. Walker told the insurer he would now consider taking legal action.
In May, Equitable wrote again. It said: "You should have been informed about your entitlement and this would have influenced your decision." It agreed to pay him £81,907, immediately.
Walker's case is not, in essence, unusual. He is simply among the determined few policyholders who successfully threatened Equitable with the same instrument – the law – that it used very skilfully to pressure the many into accepting nominal or no redress. They were victims of a culture of orchestrated mis-selling.

The regulators failed to pick up signals from Equitable's conduct of business which should have alerted them to the black holes in its accounts. They then colluded with the stricken insurer to minimise financial and reputational damage, to the society and the government.