EQUITABLE LIFE - WHAT REALLY HAPPENED? (23/09/09)
The shockwaves over the near-collapse of Equitable Life at the turn of the century were felt throughout the insurance industry. But, nearly ten years later, one accountant is still fighting for justice for the million or so policyholders left out of pocket
Colin Slater is a modest man. Quiet, earnest and unassuming, he goes about his work at Canterbury-based chartered accountants Burgess Hodgson diligently and effectively. But, talk to Slater about Equitable Life, and his whole demeanour changes. Hell hath no fury like an accountant scorned.
Like many accountants advised to invest their own pension monies in the Equitable Life Assurance Society, and who subsequently recommended that their clients do likewise, Slater believed he was putting his money in safe hands.
After all, Equitable Life was, until the turn of the century, considered the most respectable pension company in the UK. Established in 1762, it eventually became one of the biggest mutually owned life insurers in the world, with around 1.5 million policyholders.
And, along the way it became the pension company of choice for the prosperous middle classes professions - particularly accountants given that it appeared to provide a better return on its funds than most of its competitors.
But, like many things in life, if it looks to good to be true, then it probably is. From the late 1980s, the society was telling policyholders their investments were worth substantially more than Equitable actually had in its coffers.
By the year 2000, the stated value of its customers' policies was £3bn more than the assets actually held by the company.
"It made no provision for the guarantees against low interest rates contained in all policies issued before 1988 (the guaranteed annuity rate or 'GAR')," says Slater. "And it declared bonuses out of all proportion to profits and assets. In fact, it's been estimated that the cost in excess bonuses paid out to retiring policyholders in the 1990s was £1.8bn."
Equitable Life's attempt to pass on the cost of its guarantees to policyholders failed in the House of Lords in July 2000, increasing the total GAR cost to £2.6bn. "The Society had been so weakened by over-bonusing that it could not pay," says Slater. "In fact, it was so weak that no one would buy its with-profit business at any price." It closed its doors in December 2000 and its directors resigned.
In July 2001 the new board of directors slashed policy values by 16% (about £4,000 million) and proceeded to affect a compromise scheme to deal with the GAR problem. However, Equitable Life's problems were too deep-seated and this was not enough to enable it to ride out the stock market falls of 2001/2002. In 2002 policy values were cut by another 10% and the Society was forced to invest almost exclusively in fixed interest stocks.
With almost none of its money invested in equity shares, it could not operate as a with-profit insurer and its policyholders did not benefit from the stock market's rise in 2003 to 2007. The society is now being both run down and broken up.
The two main reports on what went wrong at the Equitable were published by Lord Penrose in 2004 and by the Parliamentary Ombudsman, Ann Abraham, in 2008. However, both reports were strongly influenced by Slater's own investigations into the matter. Having joined independent action group EMAG (the Equitable Members Action Group), Colin was tasked with preparing a report into the failings of Equitable. Through the examination of in-depth accounts, statutory returns, and other public information, he came to the same conclusions as Lord Penrose subsequently did several years later, despite the latter's greater access to the company's private records.
Slater's calculations were also recognised by Ann Abraham, the Parliamentary Ombudsman, who published her second report on the saga last year. She found 10 examples of maladministration by the authorities and called for the government to establish a compensation scheme, an idea it had steadfastly rejected since 2000. This compensation scheme was devised by Slater.
More recently, Slater has played a pivotal role in presenting evidence to the Public Administration Select Committee. And, after a subsequent judicial review, Slater and EMAG won the right to go to the High Court to take on the Government over its failure to offer full compensation.
Last month, former Appeal Court judge Sir John Chadwick, appointed by the Government to look into the compensation issue, published an interim report, in which he suggested a "flexible approach" to calculating compensation relatively quickly. But the report does not come to a conclusion about which people could be considered the "hardest hit" of Equitable's investors."Although this goes some way towards EMAG's and the PO's wishes, it is nothing like far enough to call off the litigation," says Slater. "It does not change anything: the Court battle will resume when the judges announce their decision in October."After nearly ten years, Slater finally believes the tide is beginning to turn in EMAG's favour. In addition to challenging the Treasury minister's decisions in Court, EMAG is lobbying senior politicians in Westminster; is providing support for the 120 plus MPs, who form the 'Justice for Equitable Life Policyholders All Party Group; and its regional organisation is campaigning in 'sensitive' constituencies.
Meanwhile, 328 MPs have signed an early day motion calling for Government compensation for Equitable Life policyholders. "It's been a long, hard struggle for justice," says Slater, "but the situation is finally turning in our favour." It's also been a personal voyage of discovery. "How often does an accountant try to quantify the losses of an insurance company?" he says. "It's been a steep learning curve but all the signs now look positive."
* for more in-depth coverage of the situation, download Colin's analysis here