Page last updated at 13:51 GMT, Thursday, 15 January 2009

What happened to the Equitable?

By Ian Pollock
Personal finance reporter, BBC News

Equitable Life sign

Once upon a time, until the turn of the century, the Equitable Life was 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.

Along the way it became the pension company of choice for the prosperous middle classes professions.

People such as lawyers, accountants and anyone else who felt they needed to invest to provide themselves with a personal pension in retirement.

The company had little trouble attracting savings and thrived in the 1980s and 1990s.

For many years it appeared to provide a better return on its funds than most of its competitors.

It claimed it did this, partly, by selling policies through its own sales force, thus cutting out commission to financial advisers.

In the process its own salesmen gained a reputation for being among the highest earners in the financial services industry.

As we now know, much of this was an illusion.


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.

The society had never really expected to make good on its promise

Together they outlined a toxic mixture of financial exaggeration by the the society's management, and a succession of government departments and regulators who were asleep on the job.

It all came crashing to the ground in 2000.

The society's own management had initiated a High Court test case to validate a policy they had been pursuing for a number of years - a policy of, in effect, reneging on a promise they had once made to certain policy holders over many years.

Known as the Guaranteed Annuity Rate (GAR) holders, these people had invested in policies which guaranteed a minimum rate of return on their investments once they got to retirement.

The society had never really expected to make good on its promise and had not put enough money aside to do so.

But once it became clear in the 1990s that these policyholders might be able to invoke the guarantee, the society tried to wriggle out of the commitment.

Eventually the House of Lords ruled that the Equitable could not do this.

And this flushed out the astonishing revelation that it now needed to put aside an extra £1.5bn to make good the promise - money it did not have.


All this triggered not only the closure of the society to new business by the end of 2000, but a financial crisis that almost caused it to collapse.

January 1999: Equitable asks a court for permission to abandon a guaranteed pay-out to policyholders it can no longer afford
July 2000: The House of Lords says Equitable must honour its original committments, forcing the company to put itself up for sale
December 2000: Equitable Life closes to new business after failing to find a buyer
March 2004: Lord Penrose's report says the society was the "author of its own misfortune"
July 2008: The Parliamentary Ombudsman says regulators failed to protect policyholders and calls for a compensation fund to be established

It led directly to hundreds of thousands of savers having the value of their policies cut by the new management, for one very simple reason.

The only way the society could survive was by paying investors in line with what the underlying funds were really worth, not with what they had been told they were worth before.

The available money simply had to be spread around more thinly.

People who were still saving were told that their fund values were being slashed.

But in addition, those who had already retired, but had still kept their funds invested in with-profits policies - the so-called "with profits annuitants" - suffered even more.

Their money was trapped in the society and their pensions payments were slashed too, partly as a result of the underlying funds being moved into much safer, but much lower yielding, bond funds.

No reserves

The position of the Equitable, as outlined by Lord Penrose, was startlingly clear, at least with the benefit of hindsight.

The society had used dubious actuarial techniques to make it seem it was profit-making when it was in fact losing money

He found that for many years the society's management had been telling its savers that their accumulated funds were, in fact, worth far more than was really the case.

The society had simply failed to put enough money away in its reserves for a rainy day, allocating far too much of the return on its investment funds immediately to its members.

Lord Penrose estimated that the society had told its investors their policies were worth £3bn more than was actually the case.

On top of that came the £1.5bn bill for the GAR fiasco.

He also found that the society had used "dubious" actuarial techniques to make it seem it was profit-making when it was in fact losing money.


Although the Penrose report pointed to failings at various regulators, like the Department for Trade and Industry and the Government Actuary's Department, it said the blame for the Equitable's problems lay principally with the society's management, who he accused of being the author of its downfall.

However when Ann Abraham, the Parliamentary Ombudsman, published her second report on the saga last year, the regulatory failings were exposed glaringly.

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.

She decided that the authorities had let the society continue trading "on an unsound basis" since 1990, thus letting the public be misled into thinking the society was solvent when it was not.

All along the government has denied that it, and by extension the taxpayer, had any responsibility for the investment and managerial shortcomings of a commercial insurer.

But the pressure on ministers since Ann Abraham's second report has been too great to resist completely any more.

The Equitable is now much smaller than it was, as various parts of the business have been sold by the new management which was installed in 2001.

But it has 200,000 individual policyholders, and 300,000 who are members of group pension schemes, who are still invested in its £6.5bn with-profits fund.

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