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The Actuary The magazine of the Institute & Faculty of Actuaries

The Equitable Life

In support of his conclusion that Equitable’s motive in misleading its policyholders was ‘for the sake of ranking in the league tables’, Roy Colbran in his June letter refers me to the Penrose Report; but I cannot see that in that document Lord Penrose, however (unjustifiably, in my view) low his opinion of Equitable’s actuarial management, produced actual evidence of falsification of bonus notices in order to boost sales. This would have been a very serious matter indeed, and if it is really what Roy intended to be inferred from his words, I would advise him to consult a good libel lawyer.

With reference to David Purchase’s letter in the August issue, David sees a ‘world of difference’ between two approaches with a similar financial outcome. A difference of style, not of substance? Yes, but the point I have been making is that had Equitable adopted David’s first approach its numbers would have been not merely similar, but exactly the same.

In this approach the office declares a cash bonus ‘having regard to the (GAR) option’. I take it David means that the asset share is first charged with the cost of the GAR, and the cash bonus tops the value of the declaration up to that share. If any part of the GAR option is not exercised, the equivalent cash can be released. Now if this release is presented as an ‘ex gratia payment’, with no figure for the asset share having previously been given, an impression of cash bonus generosity can be generated where there was in fact none. You may wish to make a comparison with Blairite spin-doctoring of bad news; I could not possibly comment.

In David’s second approach (Equitable’s) the full asset-share value is also awarded no matter what the form in which the benefits are taken. The options are for guaranteed cash plus a terminal cash bonus; or for the GAR plus a smaller terminal cash bonus –smaller because the GAR costs more than the guaranteed cash. Quite straightforward (and yes, David, I do prefer that style); and look where that got the Equitable!

I have been asked if it is not time to draw a line under this subject and move on. Well, no! I think it is in the public interest that the general understanding of how the Equitable ran its business in the 1990s is clearer than has been evident so far. Substantial vindication of the management was effectively awarded by the collapse of the civil litigation and I believe that similar exoneration of the charges laid against the ‘Equitable Three’ under the old rules of the Institute should follow. There would probably be howls of ‘whitewash’ from the ignorant in such an event, but this prospect should not deter us from determining impartially the proper outcome. I would recommend the advance formation by the Institute of a ‘Rapid Response Task Force’!

Exoneration by the profession combined with the collapse of the civil litigation would make a very strong case for the government’s being identified as the proper target for compensation of those policyholders who lost out under the House of Lords’ inequitable ruling, as its agent the Financial Services Authority, on whose protection the public are entitled to rely, could find no fault in Equitable’s differential terminal bonus declarations. Let us hope that our profession’s verdict does not come too late to see such a development at the EU inquiry into the Equitable.