The pensions model that has served the actuarial profession for so many prosperous years is broken.
I comment on Peter Morris's letter in the The Actuary May issue (bit.ly/1Wu7pXQ).
He mentions consumer detriment where policyholders have been exposed to undue investment risk. As he says, policyholders then have a legitimate cause for complaint. He seems to be implying that the compensation schemes will not threaten life office solvency: "not mitigated by compensation schemes". On the contrary,
I suggest that actuaries have been complacent about the threat of compensation schemes to life-office solvency.
Perhaps they have assumed that if the investments ill-perform, that will be the problem of the policyholder rather than the life office. Actually it is the life office's problem if the aggrieved policyholder can successfully seek redress in respect of his unsuitable policy. Such a complaint may well succeed if the policy was misrepresented to him. In fact, all he needs to do is to invoke the case of Savilles v CCL. This groundbreaking case means that if the policyholder proves that his policy was toxic, then his case is won irrespective of what he was told or not told. The case of Plevin v Paragon has had the attention in the media, although Savilles is a far more important case in my view.
Generally speaking, it is assumed that a life office cannot be troubled by a 'run on the bank' situation. The reason being that the surrenders will be on a penal basis, so that the life office will have the funds available to meet the surrenders bill. Complaints redress is another kettle of fish. The redress will be on a special compensation formula in every case. This means that the 'pay-off bill' for each case will be much more than an ordinary surrender value. We can think of these as 'super surrender values'.
Life office valuations should have a built-in contingency rate for enforced redress compensation.
If there is good reason to suspect the redress stampede might emerge at some future date, then reserving for complaints could be a major component of the valuation reserves.
Anthony Pepper
9 May 2016
