This piece first appeared in The Guardian on 20 January 2001
 The text here may not be identical to the published text

On Wednesday December 6^th 2000 senior officials of the Treasury, the Bank of England and the Financial Services Authority met in emergency session. The Tri-Partite Standing Committee is only called together to discuss events which could threaten the financial stability of Britain. The members knew by then, though the public did not, that Equitable Life, Britain’s oldest mutual insurance company, was doomed in its present form. Senior managers at Prudential - the last company in the race to buy Equitable - had decided internally not to go ahead with the sale. It was frightened by the unlimited liability of the company to 90,000 individual policyholders whose guarantees had been upheld in the House of Lords in July. With no buyer, Equitable could fail and the officials met to manage the disaster ahead of the announcement of the twenty four hours later.

It was indeed a Wednesday full of woe for Thursday’s child, Equitable. It had so far to go on Thursday 16 September 1762 when eleven men met in the City of London and approved the foundation deed of The Association of Equitable Assurances on Life and Survivorships. Using the work of James Dodson, a respected mathematician who had worked out the combination of life expectancy and statistics which form the foundations of the modern life assurance business – the science of the actuary – Equitable Life offered fixed premiums and - in a promise that was to echo down the generations - a guaranteed payout on death.

Over the next 238 years professional middle England poured in their money, first for life insurance and then for savings and pensions.. From 1957 Equitable extended the concept of guarantees - promising fixed levels of pension up to 40 or 50 years into the future. As a mutual society with no shareholders and run for the benefit of its members, Equitable seemed to have found the holy grail – low charges, high returns and low risk. Attracted by the promises, doctors, lawyers, teachers, civil servants, politicians, and journalists put their faith and their money into Equitable. What they did not know was that the actuaries who ran Equitable - no company had more per square foot - valued this pension promise at zero.

Those same actuaries (motto making financial sense of the future) failed to spot two trends - falling interest rates and rising life expectancy. Together those changes cut in half the pensions that could be bought on the market. And suddenly the Equitable promise that the actuaries had valued at zero, became an attractive option. But as people retired and tried to claim it, the lawyers stepped forward with a scheme to cut back the pension fund paid to those with the guarantees. They still got their higher percentage, but of a smaller fund, driving down their net pensions to the same level that could be bought on the open market.

So confident was the company that this wheeze was watertight, that when its view of the rules was challenged it paid for a case to go through the courts to prove it was right. But in July 2000, five Law Lords unanimously found the opposite, leaving Equitable with an unlimited liability to 90,000 individual members and - Money Box has discovered - 100,000 company pensioners. The insurance policy it had taken out in the 1980s against the potential £1.5 billion cost of the guarantees would not pay up. In a wonderful stroke of irony, the world’s oldest mutual insurer had failed to cover itself against the House of Lords overturning its lawyers’ interpretation of the law. There was nowhere to turn for the money but the other 850,000 members who had no guarantee. Within an hour of the Law Lords decision, the company told them it was taking all their investment growth from January to July to pay the bill. And in a final gamble, it put the company up for sale, hoping to recoup the cost and repay the members.

But twenty weeks later, Thursday 7 December, when Prudential formally pulled out, the Equitable Board considered the views of the Tri-Partite committee and made the decisions that were announced to the world at 7.30 the next morning. Equitable Life, the world’s oldest mutual life assurance society, would close to new business, cut back on its investment returns, and penalise anyone who left by keeping ten per cent of their savings. Equitable’s President, John Sclater, said it was ‘a sad day’. Managing Director Alan Nash resigned, solaced only by his £200,000 pay off and a pension of nearly £100,000 a year for life. Finance Director Chris Headdon took charge and twelve days later the President and seven other Directors said they would resign when replacements could be found. Presumably people who knew the meaning of the word ‘guarantee’.

But was the House of Lords the iceberg that came out of the dark to hole the safest savings vessel on the seas? Money Box has been told that the disaster was not only predictable but predicted. And while Equitable was telling the world that the cost of the disaster would only be £50 million, it was busy signing up thousands of new members to pay the cost. Mary Francis, director general of the trade body the Association of British Insurers, told us that Equitable ‘took a bet on future interest rates, which was not a wise decision’. The President of the Faculty of Actuaries told us that this unprecedented failure could damage confidence in his profession - he has launched the first ever enquiry into what actuaries did wrong. And a professor of banking told us that ‘risk management at Equitable Life was primitive in the extreme’ and ‘the accounts gave no clue what was really going on.’

The fall-out continues. Four separate enquiries have been launched - as well as the actuaries, accountants, and the Financial services Authority are all looking at what they did wrong and the Treasury Select Committee is investigating what everyone did wrong.

This week, people at the highest level in Government, in regulation, in the law are struggling to find a rescue deal which may be announced this week. No-one knows if it will work. But if the lawyers, politicians, and regulators cannot sort out the problems of the insurance company which they trusted with their money, what hope is there for the rest of us?

20 January 2001

e-mail Paul Lewis on paul@paullewis.co.uk