Chris Headdon -Chief Executive of Equitable Life

Michael Foot - Managing Director of the Financial Services Authority (FSA)

Vincent Duggleby - Personal Finance, Radio 4

Mary Francis - Director General of the Association of British Insurers

Stuart Bayliss - Director, Annuity Direct

David Hyman - Action Group

Janet Walford - Editor of Money Management

Richard Dale - Professor of Banking at Southampton University

Ned Cazalet - Independent Insurance Analyst

Richard Ottaway - The Conservative Shadow Paymaster General

Vincent Cable - Liberal Democrat

Susan Wood - Policyholder

Peter - Policyholder

"Equitable Life, one of the oldest insurance companies in the world and one of the most respected has faulted. I mean this is a company that everybody trusted and if a company like this can get into trouble well it must make ordinary mortals think twice before investing their money with an insurance company".

"Although certainty wasn’t achieved until the 7th, we had had indication a day or two before that you know it was possible things wouldn’t go as we hoped and we discussed that possibility with the FSA".

"By that stage we were in a sort of highly proactive mode trying to make sure that if that was indeed the case, first of all that the announcement got out in an orderly fashion, that there would then be as much information available for Equitable policyholders who would obviously be surprised and shocked by this decision".

"Nineteen minutes to eight, just getting some news about Equitable Life, they have to have a buyer because they’re in trouble. Mary Garnett isn’t like that?"

"No, the Equitable Life has just announced that it’s closing to new business with immediate effect. This was the company that was involved in the court case in the Summer".

"I heard that the Equitable Life was closing its doors to new business on the radio and I don’t think it would be too strong to say, I was utterly and completely gob-smacked. I found it quite difficult to put myself together for quite a while. I tried to phone Equitable Life and I actually hung on for two hours and got absolutely nowhere".

"I wrote shortly afterwards to the Manager at the local Equitable Life Office. I had the feeling that the policy had been mis-sold to me".

"I feel as if I’ve got no control. I clearly don’t understand what’s going on, I can’t trust the information I’m given. What else can I say? I feel wretched about it".

"The long-term damage at a very inconvenient moment has been done to the concept of pensions. More and more I hear people say, I’m not taking a pension plan out, I’m just going to invest in an individual savings account or I’m going to buy a property. I am not going to fund my pension with a pension and that’s bad news".

"Because of the risk. The risk that you take if you simply go into the equity market you might do extremely well for two or three years, you might do extremely well for ten or fifteen years in a property. But at the end of the day you’ve got to buy an income for life, and if at the time you decide to draw that income, the underlying investments have gone south, perhaps because of a stock market crash, perhaps because of a property crash, it’s no good saying, oh well, never mind I’ll postpone my retirement for ten years, you can’t do that. You have got to have the money at the time you need it and you’ve got to have the certainty and security, which quite frankly only insurance companies can offer you".

"One can’t deny that there is concern raised as a result of this case that’s bound to affect people’s perceptions of the industry and lead people to say, is saving going to be worthwhile?"

"When they die the payout is guaranteed".

"You have to go back twenty years to understand how the Equitable built up its reputation with professional people. I’m not talking about just journalists and lawyers and solicitors and all these sorts of people and the reason was two-fold. First of all, Equitable Life was consistently at the top of the performance tables. Ten, fifteen, twenty years, they were there paying out the big sums of money for pensions and life insurance and when the whole pensions regime changed in 1988, when personal pensions came in, you had what of course subsequently turned out to be the huge scandal of insurance companies right, left and centre ripping the

public off and the Equitable stood aloof from this. They were different. They did not have a high pressure sales force. They kept their costs under control. So in a sense they built on a long-term success".

"And policies really came in in the late ‘50’s when pension plans for the self-employed first became available under legislation and in those days they were designed to provide a pension so the guarantee gave you a certain minimum level of income that you knew would be there".

"Essentially your money is invested in a general pool which is then invested on the stock market and elsewhere on behalf of everyone. In the pool you get some profits year by year, but some of the profits are held back and smoothed over the period of the policy, so that the final return you get isn’t directly linked to the ups and downs of the market, but is more even and you take less risk."

"Interest rates started to fall and that is the key point where Equitable suddenly saw this rather obscure benefit that you had, the guaranteed annuity rate, which of course on their older policies suddenly started to become worthwhile and we looked at our policy and we thought, hang on a minute, oh I can get 8, 9, 10%, oh that’s pretty good since the current annuity rates are only maybe 7 or 8. Now at that stage no alarm bells rang, I mean after all, big insurance company, masses, millions of pounds of reserve, surely it should be enough. But there was a warning sign and that was when Equitable started to switch the emphasis from their annual bonuses towards the terminal bonuses, which were not guaranteed".

"Good morning Annuity Direct, Simon speaking. Yes can I ask who’s calling please?"

"Well, we first started getting complaints from clients about the policy in 1997, and we argued with Equitable that what they were doing was not fair and not right under the terms of their policy through to mid-way through ‘98. Then by then we had reviewed lots of insurance companies’ attitude to guaranteed annuities, and nobody, very few people were getting it right. It was a long time since these policies had been written. The admin staff didn’t know what a guaranteed annuity rate was etc. So there was a lot of review of that, and we wrote a review which was called ‘The Good, the Bad and the Ugly’ and the ‘Ugly’ one, most were in ‘Bad’, the ‘Ugly’ one was Equitable and that’s what started the Action Group".

"I think what you’re referring to is the situation in the early ‘90’s when interest rates began to fall and the guaranteed rates began to compare quite favourably with the current rates. The question then, was what was the fair amount of terminal bonus to add on to the policy, and the view the society took was that the fair amount was to give a policyholder the same value of benefits whichever way they decided to take them".

"I bought a certain sort of policy which offered certain sorts of benefits, I still think I’m entitled to those benefits. Equitable were trying to say that, I wasn’t entitled to all those benefits. They brought the case, I didn’t bring it, they wanted certainty and finality and didn’t want this constant drip of complaints to the ombudsman and bad publicity and they obviously thought they were going to win in the courts".

"Well, it all happened very quickly. We assembled in the House of Lords to hear the Judgement in the actual chamber and we heard one judgement after another fined against the society and in my favour. We then trooped out of the House of Lords’ chamber and within, I think, fifteen minutes of the verdict, Equitable had put themselves up for sale".

"Equitable Life, the worlds oldest Mutual life insurer has lost a crucial case in the House of Lords which will cost hundreds of millions of pounds. The Equitable says the ruling means that it will have to look for another company to merge with".

"We were both surprised and deeply saddened because clearly we recognised the immediate impact that that would have on the policyholders. As you know the immediate consequence was that we decided we would need to de-mutualise.

We’d had a very strong culture of mutuality and all of us who had worked for the Equitable for years had been sort of imbued with that spirit of focus on the policyholders. So it was a very sad day for everyone".

"Equitable Life has had some excellent fund performance in the past and its policy of distributing money to with-profit policyholders was well liked by the policyholders because they didn’t build up huge reserves, which could have been paid to policyholders. Instead of that they passed the money straight on and because of that they rose up the performance tables and sold a lot of new business on the back of it. I mean, Equitable Life would have continued to be a highly successful office if it hadn’t have been for the terrible mistakes it made over guaranteed annuity rates. If it had kept on operating the way it was, passing on its profits, not having huge reserves. Yes some might say, it was sailing rather close to the wind doing that, but it was the guaranteed annuity debacle which really put the cat among the pigeons".

"The risk management controls at Equitable Life were primitive in the extreme because they should never have recklessly issued these guarantees in the first place without thinking about how they were going to meet them, because these were twenty year plus and you have to consider the possibility of a different state of the world in a different level of interest rates, and of course it’s astonishing that they didn’t do that. But that’s what happened. So these guarantees, as you say, they probably thought they were worthless, they turned out to be extremely valuable and they’re getting more valuable by the day".

"We reckon that the sort of financing required from a potential bidder would have involved putting in around four or maybe even five billion pounds to shore the thing up and to give it a respectable level of financial security going forward. The way stock markets have gone recently, and these guarantees, and there are legislative changes which have caused life assurance companies to increase, you really want to put it on an even keel and you’re talking about several billions".

"The crisis at Equitable Life has struck right at the heart of the British establishment. Judges, civil servants, parliamentary staff, even MP’s have all put their faith and money in Equitable Life. So it’s no surprise that members have taken a keen interest in what went wrong with Equitable Life and who is to blame".

"Well, there’s no doubt in my mind that the regulators got it wrong and they made a mistake. You only have to look at the guidance from the Treasury’s insurance directorate, which in its language said to the Equitable, what you’re doing is the right thing and it was not unreasonable for the Equitable to have relied on that advice. There is clearly a duty of the Treasury to provide reliable advice because the policyholders are relying on it and therefore they are in the firing line for compensation".

"Our primary concern is over the company’s ability to reserve adequately for these guarantees. The information received to date is unconvincing and raises serious questions about the company’s solvency".

"I was shown the confidential memo, which some people have called a smoking gun, which did suggest that as early as the beginning of 1999 the Financial Services Authority was in possession of advice. But even if the House of Lords’ ruling hadn’t gone so badly wrong, the company was still in serious difficulty. It had major liabilities that it couldn’t cover and I think the question then is, well if that was the case, why didn’t the FSA act more decisively. Large numbers of people have acquired policies in good faith, not aware of the risks they were running".

"What he was expressing was concern over the statutory requirements we set. Now that is an absolutely normal part of the regulatory process. If firms and ourselves take different views about allowances to make provisions for things like this. What happened immediately after that was a series of meetings, and of course it’s not just the Equitable, other companies were involved in the same sort of issue, about fifty companies over all have issued this kind of business over the years, which was resolved with a much higher requirement set by us, which the Equitable made provision for in their statutory terms".

"What it means is, we’ve asked questions which we haven’t yet had full answers. What it was signalling to me was that there was an urgent debate that needed to take place and it did".

"Well, that’s what the policy’s clearly said, that is the element of the House of Lords’ judgement, which was particularly surprising".

"The FSA has made it clear that although Equitable Life is no longer accepting new business, it remains solvent and capable of meeting its contractual obligations to policyholders. Compensation for insurance policyholders is available if a firm becomes insolvent. That is not the case with Equitable Life".

"I finally signed a few weeks before the court case was lost and I kept asking him, was this a wise time to do this? I would have been much happier to leave it really until after the court case was settled. I certainly don’t think a decision like this should have been taken with a court case hanging over the company. I think the timing was wrong, and I think the advice was wrong. I feel the bottom has been wrenched from my future financial stability".

"Well, when I heard that Equitable had closed its doors to new business, obviously I was certainly a little more concerned, and in fact I wrote shortly afterwards to the Manager at the local Equitable Life office suggesting that the information I’d been given back in July wasn’t that good after all, and in fact I had the feeling that the policy had been mis-sold to me".

"Well, I mean that was thought to be a very remote contingency and we put quite a full explanation in the report and accounts to try and explain the background, and of course what normally happens at a House of Lords’ hearing is that it either upholds what the Court of Appeal has said, or rejects it".

"Well, I mean there are all sorts of very remote contingencies that can affect business and I think if all those were gone into in considerable detail our report and accounts would look like a telephone directory".

"Clearly, it was a judgement call and the judgement call at the time, you’ll remember, is that the overwhelming opinion from everybody involved was that there would be a significant number of bidders for this society. It had a very high reputation and people were talking about a purchase price of £3½, £4 billion, all of which would have gone to the existing policyholders of Equitable. So had we stepped in at that point to close its new business, I’m sure we would have been met by a storm of protests at that time from people saying, you are depriving us of the chance of getting a cash payment for the goodwill of this excellent organisation".

"Well, I believe the figure is about 15,000 altogether, which is obviously a very small proportion of the total number involved, and not all of those would have been with-profits".

"Well, of course we regulate some 8½ thousand firms, £175 million goes an awful long way. But again, as I say, we are also not, and we’ve tried to make it clear in recent months, we are not promising a no-failure regime, that is something we just couldn’t deliver and shouldn’t deliver, and you know in this sense it is very important to keep perspective. There is no money missing, there is no fraud, there is nothing of that kind. What has happened is that people’s expectations of the future are lower than they actually were, which is I mean of course a worry for them, of course a concern, and we’re still working very hard to try and deal with that".

"I don’t think that’s a fair reflection of people’s attitude towards the Equitable’s policies. Equitable had a very big with-profits fund. Now the sort of clientele they had were the sort of people who liked with-profits but don’t want to take too much risk. I mean if I want to take a risk I’ll go into the stock market. I’ll buy shares, I’ll buy unit trusts, investments trusts and so on. I don’t gamble pension money on the stock market. That is why a good with-profits fund, so-called smoothing, as they say, you know, is a very suitable vehicle for a long-term investment. But the problem which we didn’t really fully appreciate was how much "profits" Equitable were making, and as it turns out they were not making enough profits for the distributions they chose to make".

"I think it actually damages the whole insurance industry because the with-profits concept was always a means of safety, security, spreading the risk, smoothing the fluctuations, and so on and so forth. What the Equitable has shown is that the whole thing is really in a sense a bit of a sham. In other words you are reliant upon company directors who don’t have to tell you anything, that’s the problem. They don’t have to tell you how much money is in the fund and we simply do not know what the Equitable could afford, even as I speak. I do not know, they may have reserved enough, they may not. But the thing is so shrouded in mystery, that I think the lesson from this is that the with-profits concept has been damaged and people will in future simply say, well I don’t trust the insurance companies to treat me reasonably, therefore I won’t take that product. Which I think is a pity and I think people will live to regret the fact that they will have a greater risk in their pensions in other types of policy in the future".

"We always have the same attitudes towards with-profits policies. They smooth investment returns and it helps you to sleep better at night".

"Dent it severely, I mean we’ve had all the pensions mis-selling scandals over the last few years which started with Maxwell, what more do people need? Every time they open the papers, there’s some new mis-selling scandal but now Equitable Life, one of the oldest insurance companies in the world and one of the most respected, has faulted, and I should think it would make them think very hard before they invest their money. I mean this is a company that everybody trusted".

"I think the first thing to say, is that the circumstances at Equitable Life were one-off, but one can’t deny that there is concern raised as a result of this case that’s bound to affect people’s perceptions of the industry and lead people to say, is saving going to be worthwhile? Of course, I’m quite sure that it is, and that many companies are providing excellent returns for savers. So the first message from Equitable Life is don’t panic".

"We’ll need to wait for the results of the inquiries that are going on to understand the exact circumstances, but I think they included the fact that guarantees were given to a large group of policyholders, that those in turn rested on a bet about the way interest rates would move in the future, that the company seems to have been under capitalised not to have had enough reserves to cover that risk, and the fact that there weren’t shareholders’ funds to help extend the reserves if that proved necessary. But I’m not the person to give the definitive judgement on this. It’s clear though that the circumstances were unique in the industry".

"As far as I can see the circumstances at Equitable were a unique combination".

So Equitable Life, unique as it is, gambled it’s own reputation and the security of its members’ savings on what Mary Francis calls a bet on interest rates. Others have told us of course that Equitable remains solvent, can pay its debts. Ned Cazalet is more sceptical:

"The regulatory system has chopped and changed a bit in the past few years and I suppose the regulators make sure that Equitable is seen to be solvent. Well, it still is solvent, but it’s a pretty thin sort of solvency".

"Well, I think we can look at this in two ways. I think it’s fair to say that the security for Equitable policyholders is pretty thin and that must be a worry. Having said that, of course, they have been piling a lot of money into safer investments because they no longer have the financial strength that warrants taking a slightly riskier investment strategy. But there is a possibility that going forward, that contrary to what’s happened perhaps in the recent past, that actually an investment strategy which involves quite a high holding in maybe safer investments, such as government securities and cash, could actually pay off. So I think people are perhaps in danger of getting into sort of a frenzy over this thing where perhaps they ought to be a bit more calm and collected and think of the longer view".

"Well, the purpose of the adjustment is to ensure that those who want to leave receive a fair value, but that they don’t leave those who decide to stay behind in a worse position than if they hadn’t gone. We set the adjustment at 10% in order to achieve that in December and financial conditions, although they’ve moved around

a bit, on average they’re not that different, and from then, and the 10% continues to be appropriate. But if circumstances change a lower or higher adjustment might be appropriate to achieve that degree of fairness".

"Well, of course I mean the actual cost will only be known many years into the future because it depends on future experience, particularly the level of interest rates from time to time. As the actuary advising the Board on how to adjust final bonuses to allow for the House of Lords’ judgement, I had to take a view and the figure you indicate affects that view, experience over the remainder of the year was consistent with that and as a long-term view I see no reason to change it".

"Yes, I think what everybody accepts is iniquitous, including those that are sitting there with the benefit, is that these GAR holders post the House of Lords, if they put a hundred pounds now in new money into their policy, somebody else has to come up with roughly £25.00. How you then work out a way of covering all these difficulties, getting a scheme that’s simple, and all the rest of it, is a matter of current debate".

"Did the management get it wrong? The answer to that is clearly yes. I mean we now know what the House of Lords decided, a sequence of decisions were taken and everyone deeply regrets the outcome of that".