FOOL'S EYE VIEW
It's An Inequitable Life, Henry

By Jane Mack (TMFJane)
March 9, 2004

A few days ago a friend of mine was talking to me about pensions. She said she was beginning to think that the only safe place to keep her retirement pot was under the mattress.

Now that the long long-awaited Penrose Report into the near-collapse of the mutual life office, Equitable Life, has been published, you can understand why. His description of how the once highly regarded Equitable Life Assurance Society was managed and regulated over a thirty-year period is shocking. It's not surprising that angry policyholders who have lost varying amounts of money in the Society have nicknamed it ALAS.

Because, alas, it turns out the Society's finances were not only badly managed but that the people tasked with the job of double-checking the management of the organisation's finances - from the board through to the government regulators - were ineffectual to say the least.

The story detailed in Lord Penrose's 800-page report can be summed up like this:

Many years ago the Society devised a product that would guarantee a certain rate of interest for policyholders who chose to buy the product. Unfortunately, when interest rates fell and the stock market didn't do what was expected, they had to fork out far more than they'd anticipated to these policyholders. Not surprisingly, they eventually ran out of money causing losses of an estimated £3.5 billion for its one million policyholders.

That's the simple version. According to Lord Penrose, the Society's financial problems can't just be blamed on the particular product that was sold. For a start, he says that throughout much of the period he's been examining, the man in charge of the actuarial side of the business, Roy Ranson, didn't always fully always explain to the members of the Board the extent of the Society's liabilities to its policyholders.

Information was given to them in dribs and drabs so at no time were they ever given the full picture of the firm's financial problems all in one go. In fact, Lord Penrose says none of the non-Executive directors would have understood the problems anyway, even if they had been told the full picture. The actuarial side of the business was far too complicated for them because their experience lay mainly in general financial services. According to Lord Penrose, the non-executive members "...at no stage got fully to grips with the financial situation faced by the society: information was too fragmented, their collective skills were inadequate for the task."

They left that side of the business to Mr Ranson, who, eventually, took on the role of Chief Executive of the Society as well.

Lord Penrose makes it clear that he wasn't terribly impressed with Equitable's management team throughout the Eighties and Nineties but he seems particularly unimpressed with Mr Ranson who he says hid vital information from fellow directors, the policyholders and the regulators.

He describes him in the report as manipulative and autocratic and, regarding his dealings with the regulators, says he was frequently aggressive, dismissive of their views and concerns and obstructive to scrutiny.

Let's move on to the role of the regulators. Nowadays we have the Financial Services Authority, an independent body whose role is to keeps checks on the way financial companies are run and to protect the consumer. But throughout the Eighties and Nineties, such matters were the responsibility of various government departments - first the Department of Trade and Industry and then the Treasury. The policy of the government of the day was 'light touch' regulation.

However, 'light touch' does not mean 'no touch'.

For verification of actuarial figures presented by the insurers they were regulating, these civil servants relied heavily on the services of the Government Actuary's Department. Although GAD is a government department, it's run on commercial lines as an actuarial consulting firm giving independent professional advice. However, Lord Penrose describes their standards of scrutiny at the time as complacent. They were slow to criticise or challenge the information that came their way.

Lord Penrose admits that the management of Equitable Life made the job of regulation very difficult. Mr Ranson and his immediate successor certainly kept them in the dark. But he says the regulators should have tried harder than they did. "Unsatisfactory answers were accepted without follow-up. Lines of inquiry were abandoned or postponed in the face of resistance." He adds: "No problem was considered serious enough that it could not be left until next time."

And, finally, we move on the government's interpretation of the report. As Lord Penrose says, most of the fault lies with the Society itself and that can't be denied. But it seems the government regulators played a part by failing to supervise the firm properly.

The current government's way of dealing with this secondary factor is to lay this element of the blame squarely at the feet of the previous government. They say the government at that time clearly intended to regulate on a 'light touch' basis otherwise they'd have put stricter controls in place. As a result, the current government has ruled out paying compensation to the policyholders of Equitable Life.

Which bring us to the nub of the matter. Who is going to pay for the huge losses suffered by the policyholders? They can't sue Equitable Life because they'd be suing themselves. The firm itself is currently suing a number of former members of the board and also its auditor. But the losses are thought to be more than £3 billion and who's got that kind of money? Only the government - aka the taxpayer - and why should he pay?

The fact is, while the political colours of 'Her Majesty's Government' may change from time to time, if a government regulator has failed to properly supervise the organisation that it is tasked with supervising, then surely some of the responsibility lies with 'Her Majesty's Government', whatever colour it happens to be at the time the failing comes to light.

It's an alarming thought that your pension pot may invested with an organisation that is run by an 'autocratic' chief executive who is overseen by a clueless board. But it's even more alarming that those in overall charge of regulating the industry will try to abrogate total responsibility should things go wrong. Penrose closes his mammoth report with the following:  

"...it may be appropriate to comment that the practices of the Society's management could not have been sustained over a material part of the 1990s had there been in place an appropriate regulatory structure adapted to the requirements of a changing industry that happened to manifest themselves in an extreme form in the case of Equitable Life."

Confidence in the savings industry needs to be restored. At least people would stop thinking they have to hide their money under the mattress to ensure its safety. And, more importantly, at least people would continue saving in the knowledge that the government will help to protect their money. There'd be little point in saving otherwise.

Besides, who's going to have to look after people if they stop saving and have no money when they're old? Why, the government of the day, of course - aka the taxpayer.

Penrose Report | Equitable Life discussion board

The author has about £3,000 invested with Equitable Life - although it's probably a lot less than that by now.