Equitable wins right to sue directors

Equitable wins right to sue directors Equitable Life has won the right to sue nine former non-executive directors for £3.3bn. Equitable claims the directors failed to protect the company's policyholders
from huge losses.
The directors deny that they are to blame for the financial crisis which hit Equitable Life in the late 1990s.
Mr Justice Langley, a High Court judge, was urged by the counsel for the non-executive directors to strike out the claim as "hopeless" and a waste of time and money before it got to trial.
However, the judge has decided that the non-executive directors have a case to answer.
The non-executive directors will join six former directors of the Equitable in court.
The case is expected to set a precedent for future cases being brought against non-executive directors, and could discourage people from taking on such posts at all.
Blame
Commenting on the decision, Vanni Treves, Chairman of Equitable Life said: "We are pleased, but not surprised, that Mr Justice Langley agrees that this case should proceed to trial.
"The Board believes there is a strong claim against the former directors and in the interests of policyholders it has a duty to proceed."
FORMER NON-EXECUTIVE DIRECTORS IN COURT Peter Davis - first director general of National Lottery David Price - of investment bank Warburgs John Sclater - board member of Foreign & Colonial Investment Trust Peter Sedgwick - ex-Schroders Bank chief Jonathan Taylor - former chief of food wholesaler Booker Alan Tritton - commercial banker Peter Martin - former solicitor Jennie Page - former Millennium Dome boss David Wilson - chairman of housebuilder Wilson Bowden
Groups representing hard-pressed policyholders, who have seen the size of their savings slashed by the insurer expressed relief at the decision.
"It is good that the directors will have to answer for what we see as maladministration. The current Equitable board has promised they will only pursue the case if it makes economic sense," Liz Kwantas of Equitable Life Members Help Group told BBC News Online.
In September, Lawrence Rabinowitz QC, defending six of the nine, told the court: "The only effect would be the ruin or near ruin of these individuals in trying to defend themselves, without any benefit to society."
He added the action against the nine had resulted from "the usual thrashing about to find as many people to blame as possible".
The former directors sat on the Equitable Life board between 1996 and 2001 and are accused of negligence and failing in their fiduciary duty.
Equitable's problems came to light in 1999 when it admitted that it could no longer afford to pay policyholders with guaranteed pensions the amount they had originally promised when interest rates were higher.
These policyholders took the company to court when it tried to back out of its previous commitments.
Equitable Life lost the court battle and was left with huge legal bills, as well as being forced to pay the policyholders what it had said it could no longer afford to.
The mutual survived as a result of a compromise deal reached with the policyholders but has been steadily losing customers ever since.
Auditor sued
The crisis forced the society to close to new business and drastically cut members' savings.
In July the Equitable was given leave to bring a case for damages against former auditors Ernst & Young for £2.6bn.
The insurer claimed that E &Y failed to warn it of the financial liabilities it faced from the guaranteed annuity products.
If it had known what level of provisions it needed to have made, Equitable said it would not have declared the bonuses it did during the late 1990s.
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former

liabilities it

said

(1) What "provisions" did the Equitable's "Appointed Actuary" actually recommend?
(2) Who recommended the bonuses that *were* declared during the late 1990s?
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<snip>
Ignoring inconvenient facts like a) they don't have that much between them, probably not a 10th of it, and b) their Liability insurance wasn't good for that much either.
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I can see a case for making an example of people who had behaved extremely irresponsibly, but I think it's pretty unlikely that that's the case here. The thing which really blew Equitable up was the court case about paying the guaranteed annuities, and I imagine they had legal advice on that which said they would win.
--
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Yep, the Law Lords decided that ethics/morals/natural justice should take precedence over Equitable's attempts to wriggle through the loopholes (as in 'the annuity rate is guaranteed, but we can reduce the lump sum it applies to so the answer comes out the same). In this case I think the LLs got it right.
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I think that's not so clear, effectively they were adjudicating between the claims of two groups of people, those with and without GARs, and it's not that obvious that natural justice favours benefitting the former over the latter (similarly with the rule that pensions in payment take absolute precedence if a pension scheme is insolvent). Also there is no general justice of that kind in the way bonuses are declared, as we well know insurers can impose fairly drastic reductions after a specific cut-off date as long as they do it to everyone, so it's not particularly clear why it's more unfair to vary bonuses in other ways.
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The other bit of "natural justice" is that EL over-allocated bonuses on their WP funds during the 1990s, and those policyholders did very well. Those people, especially if they just happened to get out of EL c. 1999 or transferred to unitised funds, are not normally heard complaining loudly :)
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I don't think it's intrinsically any different from secured/unsecured creditors. Their real mistake was putting both GAR and non-GAR funds into the same pot, and declaring the same annual bonuses on both.
Solving the problem by saying 'your policy matures, it has an open market value of 100k, which you can buy a 6% annuity with .. or if you want the 12% guaranteed annuity, it's only worth 50k' is just a fudge, and renders the word 'guarantee' meaningless.
Like I said, I'm with the LLs on this one, however opinions are bound to differ. Bonus clawbacks hit both GAR and non-GAR fund holders, although the latter probably got a worse deal ('probably', because you have to make your own mind up about what the guarantee 'should' have been worth).
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I think that's a rather misleading way to put it. There was only ever one pot, i.e. one with-profits fund, I don't think it would ever have made sense to have more than one, for any insurer. The GARs are not directly connected with that at all, they were an independent promise to some people that when they came to buy an annuity, under certain conditions they would get at least a particular rate. The problem is that that promise was seen as a marketing attraction rather than anything which really needed to be costed (as the life insurance component is, for example). That was coupled with the fact that in a mutual there is no-one but the members to bear any liability.
It's a bit like the fact that your home insurance policy typically has third-part liability cover with some high limit like several million pounds; it's quite possible that no insurer has ever had to pay out the maximum, and certainly they will not have allowed for anything which would lead to correlated claims by large numbers of people. Equally I doubt that anyone buys home insurance on the basis of the third-party cover.

Of course it's a fudge, but they had to do something given the situation as it was (actually it's just as well they didn't wait, it would have been even worse a few years later). And as I've pointed out many times, the word "guarantee" *is* meaningless, at least in the sense that many people take it.
On the issue of fairness, it seems to me that a significant part of it is the extent to which people with GARs were actually relying on them in any substantial way. My guess would be that the vast majority of policyholders didn't even know they had them, given how little most people know about their pensions.

The legal decision had to rest on (an interpretation of) what the law actually says, not on any general concept of fairness, and I have no idea what the detailed legal arguments were - and nor have you I suspect!
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Daytona wrote:

This comment really annoys me. The other comment I've read several times is that companies won't be able to find non-executive directors. This misses the point that unless non-executives stand up for the interests of the shareholders/policyholders and scrutinize the work of the execs there isn't much point having them.
Thom
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What do you expect them to do? Non-execs will typically meet for maybe one or two days a month, and will rely on the information the company gives them. If anyone should have caught this it would be the auditors (also being sued it seems), but even there they have to rely on getting the right basic information, so they will only end up being liable if they can be shown to have known the true situation. This seems to be more about finding scapegoats than anything. In this case the underlying problem is that the guaranteed annuity rates were introduced as a marketing gimmick at a time when no-one expected them to really matter, and they didn't get plugged in to the actuarial calculations until it was too late. That kind of thing isn't anyone's fault in particular, it's a failure of the whole system.
--
Stephen Burke


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"Stephen Burke" wrote

If they didn't allow for the guarantees in the valuation calcs "until it was too late", I'd say it *was* someone's fault - either the person who instructed them not to allow for the guarantees, or otherwise the office's Appointed Actuary who should have thought about this properly.
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I don't know anything about what really happened, but I doubt that there was any one person or small number of people who made such decisions - it's much more likely that forgetting about the GARs was an oversight than an explicit decision by anyone. In principle it should have been the actuaries who spotted it, but there were probably dozens of them over the years, so which ones in particular? And how were they expected to know about them? I've heard comments, which may or may not apply to Equitable, that some insurers didn't even keep an internal record of which policies had the guarantees. Again you can say that's obviously a mistake, but it's very hard to pin down exactly who was responsible, out of all the hundreds of people who would have been involved at one time or another. Also, this problem exists for many insurers, not just Equitable, so should the directors and auditors of all the others be coughing up as well?
--
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"Stephen Burke" wrote

was

much

explicit

spotted

in

That's easy. At any one moment in time, there would be exactly *one* "Appointed Actuary" for the office (as for all other life offices). That's the one person who should have known about these, and should have instructed the valuations accordingly.
Ie whenever a valuation was being performed (eg usually once a year), the "one in particular" would be the then current Appointed Actuary.
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Err, yes, but the problem didn't exist at one moment in time, it was around for a couple of decades. It seems that essentially all the actuaries working for all the insurers managed to miss it. In that situation it's hard to make a case that any particular one was culpable.
--
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"Stephen Burke" wrote

around

working

make a

I'd say rather the opposite - they *all* should have "noticed it", hence *all* should be "culpable".
Have you ever read GN1 (Guidance Note 1, "The Prudential Supervision in the UK of Long-Term Insurance Business") of the Institute of Actuaries, aimed at Appointed Actuaries & their duties?? :-
http://www.actuaries.org.uk/files/pdf/map/GN01V5-1.pdf [This link is to an old version of GN1, which was effective from end of 1998.]
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It would be a very hard case to make. To prove negligence you have to show that people failed to do something they could reasonably have been expected to do. If essentially everyone in that position has failed to do it the starting point is going to be that it wasn't reasonable to expect it. (It would also be even more vindictive than suing the directors, given that the actuaries' assets are probably negligible.)
You could also consider a somewhat similar question. Actuaries make assumptions about life expectancies. It's possible that there could be a medical discovery which would allow essentially everyone to live to be 130, and that would blow a hole in all insurers (and all final salary pensions) in a similar way. Are actuaries being negligent in not taking account of that possibility?
--
Stephen Burke


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"Stephen Burke" wrote

130,

in

That's not the same thing at all.
You said that Equitable did not allow for the value of the *known* guarantees until too late. Your example above is of *unkown* future factors.
I was suggesting that, as the Equitable had written their policies with the guarantees, and therefore knew that the guarantees existed, then they should have allowed for these whenever performing an (annual) valuation.
Of course, the "medical breakthrough" you suggested would actually mean that life assurance policies generally paid out much later, therefore would *help* insurers. So the effect on the insurer of this type of thing would depend on the proportions of "assurance-type" policies on the books of the insurer, compared to "annuity-type" policies on their books.
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The reason the guarantees cost so much now is that annuity rates fell sharply in the 90s, and people didn't forsee that; at the rates available when the policies were written the guarantees were worth pretty much nothing. Part of the reason for that fall *is* an increase in lifespans, and there is no way to hedge that (unlike the fall in interest rates which is the other part). All actuaries can do is guess how life expectancies will change, but what do you do if the guess turns out to be substantially wrong?

With hindsight they should, but to show negligence you have to show that they should have realised it at the time. They were left out originally because the value was negligible, but that meant that no-one noticed when it started to become non-negligible.
In some ways it reminds me of this:
http://www.mssl.ucl.ac.uk/www_plasma/missions/cluster/about_cluster/cluster1/ariane5rep.html
which is well worth reading for students of human error.

I'm pretty sure that that would come nowhere near balancing the loss, and it certainly wouldn't help pension funds.
--
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"Stephen Burke" wrote

sharply

Fair enough. So, the reserve in the first valuation for guarantees would have been negligible. However, then - year on year - the reserve set in the annual valuation should have been increased higher and higher, as the experience unfolded and different valuation assumptions were introduced to value the guarantees that had been sold. In turn, the bonuses declared would also have reduced to compensate - in a more realistic fashion than ignoring guarantees from the annual valuations.
If this had been done properly, with a small step each year, then a huge leap would not have been required later!
"Stephen Burke" wrote

way to

All

you

Simple - adjust your valuation assumptions each year. No excuse.

"Stephen Burke" wrote

they

the

to

Why do you insist on not reading my earlier posts? (1) Appointed Actuaries *have to* comply with GN1. (2) GN1 states that guarantees *should be* considered when performing the annual valuation. (3) Appointed Actuaries need to confirm that they have complied with GN1 when they write the annual valuation report.
What more is necessary to "show that they should have realised it"??
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