Equitable wins right to sue directors

(1) What "provisions" did the Equitable's "Appointed Actuary" actually recommend?

(2) Who recommended the bonuses that *were* declared during the late 1990s?

Bitstring , from the wonderful person Daytona said

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.

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

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.

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" 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.

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.

I don't know what the details are of the specific case and you might be right (in that they might have done nothing wrong), but I don't agree with the general implication that because non-execs don't meet very often they don't take on any responsibilities with their salaries. They have legal responsibilities that can't be evaded by saying that it would make it difficult for compamies to recuit non-execs in future. Companies are supposed to have non-execs chair the audit and remuneration committees (and those non-execs get paid more). What is the point unless those non-execs make a serious attempt to scrutinize what goes on in the company. In this case the non-execs might well have one that (e.g., if they were misled by the independent auditors of the executive directors), but IMO neither lack of time, nor incompetence would count as adequate excuses. From my limited knowledge in this case the execs seem to have been arrogant and/or incompetent in not seeking legal advice about the status of the guaranteed policies. I think the non-execs might have been foolish and/or incompetent in not instructing/requesting the execs to take such legal advice. As I understand it the chief exec thought that the guarantees didn't have to be honoured (because of a legal loophole), but this was never checked.

Thom

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?

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.

They certainly do have responsibilities, but in general it's do to with corporate strategy, not operational matters. For example, where companies took on huge debts in the tech boom to buy other companies at inflated prices you could certainly ask what the non-execs were doing. For quoted companies they are also supposed to be making sure that the executive directors are acting in the interests of shareholders rather than in their own personal interests, and for a mutual the same goes for the members' interests.

As I say, I think that's just unrealistic. Suppose you had been appointed as a non-exec of Equitable, what do you think you would have done? If you think something is fishy you can ask for more details, but if you don't know anything is wrong at all you have nowhere to start.

I don't believe that, I'm sure they had lots of legal advice, and as far as I remember many independent commentators expected them to win. In any case it's not that obvious what they could have done at that stage, the only real difference was for those people who took out policies immediately before the court case who were given the impression that everything would be OK.

They were going to honour the guarantees, but they were going to give the people with GARs a smaller payout than the ones without. It wasn't really a loophole, it was just legally untested until that point.

"Stephen Burke" wrote

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.

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 :)

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).

rates were

expected them

actuarial

isn't anyone's

I don't agree. Equitable's behaviour after they did get "plugged-in" is at the heart of the scandal.

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!

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.

"Stephen Burke" wrote

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?? :-

[This link is to an old version of GN1, which was effective from end of 1998.]

That is mixing the specific with the general - in this case I don't know for sure that the non-execs didn't do anything wrong.

In relation to the the Q - I wouldn't accept the position of non-exec unless I felt I was qualified to fulfill those duties. Also, non-execs take on a range of role in corporations and receive a range of remuneration in return, but in all cases they should be competent to fulfill those duties. For example, David Beckham is/was a non-exec of one or more sports related companies. Presumably he wasn't chair of the audit committee or the remuneration committe, but had a PR/media role. I'm happy that non-execs can have different duties/responsibilities, as long as they do the job. They also have to accept that they may be taken to court in relation to their responsibilities (and they are entitled to mount a defense). It is a risk that goes with the territory.

According to the BBC documentary on the Equitable life debacle the chief exec didn't seek legal advice (in advance) on his opinion that there was a loophole that meant the guaranteed annuities didn't have to be honoured. Given that there was a large time gap between him taking this position and them going to court I think there was a serious problem here. I'll retract all these points if the BBC investigation or my memory of it was faulty.

It also seems highly dodgy supposition to me (in that it renders the guarantees meaninglesss). I'm no legal expert, but generally it is my impression such loopholes fail when dealing with consumers. The loophole was also not disclosed to the Equitable sales force who AFAIK sold the guaranteed policies in good faith and probably could not have advised policyholders of it if they'd wanted to.

Thom