EMAG

The independent action group for current and ex Equitable Life policyholders, funded by contributions.

Equitable Members Action Group

Equitable Members Action Group Limited, a company limited by guarantee, number 5471535 registered in the UK

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Correspondence: 05/12/2000 - Letter from Me Jeremy Lever QC to Mr Alan Nash, 5 Dec 2000
p align = right> Monckton Chambers
5th December 2000


Mr Alan Nash
The Equitable Assurance Society
Walton Street
Aylesbury
Bucks HP21 7QW



Dear Alan,

  1. I hope that it wll be helpful to you if I let you know my own conclusions about the "legal issue" after the discussion that we had on Friday, which I found very useful in clarifying my own thinking. As always, I write exclusively in my capacity as a member of the Society and not in a professional legal capacity.

  2. The point that you made about solvency requirements seemed to me to be of the greatest significance. It raised in my mind the question whether the non-GAR policies under which contributions have been paid between 1989 and mid-2000 can give a competitive return if they are weighed down by the cost of satisfying the more onerous solvency requirements that will be applicable to, and only to, the GAR policies, under some if which further contributions continue to be paid. While a purchaser of the Society may be able to find a way of getting the non-GAR policies converted into new policies that will not suffer from that disadvantage, I surmise that that would mean crystallizing the immediate loss on the non-GAR policies and that a purchaser would greatly prefer that the decision of the House of Lords was essentially reversed rather than having merely to be circumvented for the future.

  3. At the risk of being a bore, I venture to stress certain points, partly because some of them emerged as a result of what was said at the meeting but were, perhaps, not fully articulated at the meeting, partly because not everyone at the meeting appeared to find some of the points easy to grasp and partly because I am conscious of the fact that I did not myself express the chain of argument as clearly as, I hope, I do below.

    1. To imply a term into a contract one has to look at the situation as it was when the contract was made, including what was then forseeable.

    2. When the GAR policies were being marketed I do not think that anyone would have forseen, let alone assumed, that the GAR option would be neutralized by the attribution to a GAR policy of one terminal bonus if the GAR option was not exercised and a lower terminal bonus if the option was exercised.

    3. Unless the Board were legally and successfully to attribute different terminal bonuses to a GAR policy according to whether or not the GAR option was exercised, it is obvious that the considerations that necessitate different solvency requirements for GAR policies and non-GAR policies would necessitate differentiation of terminal bonuses as between the two classes of policy.

    4. It follows from (ii) and (iii) that , when the GAR policies were being marketed, no-one could have foreseen, let alone assumed, that, whatever the terms of future with-profits policies, the Board would not differentiate terminal bonuses as between the GAR policies and different, new, with-profits policies.

    5. I think that there was general agreement at our meeting that when the Society ceased to issue new GAR policies and began to issue non-GAR policies, the Board could have differentiated between terminal bonuses allocated to policies according to whether they contained or did not contain a GAR option.

    6. Even if the Board had been correct in believing that it could allocate to a GAR policy one terminal bonus if the GAR option was not exercised and a lower one if it was, there are powerful arguments for saying that the Society should still have pursued different investment policies with regard to the funds contributed under GAR policies and the funds contributed under non-GAR policies. This is because, in certain economic conditions, the Building Society-type security coupled with a (high) guaranteed annuity rate offered by GAR policies, if the GAR option was exercised, would have resulted in a better annuity than an ordinary with-profits annuity - in the economic circumstances in question there would simply not be sufficient profits to attribute to the policy if the option was not exercised to induce the policy-holder not to exercise the option. This is a point with regard to which Adrian Howard-Jones spoke at some length at the meeting because if it is correct, it is crucial. If the point is correct, then the Society was acting in an economically irrational way if, when making investment decisions, it did not take into account the distinct economic characteristics of GAR policies, and in particular, the risk that in certain economic circumstances, the option might be exercised - with a resultant need to allow for that possibility.

    7. If, in making investment decisions, the Society ought to have taken into account the distinct economic characteristics of GAR policies ( and ought to have done so even if it had been correct in believing that it could allocate to a GAR policy one terminal bonus if the GAR option was not exercised and a lower one if it was), then the necessary corollary is that the Board was acting in an econmically irrational way in not differentiating from Day 1 between terminal bonuses according to whether policies did or did not contain a GAR option.

    8. No-on in the 1980s could have foreseen, let alone would have assumed, that the Board would act in an econmically irrational way with regard to terminal bonuses when it ceased to market new GAR policies and began to market non-GAR policies.

    9. If that is correct, then it is impossible to imply, whether into GAR contracts or into the Society's Articles, a term that the Board would not differentiate between terminal bonuses allocated to policies according to whether they did or did not contain a GAR option since that would be to imply a term that the Board would act in an econmically irrational way.

    10. Yet that is unfortunately how the Board did act, and it was not to be expected that the Society would instruct Counsel to advance to the House of Lords an argument that proceeded on the premise that the Borad had acted in an irrational way (and therefore certainly not in a way which anyone would have assumed ex ante that the Board would act).

    11. Therefore the Society was not in a position to represent the non-GAR policy-holders on this issue in the House of Lords.

    12. Therefore -
      1. the gates of the courts of justice ought not now to be closed to the non-GAR policy-holders on the ground that, represented by the Society, they have had their say, and

      2. there was never advanced on behalf of the non-GAR policy-holders a cogent argument as to why, although the Board had acted in an economically irrational way in the past, it was not constrained to do so in the future.

  4. I understand clearly -
    1. that, given the uncertainty of litigation, the time that it takes to reach a conclusion and your belief that, at least in the absence of an effective reversal of the House of Lords decision, a sale is unavoidable, you wish to avoid anything that might jeopardize the effectuation of your hoped-for sale.

    2. that it would be disagreeable for the Board were the Courts to conclude that its policy with regard to terminal bonuses had been econmically irrational from 1989 onwards and that, as an indirect consequence of that fact, the Society should have declined to act as representatives of the non-GAR policy-holders on the differentiation issue that was, for the first time, directly up for decision in the House of Lords.

    3. that it would be very undesirable for the Society to do anything further in relation to the House of Lords decision otherwise than under effectively irresistible pressure from dissaffected policy-holders.

  5. As to 4(i), I would have thought that it was very desirable in any event to include in any contractual arrangements for the sale of the Society provisions covering the possibility of further litigation with reference to differentiation of terminal bonuses. Otherwise there may be opposition to the sale on the ground that the benefit of such litigation, if favourable to non-GAR policy-holders, would ensue to the benefit of the buyer - the buyer would get a Society without the black hole which is currently believed to exist but would have paid a price appropriate for a Society with a black hole. The fact that the contingency was covered by the contractual arrangements should make a buyer more rather than less confident that the sale would go through. In this connection one cannot exclude the possibility of further litigation if the Society does not pursue the course that I suggested, namely, as a first step, taking the advice of Leading Counsel who has not been involved to date, as to whether arguments along the lines outlined above would have any real chance of success.

  6. As to 4(ii), I think that the members will not think worse of the Board for giving way to pressure to enable an important legal question to be tested if the Board is independently advised by properly instructed Counsel that the point is reasonably arguable.

  7. As to (iii), I think that EMAG could be relied on to bring the necessary pressure, unless, on the basis that a bird in the hand was worth two in the bush, it was convinced that by so doing it was prejudicing the effectuation of a sale which the Board believed to be necessary in the interest of members, something of which the committee of EMAG is not at present convinced.

  8. I am authorized by the Committee of EMAG to say that I have discussed the contents of this letter with them and they are in agreement with the letter.
I hope that you will not think it inappropriate that I am copying this letter to Jenny Page since we felt that her added presence and contribution as a non-executive Director had been helpful in making our meeting as constructive as I hope that it was.

With kind regards,

Yours sincerely,

Jeremy Lever