Notes on EPHAG meeting with ELAS board - opinions expressed are those of EPHAG

The following communique is published by kind permission of EPHAG

COMMUNIQUE 2 - A meeting took place at the Aylesbury office of ELAS on 19th December 2000 between representatives of The Equitable Life Assurance Society,(ELAS), and Equitable Policy Holders Action Group (EPHAG). - These notes are intended to to convey the nature of the discussions, but are not a verbatim report of the meeting.

ELAS were represented by Messrs. C.Headdon,P.Wilmot, and A.Dunbar. - EPHAG were represented by Messrs. R.Bullen, J.Denbin, and J.MacLeod. - Mr V.Nolan of EMAG attended at the invitation of EPHAG as an observer.

OPENING REMARKS BY RON BULLEN,(CHAIRMAN OF EPHAG COMMITTEE) - Ephag now has in excess of 4000 members registered with us. (the up to date figure at 22.12 is now well in excess of 5000).We will NOT be joining in critiscism of the executive directors, unitl you have had the opportunity to formulate and communicate to members your policy for managing the Society. We do have some requests : FIRSTLY - that any new policy for the direction of the Society will be transparent and communicated to members as a matter of urgency . SECONDLY - that high on your list of priorities will be a policy which seeks to redress the gross unfairness to those members of the Society who have had their funds plundered to meet the GAR liabilities. THIRDLY - we must ask you to directly acknowledge that the Board has lost credibility in the eyes of members, and that non-executive directors will be asked to consider their positions. They are percieved to have failed the membership , and unless they have particular skills or knowledge to bring to the present situation, they should go. LASTLY - to attempt to understand the situation clearly we would like to have a breakdown of assett value as owned by the various grous of policy holders - ie. (1) GAR policies, (2) non matured, non GAR pensions, (3)Annuitants, (4)other with profits policies. THE ANSWERS TO THE ABOVE WERE FORWARDED AFTER THE MEETING,AND ARE : GAR policies - 30% ; Annuities, and Managed Pensions in payment - 20% ; OTHERS - 50%.

A question and answer session then followed.

Q. Although the Society is closed to new business, it can continue to accept new premiums, including from those policyholders with pre July '88 GAR policies, still up and running. These new premiums, which can be right up to Inland Revenue limits, will in fact immediately purchase benefits at a cost well below the market rate, thus eroding further the benefits of existing policyholders without the GAR guarantee. Scottish Widows who are still in business have succeeded in blocking off this loophole, so why cannot the Equitable, which has closed to new business?

A. It is not for the Society to comment on Scottish Widows. As it is part of the policy conditions of the Equitables' GAR policies that they can continue to accept premiums, it would not be legally possible to stop this practice.

Q. Those policyholders with 'with profit' annuities in payment, and thus with no GARs' were in a different position to other non GAR with profits policyholders, in that the latter had the option to transfer their money out of ELAS. (possibly, though not necessarily subject to an MVA reduction - but an option, nevertheless). The annuitants, however, were legally obliged to stay with ELAS until the end of their lives. Could this distinction not be at least off-set by (a) 'ring fencing' - i.e. by giving a different rate of bonus to them from that given to those annuitants who had not yet retired, or by (b) selling off the portfolio of with profits annuitants?

A. The annuitants could not be given a different bonus, because they were members of the same fund, and anyway, the H.O.L. decision prevented it. Selling off may be a possibility.

We expressed the view that the H.O.L. decision did not prevent ELAS from ring-fencing different classes of policy - only policies of the same class,and which differed only because one had a guarantee, and the other did not. The fact that there was only one fund did not imply that there could only be one bonus declared, even when tax made no difference. Policyholders who were tied in where others were not, were therefore, in our opinion, entitled to some compensation for that fact, and giving them a different bonus was the only way of doing so.

Q. AS TERMINAL BONUSES ON A GIVEN POLICY INCREASE EACH YEAR, HOW CAN THEY BE REDUCED?

A. No indication of plans to reduce bonuses were given, but ELAS made the point that 'unlike declared bonuses, final bonus is not guaranteed before the contractual payment is made. Final bonus can, therefore be taken away.'

Q. WHAT WERE THE REASONS GIVEN BY PROSPECTIVE PURCHASERS FOR WITHDRAWING FROM THE SALES PROCESS? ARE THERE ANY MORE 'HORRORS' TO BE REVEALED?

A. 'The final bidders withdrew because they believed that a purchase would offer their shareholders more limited opportunities for a retun on the (substantial) capital invested compared to other opportunities available to them. There are no undisclosed items which make the situation potentially worse than the continued funding of GAR liabilities.

Q. WHAT NEW LITIGATION HAS BEEN TAKEN AGAINST THE SOCIETY? - A. There is no indication of any litigation by or against the Society. Leon Kaye has asked for further information, but no letter before action or proceedings have been received

Q. ARE THE BOARD SATISFIED THAT THEY HAVE CORRECTLY INTERPRETED THE H.O.L. RULING A. The Board are satisfied that they have correctly interpreted the H.O.L. decision.

Q. WHAT IS THE CURRENT SITUATION REGARDING WITHDRAWLS FROM THE WITH PROFITS FUND? A. Surrenders are running at higher levels than normal,but are still at levels which remain modest. This is not causing alarm. COMMENT :WE WOULD NOT CONSIDER THIS TO BE A CAUSE FOR ALARM - GIVEN THE MASSIVE AMOUNT OF ADVERSE PUBLICITY, AND THE ACTIVE PURSUIT OF ELAS MEMBERS BY OTHER ORGANISATIONS.

Q. WHY HAVE YOU IMPOSED A PENALTY OF 10% ON WITHDRAWLS FROM THE WITH PROFITS FUND? A. This is necessary to ensure that the fund is not weakened by premature surrendering of policies. It is no greater than other Life Offices routinely impose.

Q. ARE YOU IN NEGOTIATION WITH THE MANAGERS OF COMPANY PENSION FUNDS WHO ARE ATTEMPTING TO IMPROVE THEIR POSITION AT THE EXPENSE OF OTHER MEMBERS? A. No,we are having exploratory meetings with them, as yourselves. COMMENT : WE WOULD FIND ANY ATTEMPT TO ADVANCE THE INTERESTS OF SUCH FUNDS TOTALLY UNACCEPTABLE

Q. WHAT DO YOU HOPE TO ACHIEVE FROM THE ON GOING SALES PROCESS? A. We expect to sell off subsidiary companies, the proceeds of which would be used for the benefit of all members. We hope to sell off the aspects of the business which may be better managed by others, such as investment management. We would , where appropriate, buy back the services of such functions. COMMENT: IT APPEARS THAT CONSIDERATION IS BEING GIVEN TO REDUCING THE SIZE OF THE OPERATION IN EVERY WAY POSSIBLE. THIS IS SENSIBLE IN THAT IT REDUCES OVERHEADS, AND HAS BETTER PROSPECTS OF KEEPING INVESTMENT RETURNS AT ACCEPTABLE LEVELS

Q. IF YOU PROPOSE TO REDUCE THE FUNCTIONAL MANAGEMENT DRASTICALLY, WHY DO YOU NOT COMPLETE THE TASK,AND WIND UP THE SOCIETY COMPLETELY? A. We would prefer a less drastic solution, such as seeking agreement from GAR policyholders to 'cap off' their policies and hence contain the liabilities which have arisen from these policies. COMMENT ; WE CONSIDER THE CAPPING OF GAR LIABILITIES TO BE ESSENTIAL IF RETURNS ON FUTURE INVESTMENTS ARE NOT TO FALL OVER TIME. IF AGREEMENT TO THIS PROPOSAL IS NOT ACHIEVED, WE WILL PRESS FOR THE SOCIETY TO BE WOUND UP. THIS WOULD BE TO THE ADVANTAGE OF THE GREATEST NUMBER OF MEMBERS IN OUR OPINION. WE ARE SCEPTICAL OF THE CHANCES OF SUCCESS OF PERSUADING GAR POLICYHOLDERS TO RELINQUISH RIGHTS VOLUNTARILY, AND SUGGESTED THAT THE PROPOSAL WOULD BE BETTER FORMULATED AND EXPLAINED TO THOSE AFFECTED, BY AN INDEPENDENT AND CREDIBLE BODY. THE EXPLANATION WOULD NEED TO POINT OUT CLEARLY THE RISKS POSED BY REJECTION.

THE FUTURE OF THE BOARD AND MANAGEMENT TEAM : The position of the non executive directors was raised, and we expressed strong concerns as to their need and effectiveness. It is assumed that the Board will consider this at their next meeting. We considered that the honourable thing would be for the non executive directors to individually consider their position, and if approporiate, to resign. Mr Headdon noted our position, but did not comment. OVERVIEW :- THE NEW CEO HAS CLEARLY UNDERSTOOD THE NEED TO IMPROVE COMMUNICATION. THIS WAS EVIDENCED BY HIS WILLINGNESS TO CONSIDER SUGGESTIONS FROM US, SUCH AS ORGANISING REGIONAL MEETINGS, WHERE MEMBERS CAN PUT THEIR OWN QUESTIONS TO REPRESENTATIVE OF ELAS. THE PRIORITIES BEFORE THE BOARD ARE CLEARLY TO GAIN CONTROL OF THE SITUATION, FROM A PURELY MANAGEMENT PERSPECTIVE. THIS CANNOT BE CRITICISED. HOWEVER, THE ANXIETIES THAT MEMBERS ARE EXPRESSING TO US ABOUT THEIR PERSONAL POSITIONS NEEDS GREATER EMPHASIS , IN OUR OPINION. THE DUBIOUS NATURE OF SOME OF THE ADVICE CURRENTLY ON OFFER MAKES THIS NEED STRONGER. HOW CAN ANYONE MAKE A RATIONAL DECISION ON WHETHER TO SUFFER A PENALTY TO REMOVE FUNDS, WITHOUT HAVING A CLEAR IDEA OF WHAT IS LIKELY TO HAPPEN TO THOSE FUNDS IF THEY ARE LEFT IN PLACE?