These notes are a summary of more detailed proposals submitted to the Chairman and currently subject to ongoing correspondence with Alistair Dunbar.

1. BONUSES WERE TOO HIGH

   The old Board did not provide adequately for the guarantees built into the GAR policies. Nor did they re-insure against that risk. When interest and annuity rates fell, they had nothing set aside. Had they re-insured the risk or made provision for it themselves, the Society's profits and the members bonuses would have been smaller, but the funds would have been available to meet the cost. The members have to face the unpalatable truth that policy bonuses were too high for a decade or more.
   
   

2. BOTH TYPES OF POLICYHOLDERS FEEL AGGRIEVED

   GAR's because the old board tried to deprive them of the protection from low annuity rates built into their contracts and non-GAR's because they were sold policies based upon bonuses that were declared out of profits that had not been earned. To achieve general acceptance, any scheme must address both these factors.
   
   
3. A REALISTIC ESTIMATE OF THE DAMAGE

   The new Board needs a realistic estimate of how much it will cost to persuade the GAR policyholders to give up their GAR rights now. This is not the same as the actuarial cost of running off the with-profit fund over 40 years. The members will not wait 40 years. This question needs to be approached from the viewpoint of individual GAR policyholders rather than from the viewpoint of the Society's actuaries, i.e. from 'bottom-up' rather than the 'top-down'.

   It is also vital to include something for the mis-selling of non-GAR policies. We surely do not need another trip to the House of Lords to see that non-GAR policies were mis-sold upon the back of bonus rates that ignored the GAR liabilities.

   The new board has one opportunity to put up a credible statement of damage. It cannot allow itself to get into the situation of the old board, taking too optimistic a view and being forced to revise it upwards.
   
   
4. HOW MUCH HAVE WE GOT TOWARDS THIS COST?
   
   The proceeds of the Halifax sale (between £750 million and £1000 million) should be earmarked for this deal. Also whatever money the Society has set aside for GAR costs. This should be at least the £200 million provision made in the 1999 accounts.
   
   
5. A FAIR WAY OF SHARING THE BURDEN
   
   Once we have arrived at the amount to be funded, we need a fair way of recovering it from the members. Provisionally, the old Board froze everyone's bonuses for 7 months in 2000. This had the effect of docking all funds by about 6%. This is plainly unfair to more recent policyholders, overwhelmingly non-GAR, who did not enjoy the excess bonuses in the first place. It should be reinstated and replaced by a bonus reduction proportional to the bonuses declared in the past. I suggest those for the period 1988 to 1999. This would spread the cost fairly amongst those who benefited from excessive bonuses. Coincidentally, but rightly, the GAR policyholders will shoulder a proportionately higher share of the cost. The House of Lords did not outlaw an across the board bonus reduction.
   
   

6. DISTRIBUTING THE NEW RESERVE

   Having created an adequate reserve the Board can then distribute it to persuade the GAR's to give up their contractual rights and to compensate non-GAR's for mis-selling.

   The policyholders will have every incentive to agree. It should be possible to achieve the high approval rates required by S425 of the Companies Act so as to make the compromise binding upon all parties.
   
   

7. RESULTS

   The GAR's will get a fair price for their lost rights, but based upon a lower capital value that reflects their proper share of the cost of those rights. They will not have their cake and eat it.

   The non-GAR's will lose very little.

   The GAR problem will be killed off, we will all know where we stand and can look forward to a resumption of decent investment performance and the removal of the Market Value Adjuster.

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