7 December ‘02 - Radio 4’s Money Box – Ned Cazalet and Paul Braithwaite (Transcript)

LEWIS: Now two years ago this weekend Equitable Life closed its doors to new customers and started the long and painful process of trying to restore the company to some sort of financial stability. Since that day it's announced eleven separate cuts in the amount it would pay to its investors and raised the penalty for leaving the society five times. People who take their money out now have to leave 20% of it behind. More cuts are feared and the society has said it cannot guarantee it'll remain solvent. This week independent insurance analyst Ned Cazalet produced a report on Equitable's finances. I asked him how they were two years on?

CAZALET: In a word powerless. There's very little excess capital to insulate the life assurance company from any unpleasant surprises that might arise from poor markets or mis-selling bills that get out of control. Also, the way in which the Equitable has put together its liabilities really don't leave a whole lot of room for what we call surplus or profit to emerge to generate future bonuses. I guess the policy holders are probably very concerned and frightened about the situation they're in because it's all unknowable.

LEWIS: And what kind of deal do you think could be done to save it?

CAZALAT: One idea is perhaps saying to the with profit policy holders look this really isn't a with profit fund as we know it - there's no spare capital to cushion you and to smooth out payments - there's no spare capital to allow Equitable to invest like other life companies. Could we not sort of break this up into what we call a unit linked fund so everyone's got an absolute precise allocation of units and move it into a sort of normal managed fund? If that was achieved they could see their unit price move up and down on a daily basis and could also switch out of the managed fund into riskier funds or more secure funds.

LEWIS: If you were an Equitable Life policy holder would you get out now?

CAZALET: It's very tricky. I'd be very unhappy about where I am. I think the problem is actually that the lights are out and no-one can see what's going on outside. For some people to stay could expose them to further disappointments, for some people to go however they have to take the haircut with the so called market value adjuster. So you're sort of between a rock and a hard place. But I can understand why people are leaving.

LEWIS: Ned Cazalet's report was commissioned by the Equitable Members Action Group. I asked its chairman Paul Braithwaite how he reacted to Ned Cazalet's plan?

BRAITHWAITE: Well it's interesting that unit linking was a paper that we presented to the board 18 months ago and was dismissed at that time. So we were very interested that Ned too had reached the same conclusion. At the moment this isn't prospectively ever going to be a with profits fund because of its contractual commitments to cover 3.5% guarantee for the vast majority of the funds that it's managing.

LEWIS: So these are the people with guaranteed returns. In a sense you're looking for a second compromise deal to buy them out just as the guaranteed annuities were bought out after the House of Lord's decision?

BRAITHWAITE: Exactly so, and it seems to us irrelevant that at the moment the society is spending huge amounts of money preparing a 425 compromise scheme, a second one for the people who've left. The important thing is to look after those who remain.

LEWIS: Now this kind of plan of turning the fund into - into a different kind of investment has been put to the board as you said by your organisation. We know they've considered it. We know they've turned it down. Do you think there's any prospect of it being accepted this time around?

BRAITHWAITE: Well fortunately we have got a board of nine non-executive directors. I think to date we've had a society dominated by actuarial thinking. The actuaries have got to be overcome. Their strategy here is non-viable. We have to find a creative way forward.

LEWIS: Paul Braithwaite. And Equitable Life has told Money Box that the proposal to convert its with profits fund would be complex and cost tens of millions of pounds and any individual who wanted to leave the society could already do so subject of course to that 20% penalty. Well there's a list of the eleven cuts in policy benefits and the changes in the penalty for taking your money out of Equitable Life on our website - bbc.co.uk/moneybox.