Unpublished Letter From Colin Slater to the Editor of the Telegraph

(Written in response to a Leader of 1st November 2003)

Your leader on Saturday 'Looking for Equity' rightly points out that Equitable Life's battered policyholders, the victims of 'the biggest financial scandal for a generation should press the government for compensation. Equitable Members' Action Group has been pursuing this course for two years. Our determination has increased as the facts have emerged, most notably from the report EMAG commissioned from Chartered Accountants Burgess Hodgson, which we published in March and the validity of which was confirmed when Equitable Life's own figures were presented to the Court of Appeal in May. The story is now very clear.

Before 1988, Equitable issued pension policies with guarantees (the 'GAR'), which it made no provision to meet, thus building up a huge risk. Thereafter, it passed this risk on to new policyholders ('"'on-GARs') without their knowledge. When falling interest rates turned this risk into a liability, Equitable tried to avoid meeting the cost by the secret device of a 'differential terminal bonus policy', eventually outlawed by the House of Lords.

In addition to not dealing properly with its liabilities, throughout the 1990's Equitable also operated what it called a 'full and fair' bonus strategy, designed to pass all its profits on to policyholders, leaving nothing for a rainy day. This would have been risky enough, but the directors consistently declared bonuses in excess of profits. Hundreds of thousands of new investors were drawn into Equitable on the basis of fictitious growth.' This meant that alleged policy values consistently exceeded assets by between £1,000 million and £2,000 million and that departing policyholders took about £250 million each year more than was justified.

The bill for these misjudgements was paid by those who were still Equitable Life policyholders in July 2001, when policy values were slashed by 16% (about £4,000 million). Equitable Life's problems had little to do with the stock market. Its asset deficiency persisted throughout the 1990's when stock prices were rising. It ceased writing new business in December 2000 when the FTSE-100 stood at more than 6200 and policyholders were oblivious to a deficit on assets by then of circa £4,000 million. The performance of the regulators - the Department of Trade and Industry, the Treasury and the Financial Services Authority, advised throughout by the Government Actuary's Department - was pathetic.

In the 1980's they failed to observe that Equitable that taken on far too much pension business, almost all of it carrying the onerous GAR risk. When, ten years and £1,600 million too late, they forced Equitable to recognise the GAR risk, they allowed the company to provide for it with £800 million of worthless reinsurance and £850 million of 'future profits' .

The information they had on Equitable's chronically weak finances should have told them that the company was unsaleable after its defeats in the the House of Lords. However they allowed it to carry on trading throughout 2000 on the off-chance that someone would buy it.

The Treasury was aware of this sorry tale of mis-regulation long before policyholders had any idea what had gone on. In the tradition of Sir Humphrey Appleby in 'Yes Minister', Inquiries were set up to obscure or delay the truth. Both the FSA's and the Parliamentary Ombudsman's inquiries only covered the period after the Treasury had ceased to be the primary regulator in 1999, by which time, as Sir Howard Davies has put it, ' the die was cast'. Lord Penrose's Inquiry covers the relevant period, but has taken too long and cannot attribute blame or recommend compensation. The Parliamentary Ombudsman has the power to deal with compensation, but Ann Abraham claims (wrongly in our view) not to have jurisdiction over the Government Actuary's Department, which played a major role in regulation throughout.

Although this seems to have saved the Treasury compensation it knows it should have paid to Equitable Life's policyholders, the huge loss of confidence in pension investment the scandal has brought about will be infinitely more expensive to future Governments, as our ageing community relies increasingly on the state.

The time has come for Gordon Brown to set up a proper compensation scheme for the million investors in the world's oldest life office. This is the biggest single act he could take to restore faith in personal pension provision and will only cost a fraction of the £5,000 million he charges each year in tax from pension schemes. If he needs help to devise a fair scheme, EMAG will be pleased to assist him.