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

Correspondence: 20/06/2007 - EMAG concerns to the FSA about the process of asset sale to the PRU

20 June 2007

Ian Tower Esq
Head of Department,
Retail Firms Division,
The Financial Services Authority
25 The North Colonnade,
Canary Wharf,
London E14 5HS

and by email to ian.tower@fsa.gov.uk

Dear Ian

The Equitable Life Assurance Society - "ELAS"
Proposed transfer of With Profit Annuitants - "WPAs"
The defined charges with-profits sub-fund of the Prudential Assurance Company Limited - "The Pru"

You will recall that we spoke, corresponded and emailed each other regarding the transfer of the annuity business of ELAS to Canada Life. I have waited until after the Annual General Meeting of ELAS before writing to you on the above as at that meeting some matters of procedure were explained by the Chairman of ELAS. The transaction raises, I believe, points of principle which the FSA once again should recognise. Some of these points need action now before the above transaction becomes fully formulated and I set them out in no particular order or numbering below.

1. Hindsight on Canada Life

With hindsight I continue to feel that the Independent Expert's report for the Canada life transaction was both inadequate and unsatisfactory at the outset. You will recollect that he did not then identify the WPAs as a separate class properly or adequately. The issue of a “clarifacatory” paper went some way to recognise this but, as I explained at the time, the analysis in the paper was superficial. The current transaction which involves the WPAs as a separate and distinct class being transferred to the Pru demonstrates that they are and were a separate and distinct class and should have been recognised as such at the outset in 2006. It seems to me that this procedure shows that the Independent Expert who reported in the Canada Life transaction lacked the necessary skill set. Please confirm he will not be asked to report on this transaction.

2. The Independent Expert

We feel it inappropriate to employ an independent expert who has had previous contact with ELAS. The Board in their paper on the proposals in detail advise that such an expert has been appointed - is this the case and what is that individual's name and address please? Has he or she been approved by the FSA? May we see the terms of his or her appointment?

3. The Draft Report of the Parliamentary Ombudsman

At the Court Hearing on Thursday 1 February on the Canada Life transaction (which we both attended), Mr Ian Glick QC stated that the Parliamentary Ombudsman had released a draft report to an authorised team in the FSA., this was a change to your affidavit of 26 January where you do not mention the draft report or its receipt. The authorised team were assimilating the report to the extent it dealt with prudential regulation of ELAS up to December 2001. From a letter dated 22 May 2007 the Parliamentary Ombudsman has advised that the Treasury, the Government Actuaries Department and the FSA received the draft report at the end of January 2007. She received a substantial joint response from these bodies which runs to more than 500 pages. This joint response apparently addresses matters concerning the investigative process, the scope of the draft report, a range of legal and actuarial issues related to matters covered by the report, and the merits of the relevant complaints. Of course, like the report itself, none of the policyholders, complainants and member s of EMAG have seen this.

The result is yet further delay until at least October and probably much later. However we are certain that the conclusions of the report will point to regulatory failure which would follow the comments of Lord Penrose in Chapter 19 of his report issued in March 2004. The regulatory failure would include the FSA since if it did not there would be no reason for the report to be sent to the FSA. Please advise what steps are you taking to ensure that the judgement of individuals who are dealing with this transaction are not affected by criticism contained in the draft report? Are you yourself implicated? You will appreciate that we do not know the extent and the nature of that maladministration but the FSA does know and has known this since January and you are an officer of that body.

4. Compensation

We then turn to the result of regulatory failure, following the precedent of Barlow Clowes and the more recent action over the sufferers in the occupational pensions scheme cases, we think it is reasonable to assume that the Parliamentary Ombudsman will call for compensation. That compensation may be a long time in the coming. But we have to ensure that the compensation is fairly dealt with and does not come to be enjoyed by one class of policyholders versus another. In this proposed transaction, as I understand it and following clarification by Mr Vanni Treves at the AGM, the WPAs will have no rights against ELAS following Court approval of the transaction. The compensation, if there is any and if nothing is done, will therefore enure to the remaining policyholders in the with profits fund.

EMAG has consistently maintained the position that it is inappropriate for the Board of ELAS to ask for any compensation to be paid to the remnant of the with profits fund. We feel it should follow the policyholders who suffered the regulatory failure. This is the reason we have asked that the FSA ensure that policyholder records as at, say, 31 December 2000 and 2001 are properly maintained so that all such policyholders may be fairly compensated. What steps are you taking on behalf of the FSA (which is now fully aware of the Parliamentary Ombudsman's recommendations) to protect the policyholders?

5. The transaction programme and timetable

I regret that the documentation to date is not specific on the programme and the timing of events. However we think a reasonable summary of what will happen is as follows:

[1] Sometime in September or October, (following the changes to the Articles of ELAS approved at the AGM), an Extraordinary General Meeting will be called. Appropriate documentation or the EGM would be sent out. This would be for one purpose only: to vote on the proposal to allow the WPAs to receive a share of the excess assets of ELAS at the date of ultimate transfer. There will be no vote, I assume, on the transfer to the Pru under the Court procedure.

[2] At the EGM there will be a vote on the resolution which will be decided on a simple majority either by a show of hands or, more likely, by a poll where proxies would be counted. No distinction would be made in this vote between members who were WPAs and ordinary with-profits policyholders.

[3] Thereafter the transfer scheme, including the Report of the Independent Expert, would be sent out in the same manner as the Canada Life documentation was sent out to all policyholders. A period would be allowed for comment. A date for the scheme hearing would be set.

[4] The Judge in the Court hearing would (in the same manner as Evans-Lombe on 1 February 2007), consider the scheme and rule on it. Individual policyholders would be able to be represented in Court. The FSA would once again have key role in the protection of policyholders. The hearing would occur some time at the end of this year or more probably in early 2008.

[5] At a date immediately after the Court hearing, if all is approved, the WPAs would transfer over to the Pru.

I hope this summary is fair and reasonable - if you wish to correct my understanding I would welcome it.

6. The voting structure of ELAS

The voting structure of ELAS is strange and we have criticised it as being unfair in the past to no avail. Nothing has been done to rectify this unfairness whilst other matters have been dealt with. The problem we have is with Article 24(4) of the Articles which reads (paraphrased) as follows:

"On a poll every Member .......shall have such number of votes as shall be obtained by dividing by £1,000 the total sum assured in relation to such Member ....... Provided always that no Member shall be entitled to more than ten votes on a poll ..."

The result of the proviso means that policyholders having a sum assured over £10,000 have 10 votes. Whether they have a sum assured of £10,000, £100,000 or £1,000,000, they have an equal number of votes. Because of the impact of inflation since the proviso was inserted many years ago it would seem that very few policyholders have anything other than 10 votes. This is intrinsically undemocratic and unfair. We cannot say (we do not have the information), whether the £1m policyholders will be advantaged or disadvantaged by the transaction but they will be disproportionately disenfranchised.

We do not want this issue to be a stumbling block when the matter comes to the Court. Could you please let us know what steps the FSA will take to make the voting process fair?

7. What the WPAs wanted & Convertibility

The undated paper issued with the documents of 15 March entitled "The proposal in detail", from the Board of ELAS has a section entitled Alternatives. It states that the WPAs are not getting what they subscribed for i.e. a pension which depends on broadly based investment fund. Please could you describe what steps you have taken to make sure that WPAs did get what they wanted; that is their reasonable expectation? Is it, for example true, that the FSA has forced the Equitable to invest almost exclusively in fixed income securities whilst the stock market has boomed? To meet the desire of WPAs to have such a product the Board suggests that the Pru deal is the best on offer although "going it alone" would be possible though this raises a number of complex issues. The issues raised do not include regulatory or capital issues (they are in fact complexity, significant changes to policy terms, create greater risk for policyholders and be less likely to appeal to policyholders), we would be grateful if you could comment on this. As above we had been led to believe that the sole reason that WPAs are not getting what they subscribed for and wanted was the impact of FSA regulation.

At the AGM Mr Treves reiterated that the terms of the policies held by individuals transferring to the Pru would be identical to the terms of the policies held with ELAS. In the Alternatives paper the Board advises that policyholders "have little enthusiasm for options involving converting WPAs to non-profit policies”. This is not my experience; many of the WPAs would wish to reappraise their experience and take the WP risk out of their annuities in whole or in part. Could you please consider whether the Pru could build in such an option of convertibility which might apply to the whole or part of the transferring fund for each WPA? The transfer is a radical change and we believe that WPAs should be given this option and we wonder whether you could examine the robustness of the ELAS market research in this connection. From anecdotal evidence we do not feel it was done on a proper representative basis. The questions and answers session at the AGM did not deal with convertibility so we are unaware as to whether the Pru has been asked, for example. In order to carry out your duty to protect policyholders we feel it is incumbent on you to take this matter up.

8. Proxies and democracy

The Chairman has, (no doubt on advice), adopted the practice of not publishing the number of proxies which he has voted utilising his discretion. Publication or not makes no difference to the result of the poll and we wonder if you could ensure that at the forthcoming EGM this practice is not followed so that the fairness of this practise will be apparent in the Court hearing.

9. Identification of classes of policyholders

The failure of the expert in the Canada Life transaction to analyse initially the classes of policyholder leads us to request that you monitor this from the outset. We now feel that the whole class of with profits policyholders can still be divided into two i.e. WPAs and the rest who have not exercised their rights to an annuity. However within the rest of policyholders there are those in possession of a Guaranteed Investment Return ("GIR"). The financial impact of this guarantee makes quantification of the holders of this feature effectively and economically a distinct class. The Board seems to have ignored this factor. Could you ascertain the magnitude of the number and value of the GIR holders?

We feel it is woeful that the undated proposal paper makes no mention of the impact of the GIR on either the remaining policyholders or the WPAs and would ask you and the FSA to direct the attention of the independent expert to this.

10. Defined Charges Participating Sub-Fund

The undated paper gives under the heading "Prudential" data on the Prudential itself, its with-profits sub-fund , the main with profits fund, the with-profits committee and lastly the Defined Charges Participating Sub-Fund. (DCPSF). This is the destiny fund for the WPAs and the paper concludes with the sentence "The DCPSF is used by Prudential for business which has a fixed level of charges". This section fails to make any comment on the historic performance of this sub-fund, its size or what level of ring fencing there is in this fund.

The financial data quoted about the Pru in general includes a significant boast of a return of 12.4% in 2006 which arose in the with-profits sub-fund. In our view this is misleading unless the performance of the two funds is identical. If this were so then why does the paper not say so? This necessarily leads on to the unexplained impact of the "fixed" charges to the above fund. Detail is needed in this respect and we expect you now to enforce a standard of transparency which is currently lacking.

11. Downside vs upside analysis

Looking at the proposal from the pessimistic view (always now necessary in the context of ELAS) is a necessary analysis and one that has not been carried out, it would seem, from the undated paper. For the transferring WPAs the risk is that the DCPSF bears an excessive fixed level of charges and the investment performance of the unpublished sub-fund has peaked and goes into decline! For the remaining policyholders the downside is that they will be left with ongoing and excessive charges from HBOS and the large overhead of an unslimmed staff and Board of ELAS. The Board gives two benefits for the remaining with profit policyholders namely "improved opportunities for future strategic change" and less risk of the WPAs longevity. This analysis is, I am afraid, totally and completely inadequate.

It beggars belief that there is no description at all of the conduct of negotiations for downsizing the HBOS overhead. What are the levels of the termination charges payable because of the Canada Life transaction and this transaction? The future strategic changes are not described which seems to me to be a somewhat Micawberish sentiment. The longevity risk is a matter that is within the province of the FSA and I question you specifically are you, as the regulator, confident in the mortality tables which have been utilised? Is the increasing longevity of the population, and the particular population of WPAs apparent and not reflected in the mortality tables used?

12. Bond prices, ELF, interim results and adjustments

Over the last few weeks there has been some weakness in the bond market as interest rates in the USA harden. This could lead to a significant decline in the value of ELAS's assets and an overvaluation of the WPA liability. Further on 6 August 2007, £171m of 8% bonds issued by Equitable Life Finance plc fall to be redeemed. It is not crystal clear to us as to the timing of the transaction with the Pru i.e. whether it was struck in March at March values or what. It would be unfortunate if the with-profits fund had all the downside of this. It also leads to the question of what financial data will be presented in September. I assume that the interim figures to 30 June 2007 will form the basis of Court and EGM documentation but could you advise what the FSA will insist on.

13. In conclusion

This letter represents the summary of my thoughts and those of my colleagues to date. In accordance with our previous practice we will publish this letter on our website and would be obliged if you could circulate it to the independent expert (whomever he or she is), the Pru and so on. If you wish to discuss this letter I would be more than happy to meet with you or you could telephone me.

I would conclude by advising you that we welcome the transaction but need more and better information to consider it properly. Our tactics to ensure that we are properly heard could, for example, include seeking representation at the EGM.

Best regards

Yours sincerely

John A Newman MA FCA

Chairman, the Equitable Members Action Group Limited