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: 09/11/2007 - Kitty Ussher MP

Dear Adam (Afriyie),

Thank you for your letter of 5th October to Alistair Darling enclosing correspondence from your constituent, Mr D************** of Sunningdale, Ascot, about Northern Rock. I am replying as I have Ministerial responsibility for this policy area.

Over the summer, reduced liquidity in inter-bank markets resulted in particular problems for Northern Rock, as a result of its relative reliance on wholesale funding. The Treasury, on the advice of the Governor of the Bank of England and the Chairman of the FSA, has agreed liquidity support, together with guarantee arrangements for depositors, so as to support consumer confidence and provide the company with stability for a period in which it can consider its strategic options.

The European Parliament Committee's EQUI report centres on a period in Equitable Life's history that is the subject of the UK Parliamentary Ombudsman's continuing investigation into the prudential regulation of the Society. As such, a comment made now on the substantive findings made in the EQUI report could be considered as a premature comment on the outcome of the Ombudsman's investigation. I am sure you will understand that it would not therefore be appropriate for the Government to comment at this stage.

The timetable for the completion of the Ombudsmand's investigation is a matter for her. I can assure you that the Treasury is continuing to co-operate fully with the Ombudsman's investigation.

The withdrawal of payable tax credits on dividends was part of a wider package of measures designed to improve the climate for long-term investment in the UK. This measure removed a distortion in the tax system, which encouraged companies to pay out their profits in dividends, rather than retain them for re-investment in the business. It also allows pension schemes to make decisions on investment strategies based on their economic merits rather than for tax reasons.

This package included the recycling of revenues from the abolition of payable tax credits through cuts in the main rate of Corporation Tax (from 33% to 30%) and a reduction in the small companies rate (from 23% to 19%) to encourage companies to invest, leading to better long-term growth in the economy.

These reforms have encouraged enterprise and increased competitiveness, directly and indirectly, benefitting company performance and pension savers who are investing in UK firms.

The short-term effect of this measure on pension schemes, excluding the beneficial impact of offsetting cuts in the Corporation Tax rates, was small compared to the effect of wider factors such as poor stock market performance and the increase in pension funds liabilities dur to rising longevity. It is these factors that have been the real problem in recent years. Specifically :

The most significant downward effect on the health of pension funds came from the stock market fall of the late 1990s and early 2000s which would have largely accounted for the reduction of around 250bn in the market value of occupational pension scheme assets between 199 and 2002.

Many firms made the decision during the 1980s and 1990s, despite rising liabilities, to take contribution holidays, believing a bullish equity market to be a long-term trend. (Indeed the Pensions Commission in its first report stated that : "The deep dip in contributions seen in in the period 1988-91 almost certainly reflects the impact of this policy")

And actuaries had to reassess their valuations due to life expectancy rising with unexpected rapidity - in 1950 a 65 year old man could expect to live for only another 12 years. This has now risen to 20 years.

Please pass on my thanks to Mr D****** for taking the trouble to make me aware of these concerns and I hope he finds this response helpful.


Kitty Ussher MP