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

Press Releases: 29/12/2003 - EMAG publishes "Alternative Penrose Report" today

29 December '03 - Press Release - EMAG publishes "Alternative Penrose Report" today

It was reported on Christmas Eve that, after 28 months in preparation, the 818 page report of the Penrose Inquiry has finally been delivered - to the Treasury, one of the prime suspects. Ruth Kelly, financial secretary to the Treasury, maintains that it will take weeks to establish that the content is 'legal' to publish. The reality is that the Treasury is now facing the dilemma of how to respond to this truly hot potato.

In the interim EMAG has produced, from its own rigorous research, a succinct 26 page evaluation that summarises what it believes the Penrose Inquiry will report, if it is released in full by the Treasury. The EMAG study was conducted by chartered accountants Burgess Hodgson and is available from today, FREE from EMAG's website at: www.emag.org.uk

The report's author, Colin Slater of Burgess Hodgson:

"The roots of the Equitable's collapse are to be found in the 1980s. Watchdogs stood by for years while Equitable was 'over-bonusing'. Equitable was concealing the fact that it was over-paying on policies and effectively running the with-profits fund on a multi-billion pound overdraft, luring in new investors while its finances were chronically weak. The DTI and the Government Actuary's Department (GAD) did not notice the problem until 1998 - 10 years too late. We are entitled to ask what on earth the regulators were doing."

EMAG and one million policyholders who lost a large proportion of their pension savings have now been waiting for more than three years for official confirmation that there was serial regulatory failure, which would warrant substantial government compensation.

Paul Braithwaite, general secretary of EMAG:

"When will Gordon Brown admit that the Equitable Life fiasco is at the centre of the collapse in confidence in UK pensions? Until the government owns up to blatant regulatory failure for a decade and addresses it with compensation, confidence won't return. Hundreds of thousands of policyholders have borne a 3 billion pound bill that was nothing to do with stock markets, but down to the regulators being incompetent and asleep at the wheel. Policyholders, including those who have left the pension fund, should be compensated. If regulators have failed, then government must own up and pay up. Anything less would be just more fudge."

Further information, contact: Paul Braithwaite
The two pages of the summary of "The Alternative Penrose Report" are appended.


Equitable Life did not go down simply because of bad luck in the House of Lords. There were five major factors, which contributed to its demise:

The Contractual Guaranteed Annuity Risk

In the vast majority of its policies issued up to 1988, Equitable had insured the same risk (the Guaranteed Annuity Option), for which it had made no provision. This meant that reversionary bonuses were too high for the decades of the 1980s and 1990s. Instead of devising ways of meeting this risk the directors effectively passed it on to a new generation of (non-GAR) policyholders (without their knowledge).

When the regulators eventually intervened they were fobbed off with threats of Judicial Review, ministerial intervention and 'financial engineering' (future profits, re-insurance arrangements and selling costs).

The Asset Deficit (and consequent undue exposure to risk)

The directors operated an unusual 'full and fair' terminal bonus system, which meant that the Society never built up an 'estate' of surplus assets (over and above what was earmarked for policyholders). This mean that the Society was always vulnerable to the 'unexpected'.

The directors then went on to exaggerate this risk, by voting terminal bonuses which were not covered by assets. At almost all year ends during the 1990s aggregate policy values exceeded the value of underlying assets. This 'asset deficit' varied from year to year but was typically of the order of 1,000 to 2000 million. Only about half of terminal bonuses was represented by assets, the other half was 'hope value'. This made the Society very vulnerable indeed to 'unexpected' events, like the House of Lords' decision or falling stock market prices.

The generation of policyholders that retired in the 1990s was paid more than was fair from the money introduced by new investors, lured in by Equitable Life's unjustified 'past performance' record.

The Court Case

In the early 1990s, before the GAO was 'in the money', the amounts involved were small, there were few non-GAR policyholders and almost all of the cost would have fallen on the GAR policyholders themselves, there was a good chance of an open compromise. Instead the directors preferred the 'differential terminal bonus policy', which was only explained to policyholders (if at all) as they came up to retirement. This set the stage for the litigation of the late 1990s, which the Society lost.

Whilst this was the occasion which triggered the Society's downfall, its eventual cost was much smaller than it might have been. This is because in the compromise GAR policyholders accepted much less than that to which the House of Lords had decided they were entitled. The Society estimated the total cost at about 900 million.

Even if Equitable Life had won the Court case with the GAR policyholders, it is still likely that the prolonged and serious stock market fall in 2000-2003 would have exposed its weaknesses and brought about its downfall. It had used 'financial engineering' to match its contractual liabilities and its smoothing kitty was heavily overdrawn at the top of the market, when it should have been very full. It was in no position to withstand falling share prices.


The Equitable Life with-profit concept was incapable of existing except under a cloak of secrecy. Would the GAR investors of the 1970s and 1980s have continued to invest if they had realised that the Society had made no plans to deal with the payment of guaranteed annuities? Would the non-GAR investors of the 1990s have pumped so much money into the Society if they had realised both that they were funding a guarantee made to an earlier class of investor and that its 'past performance' included a large element of hope value? Would the investors of the late 1990s with no income guarantee have invested, if they had realised that everyone else was entitled to 3.5% p.a. regardless?

Yet Equitable Life was able to 'play it by the book'. The 'book' was deficient, especially the lack of any requirement for the accounts of with profit funds to be presented separately from the results of the company (i.e. excluding non-profit and unit-linked business but including terminal bonuses). The FSA has talked about such a requirement, but it is still not in force.

Ineffective Regulation

Obviously the directors of the company must bear the major responsibility for what happened, especially the actuary directors, who presumably knew what was going on.

Whether the non-executive directors or the auditors performed their legal duties is a matter currently before the courts. Whatever the outcome, their activities did not prevent the Society's demise.

Neither did the efforts of the external regulators. The old style regulators of the Department of Trade and Industry (later the Treasury) assisted by the Government Actuary's Department simply did not perceive until much too late (1997) that there was a GAO problem at either industry or company level. They took far too long to identify (in 1998) the Society's asset deficit and even then did not appreciate its importance.

A Treasury briefing of December 2000 on the Society's closure raised the question 'Does this event show up a deep-seated oversight on the part of the regulator? - Probably'. On the evidence, the answer should almost certainly be 'yes'.

By the time the new team of the Financial Services Authority (also assisted by the Government Actuary's Department) took over in January 1999 the 'die was cast' as then FSA chairman Sir Howard Davies put it. The critical policies had been written more than a decade before. The options they contained were already well 'in the money'. No effective action had been taken by the Society or the previous regulators to provide for their cost. The court case was under way. The Society had a hefty asset deficit and the stock market was about to stop going up. The chances of disaster were already high.

Earlier appreciation of the full seriousness of the situation by the FSA and earlier closure of Equitable Life would not have 'saved' the Society. It would certainly not have saved its existing policyholders. Indeed it would have denied them the possibility of being saved. It would have saved the losses of the thousands of investors who joined after the House of Lords' decision. The option was not carefully considered.

All of these issues played a part in the downfall of Equitable Life.

Burgess Hodgson
Chartered Accountants

Camburgh House, 27 New Dover Road, Canterbury, Kent CT1 3DN
Tel: 020 7930 4966 and 01227 454627
December 2003

Burgess Hodgson has been responsible for the forensic study of Equitable Life's financial accounts and statutory returns on behalf of EMAG. Established over 60 years ago the company, based in Canterbury, is one of the largest firms of chartered accountants in the South East. It is a specialist in tax and financial planning, forensic auditing, public company audits, flotations and mergers and acquisitions.