The Equitable looked too good a club to be true and it was
Lord Penrose's report on the Equitable Life Assurance Society bears the delicate impress of Ruth Kelly. She has been sitting on it for months, as a part of her duties as Financial Secretary to the Treasury. and this week, at last, she hatched it. No one will be the happier, except her colleague, Gordon Brown, who need not now expect to dip into his pockets — that is, into ours — and pay out compensation. Otherwise it is embarrassment all round, financial and personal, and deepest of all for the directors, who may be facing ruin. Harsh critic though I was of their misjudgment and complacency, I would not wish them that. The Equitable had been such a good club for so long that almost everyone — members, advisers, regulators, management and, fatally, the board — was slow to believe that something could be wrong with it. Dating from 1762 (which made it Barings' twin) and claiming to be the first life assurer to work on actuarial principles, it seemed to work on the principle of a virtuous circle. It did well by its members, who recommended it to their friends, which helped to keep its costs down and brought it out at the top of the league tables, which kept the new business flowing. Its competitors put more of their money aside in reserves, but the Equitable and its regulators saw no need to match them, just so long as the circle stayed virtuous, When its virtue first came under threat, nobody noticed, and the Equitable never thought of insuring against it.
It's question time
To help sell its policies, the Equitable offered guarantees. When the policies matured, they would be used to buy annuities, and the guarantee underwrote the annuities' value. Against this future risk. the Equitable could have hedged itself, at little cost, but it never bothered. This was a calamitous error for a society founded on actuarial principles. Decent annuities, as we all know, cost more these days. The guarantees began to loom up and the reserves suddenly looked scanty — worse, Lord Penrose says, than the board was allowed to realise. This gave a new twist to the advertising slogan: 'Ifs question time — the Equitable Life.' One choice would have been to turn the society into a company and find a rich suitor for it. Ma was thought to have set its cap at the Equitable. That would have made for a happy ending and windfalls all round. In an evil hour, the society's board was led to think that it had a better idea.
Lawyers were found to advise the Equitable that it could get out of its guarantees, or get round them. Easy, really: just tell the holders that if they insisted on having the guarantees honoured, their bonuses would be scaled down to fit. This, as I said at the time, was life assurance on the principle of Macbeth and the three witches, who keep the word of promise to our ear and break it to our hope. The Equitable's business was built on promises, and once it allowed itself to pick and choose among them and to keep the ones that suited it, the circle would turn vicious. So it did. The annual meeting was stormy, and the chairman praised the chief executive for his leadership — in which direction? In the High Court, Sir Richard Scott found for the Equitable, and I declared my hand as a policy-holder: 'If Sir Richard is right, the directors have discretion to allot the entire bonus pool to me, so long as they could show that they were acting rationally. Well, of course they would be, but this, too, needs changing.' Then the Law Lords ruled that Sir Richard was wrong, and the Equitable had lost its reputation without saving its skin.
Writs all round
Now the roof fell in. The Equitable was at last put up for sale but found no takers, the books were closed to new business, the axe came down on bonuses and on policy values, and a new board of directors arrived to spray writs in most directions, starting with their predecessors. Only the regulators were spared. Lord Penrose picks them up, and finds fault with the tests they were set, but in any case, so long as they made their mistakes in good faith they cannot be sued for damages. Though the Equitable will never bounce back, it is still solvent and can meet its members' diminished expectations. Their last hope is the Compensation Fairy, but she seems to have folded her wings.
No magic wand
Where is this busy Fairy in the losers' hour of need? She loves redistributing other people's money. At the wave of her wand, millions of savers who were mis-sold' their policies got second guesses: heads they won, tails they got compensated. Even the poor old Equitable was lumbered with what she called a rectification scheme, forcing one set of losers to compensate another. What has happened to her? Has she turned into Ruth Kelly? She certainly seems to stop short of redistributing taxpayers' money. That, of course, is good news for us taxpayers. If the Fairy will always be there to pick up the pieces, bad businesses will multiply, and so will the bills that she sends to us. Equally, if regulators are told that they must let nothing go wrong, they will never let anything happen, and we shall be the poorer for that,
Reputation at risk
The spotlight now turns to the Equitable's ousted directors, a mixed batch of nonexecutives, not all of them (as I unkindly observed) out of the City's top drawer. Lord Penrose now says that they were not given the information they needed, but directors must ask for the information they need, and make a scene if they don't get it. They needed no special insight to see that the Equitable had put its reputation at risk when it reneged on its promises, but they went along with it, apparently taking their lead from the management and, of course, from the lawyers. They could scarcely expect to be sued for acting on legal advice, but unexpected things happen in courts, as they now know. They must have believed — as the chairman of Barings, that ill-fated twin, once believed — that they had a business which was essentially risk-free and very profitable. Put like that, the moral of their story is an old one: if something looks too good to be true, then it probably is,