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Equitable Life

The hon. Lady is right. Later in my remarks, I shall address the points that she has made. Why is the regulator to blame? Surely investors must have understood that their investments could decrease as well as increase. How could Equitable Life have maintained a rate of return and a guaranteed annuity rate that was way beyond any competitor in the market? Those are the questions that Ann Abraham addressed in her initial report of July 2008, which took four years to complete. Her answers go to the heart of the anger expressed by investors through the Equitable Members Action Group, or EMAG. At the core of the problem is the fact that Equitable Life simply could not meet the obligations that it had made for itself because it made no provision for guarantees against low interest rates on policies issued before 1988. It therefore declared bonuses out of all proportion to its profits and assets. Following the ruling of the House of Lords in July 2000, the society stopped taking new business in December of that year, which effectively spelt the end for Equitable. More than 1 million policyholders then found that they faced cuts in their bonuses and annuities, which caused a huge loss of income, on which many small investors had depended. After all, the average investment for the 500,000 individual policyholders was just £45,000, which, according to EMAG, even at its height yielded no more than £300 a month. In July 2001, the new board of directors slashed policy values by 16 per cent.—about £4 billion—and proceeded to effect a compromise scheme to deal with the guaranteed annuity rate issue. However, Equitable Life's problems were too deep-seated, so the scheme was not enough to enable it to ride out the stock market falls of 2001-02. In 2002, policy values were cut by another 10 per cent. and the society was forced to invest almost exclusively in fixed interest stocks. Almost none of its money was invested in equity shares, so it could not operate as a with-profit insurer and its policyholders did not benefit from the stock market's substantial rise between 2003 to 2007. As I am sure we all remember, in 2004, Lord Penrose carried out an investigation into Equitable Life. However, he had no power to apportion blame or recommend compensation. He highlighted the society's unsustainable bonus policy and the""practices of dubious actuarial merit"" that it used to discourage action by the regulators. He concluded:""Principally, the Society was the author of its own misfortunes."" However, crucially, he went on to say:""but it may be appropriate to comment that the practices of the Society's management could not have been sustained over a material part of the 1990s had there been in place an appropriate regulatory structure adapted to the requirements of a changing industry that happened to manifest themselves in an extreme form in the case of Equitable Life."" He also found that""the standards of scrutiny still impress me as complacent, lacking challenge, and hesitant in criticism and in following up on any criticism made."" In its December 2008 report, one of the many recommendations of the Public Administration Committee stated:""We strongly support the Ombudsman's recommendation for the creation of a compensation scheme to pay for the loss that has been suffered by Equitable Life's members as a result of maladministration. Where regulators have been shown to fail so thoroughly, compensation should be a duty, not a matter of choice."" Although the Select Committee fully acknowledged the huge sums of money that might be involved and the need to strike a careful balance between the interests of the taxpayer and the policyholder, it went on to conclude:""Not only did the regulators fail, but they failed over a prolonged period and at a fundamental level. The impact has been severe for many of those who were worst affected; it would be unacceptable for current financial pressure to override failings which took place seven or more years ago.""