Corporate Update

It is heartening to be able to report that, after a very challenging 2009, the year ended with real positive momentum. The completion of the contract with HCL to provide administration services to the Society from March 2011 has added many millions of pounds of value to policyholder funds. This, together with a considerable easing in the stresses on the bond, equity and property markets, gave the Board confidence to increase policy values in 2010.

While these increases in policy values cannot be guaranteed, they are an important step towards the recreation of policyholder value that, over so many years, has been eroded.

Having set down our vision to recreate policyholder value, we believe we have three principal ways of achieving this:

• Maximising the return on policyholder assets subject to meeting solvency requirements;

• Providing the best value for money cost base;

• Achieving maximum Government compensation for policyholders.

It is our intention to distribute all of the assets amongst with-profits policyholders as fairly as possible over time.

The importance of solvency (last updated 29 March 2010)
At the heart of everything we do is the need to remain solvent. Sadly, given the events of 2000, this is a matter better understood by Equitable Life policyholders than most. It is also a matter that has profoundly affected the financial services industry, in particular, over the last two years.

At the Society, the demands of solvency are unique. The nature of the underlying guarantees on many policies requires, on the one hand, conservatism in our choice of investment which limits return much in excess of the guarantee; and, on the other hand, requires a great deal of capital above and beyond policyholder liabilities to protect policy values against unexpected events.

Given the Society’s solvency imperatives, its holdings in equity-related investments and property (albeit a relatively small proportion of total assets) are simply too volatile, and the fluctuations experienced in 2008 and early 2009 put very considerable stress on the solvency margins of the Society. While, at all times, the Society remained solvent, the uncertainty around a recovery in equity, property and corporate bond prices was not assured. Prices did, of course, recover to some degree and the Board then felt it prudent to reduce its holdings in both equity-related investments and property. The virtue of this was to increase solvency cover but, in direct consequence, there is less opportunity to achieve returns much in excess of that needed to meet policy guarantees.

Tying up your funds in relatively low growth assets is not consistent with recreating policyholder value, and we will return to the implications of this at the conclusion to this report.

Government’s proposed compensation scheme(last updated 29 March 2010)
At the Judicial Review in the High Court in October 2009, the Government were told that their rejection of some of the Parliamentary Ombudsman’s findings was unlawful. As a result, the Government were obliged to change the Terms of Reference of Sir John Chadwick so that his advice on a compensation scheme will be more comprehensive than it might otherwise have been. We congratulate the Equitable Members Action Group (“EMAG”) on their success in bringing that action. The good work carried out by EMAG is both welcome and influential and we look forward to working productively with EMAG in the interests of past and present policyholders.

The Society continues to work with Sir John to help him to reach a sensible proposal as quickly as possible, currently scheduled to be in May 2010. In Sir John’s interim reports, he describes a flexible approach which has the potential to cover all those who were policyholders during the period affected by the maladministration. We support Sir John’s argument in this matter.

We appeal to Sir John and the Government to bring forward a scheme that is simple and transparent. No matter how fair the theory of any scheme, if policyholders and commentators are unable to understand it, it will never seem fair.


A new third party administrator (last updated 29 March 2010)
We announced in November 2009 that, following an extensive review of the life and pensions administration providers, the Society had awarded its policy administration contract to HCL. This agreement will provide very significant cost savings and cost certainty, enabling the Society to release more value to our policyholders in the years to come. Our latest estimate is that policyholder funds can be increased by some £130m as a result of the contract, and this will be passed to policyholders in future years through reduced charges for expenses, thereby increasing policy values.

In March 2011, when HCL take over full responsibility for the administration services to the Society, policyholders can expect little change and, in particular, the contact centre will remain based in the UK. We will be communicating clearly and fully nearer the time. Until then, policyholder services will continue to be provided by HBOS, now part of the Lloyds Banking Group.

Asset management services (last updated 29 March 2010)
In a similar manner to the way we reviewed the provision of administrative services, we have embarked on an assessment of companies that provide asset management services. In recreating value, policyholders’ assets should be optimally managed, and we expect to complete the selection process by the autumn of 2010.

Your Board of Directors (last updated 29 March 2010)
Over the last year, your Board has appointed a new Chairman and a new Chief Executive following the retirement of Vanni Treves and Charles Thomson. As announced in our September interim report, we also welcome Keith Nicholson, Cathryn Riley and Mark Earls to the Board.

Peter Smith retired from the Board in March 2010 and we take this opportunity to thank him for his sterling service over nine years. We will miss his thoughtful, penetrating and wise counsel through the uniquely difficult challenges that the Society’s policyholders have had to face.

Recreating value for policyholders (last updated 29 March 2010)
Following our decision in 2008 to run down gradually, 2009 was, in many respects, a watershed year for the Society. Having navigated its way through the financial crisis, having put in place new third party administration arrangements and having refreshed the Board membership, the Society is now studying options for the most effective run-off strategy to recreate value for policyholders.

As a first step, the Board is establishing a set of risk objectives which guide the Executive in its decision making. One such objective is that the Society will seek to hold solvency capital in excess of the requirements laid down by the regulators so that we have time to effect remedial action before falling below the regulatory requirements. This will give reassurance to policyholders that the Society will be able to withstand market events as challenging as so recently experienced.

The solvency capital required to be held by the Society is considerable and this can be expected to increase as a result of Solvency II, the new regulations being developed by the EU Commission scheduled to come into force in October 2012.

Policyholder assets will be invested to provide a secure and stable return but, as we described earlier, growth much in excess of policy guarantees is unlikely. This dilemma is one that we can only see persisting, and one that does not easily lend itself to the recreation of policyholder value as it is difficult to significantly accelerate the distribution of solvency capital.

Accordingly, your Board is looking at what strategies would maximise the return on policyholder assets and we will report further on this well before the introduction of the new solvency regulations.