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Corporate Update
2008 is likely to be a key year in deciding the longer term future of the Society. The Society can run its existing policies to maturity or it may be able to transfer them to one or more third parties who can provide the prospect of better outcomes for policyholders. The options should become clear during 2008.
We are pleased to report that 2007 saw some very important milestones in the strategic development of the Society:
• Most of the Society’s fixed pensions transferred to Canada Life Limited in February 2007;
• University Life Assurance Society was transferred to Reliance Mutual at the end of May 2007;
• The Subordinated Bonds were redeemed in August 2007; and
• The Society’s with-profits annuities (pensions in payment) transferred to Prudential in December 2007.
The Society remains a very large business – the with-profits fund is £6.8 billion – and most with-profits policyholders have savings contracts of various forms (mostly saving towards a pension). The Society is now stable and secure and it can foresee running its business, paying policy benefits as they fall due, for many years. The Society will remain closed to new business and will gradually run down as policies mature. This is known as ‘run-off’.
In 2008 we are inviting other companies to say what they could do to improve the prospects for policyholders. If we believe that one or more can provide a better option for policyholders than run-off, we will choose the best proposal and recommend it to you. We emphasize that no such change would take place without the approval of members.
2007 Bonus declaration (last updated 28 March 2008)
During 2007, the Society achieved a gross return on the with-profits fund of 4.0%. After adjusting for a rise in the value of liabilities corresponding to the fall in interest rates, the effective gross return was 3.3%. The Society currently deducts 1.0% p.a. to cover the cost of administration (this figure allows for future diseconomies of scale) and 0.5% p.a. to cover the cost of guarantees. The effective net return on the with-profits fund in 2007 was 1.9% (2006: 3.9%). The removal of some risks in the business and the reduction in others during 2007 in particular has allowed the Board to enhance returns for policyholders above the effective net return arising from investment performance alone. Further details of the factors affecting the Board’s bonus decisions are given in the Financial Review.
The key decisions are:
• Policy values (or their equivalents) will be increased for UK with-profits pensions policies at a non-guaranteed accrual rate of 5.0% p.a. (2006: 5.0% p.a.) for the whole of 2007 (4.0% p.a. for UK life policies – 2006: 4.0% p.a.);
• A non-guaranteed interim bonus in 2008 of 5.0% p.a. for UK with-profits pensions policies (4.0% p.a. for UK life policies) will continue to be added to policy values (or their equivalents);
• Consistent with previous years, there is no guaranteed reversionary bonus for 2007; and
• The financial adjustment applied to the early surrender of with-profits policies was reduced to 5.0% in April 2007 (from 8.0%). This adjustment can be varied at any time and is kept under regular review.
Where a contractual policy payment is due and the guaranteed benefit exceeds the policy value (or its equivalent), it is the guaranteed benefit which will be paid. For this reason, increases in policy values (or their equivalents) described above will not affect the benefit payable under a policy unless the policy value exceeds the guaranteed benefit at the due date.
Financial position (last updated 28 March 2008)
The Society has maintained its satisfactory financial position. The Society’s key measure of solvency is known as ‘Excess Realistic Assets’ and we continue to have an appropriate level of excess realistic assets for a fund in ‘run-off’.
Excess realistic assets at 31 December 2007 were £621 million following the transfer of with-profits annuities to The Prudential Assurance Company Limited (“Prudential”) (2006: £884 million), representing 9.2% of the with-profits fund (2006: 9.4%).
Parliamentary Ombudsman and the European Parliamentary Inquiry (last updated 26 March 2008)
In 2004, following strong criticisms of the regulators in Lord Penrose’s report, the Society called on the Parliamentary Ombudsman (“PO”) to reopen her independent inquiry into the regulation of Equitable Life. We have had lengthy and numerous confidential discussions with her inquiry team and continue to give all possible assistance. If the PO finds maladministration on the part of the regulators, she has the power to recommend Government compensation. We look forward to publication of the report.
The PO has stated that in April 2008 she expects to inform all interested parties of the final date for publication (which we expect to be in the summer). If she recommends Government compensation for policyholders we will be in the forefront of those calling on the Government to do the right thing. We will continue to work with politicians to support that goal.
Click here to view the Parliamentary Ombudsman statement regarding the further investigation into Equitable Life.
In June, the European Parliament adopted the report of its special Committee into Equitable Life in the European context. The report recommended (among other things) that the UK Government should pay compensation to policyholders, but it also acknowledged that this recommendation has no force. The Government’s reaction has, as predicted, been to wait for the PO’s report.
Governance (last updated 26 March 2008)
The Association of Mutual Insurers (“AMI”) published guidance for mutual insurers in December 2005. Much of the guidance was already covered in the Society’s practices and the Society’s Articles were amended at the Annual General Meeting (“AGM”) in May 2007 to reduce to 500 the number of members needed to requisition a resolution to an AGM or to requisition an Extraordinary General Meeting (“EGM”).
The Society’s member relations strategy (published in the corporate governance section of the Society’s website) aims to help members take an interest in its governance. Questions from members in respect of corporate issues can be addressed to the member relations function through a dedicated email address: member.relations@equitable.co.uk and through a special postal address: Member relations, Equitable Life Assurance Society, Warwick Court, Paternoster Square, London EC4M 7DX. Questions relating to members’ policies continue to be addressed by customer services staff in Aylesbury.
The Society has produced a guide on how we manage the with-profits fund. This is a simpler, easier to follow version of the Principles and Practices of Financial Management (“PPFM”). Also, each year we produce reports by the Board and by the With-profits Actuary on how the with-profits fund has been managed. In the interests of keeping costs down, we make these documents available on the corporate governance section of the Society’s website. They are also available to members on request. If there are material changes in these documents we will, of course, draw them to your attention.
Click here to view A guide to how we manage the with-profits fund (April 2006)
Click here to view Annual report to with-profits policyholder (April 2008)
Click here to view Changes to the PPFM (October 2007)
Click here to view Principles and Practices of Financial Management (PPFM)
The Society held an EGM in October 2007 to allow members to discuss and vote for the proposal to transfer the with-profits annuity policies to Prudential. They did so by an overwhelming majority of over 98% of those voting.
Litigation (last updated 26 March 2008)
In 2004, a group of 873 with-profits annuitants commenced proceedings against the Society, although the majority subsequently withdrew from the proceedings. Settlement was agreed in December 2007 with the remaining 401 annuitants involved. The cost was well within the provisions which the Society had made in respect of this action.
During 2008 we have been notified of 78 legal claims lodged in various regional courts in Germany. We will examine these claims in due course and consider them on their individual merits. As usual, we will resist any attempts by policyholders to obtain an unfair advantage at the expense of all other with-profits policyholders.
Customer service (last updated 26 March 2008)
During 2007, we issued 260,000 annual statements to inform policyholders of the progress of their policies. We also issued around 284,000 letters announcing the proposed transfer of with-profits annuity policies to Prudential and more than 385,000 packs explaining the proposal in detail.
Our customer services staff dealt with 330,000 telephone calls (2006: 400,000) and 316,000 letters (2006: 550,000). The higher levels in 2006 reflected the impact of the new rules for pensions which were introduced on 6 April 2006.
Business outlook (last updated 26 March 2008)
The Society’s business objectives continue to include:
• Treating policyholders fairly, including leavers, and ensuring we meet the guarantees provided to policyholders by pursuing an appropriate investment strategy;
• Reducing expenses and further improving our business model; and
• Resolving outstanding claims against the fund.
The Society is stable and secure and it achieves that, in part, by investing predominantly in fixed-income investments (with only around up to 20% of the fund in equities and property). The current outlook is:
• Policyholders will get at least their minimum guaranteed benefits when they fall due;
• Additional, non-guaranteed, benefits will reflect the cautious investment policy – in stable conditions we would expect returns to remain around the current levels (for example, growth of policy values of 5.0% p.a. for UK pension policies);
• We hold back some assets to cover the risks of the fund. As the fund runs down those extra assets (if they are not needed to cover the risks) will be released to policyholders. The effect is likely to be a gradual release of these assets to policyholders over a long time;
• Members continue to share in the profits and also the losses of the business. So, for example, policy values could be adversely affected by the cost of any unanticipated future claims against the Society (or any other new problems) if the existing money put aside is not enough; and
• Over time, as policies continue to mature, the relative management costs of the Society will increase and the cost of the increase will fall on the remaining policyholders. We have modelled this development and have made allowances in our accounting, but there is a risk that the actual changes will be greater than the models have implied.
This is the background against which the Society will assess any proposals from third parties to see whether they can provide improved prospects for policyholders.
Your Board (last updated 26 March 2008)
We were pleased to welcome Tim Bateman, General Manager (Finance), who joined the Board as an executive Director in January 2008. Tim has been with the Society since 2004 giving advice to the Board in his professional capacities as Head of Actuarial Function and, until November 2007, as With-profits Actuary.
Looking forward (last updated 26 March 2008)
The Society has a stable and secure future, even though, inevitably, it will face some challenges as a closed fund in ‘run-off’.
As we said earlier, it is from this position of relative strength and security that we are about to invite third parties to approach us with proposals which could improve the prospects for policyholders. We will also continue to look for improvements that could be made internally.
During 2008 we expect to be able to determine whether the next phase of the Society’s future will be best for policyholders if we continue independently, or whether one or more third parties can produce the prospect of better outcomes for policyholders. No such change would take place without the approval of members. If such a change appears to be the right way forward it would probably be implemented during 2009.
As always, you may rest assured that your Board will continue to do everything it possibly can to maintain the stability and the security of your Society and to improve further the prospects for all policyholders.
Review of the Society’s financial position (last updated 26 March 2008)
The key measure of the Society’s net resources is the excess of realistic assets over liabilities before deduction of the estimate of the value of future discretionary enhancements to policy values (“ERA”). This amount, which is reported as a policy–related liability in the technical provisions, is available to meet any unforeseen liabilities, and liabilities in excess of those provided for at the balance sheet date, and to enhance bonuses in the future.
At 31 December 2007, ERA were £621m, a decrease of £263m over the prior year, including the reduction of £188m transferred to Prudential as part of the transfer of with-profits annuities mentioned above.
The Society seeks to maintain the ERA balance at a level that protects solvency whilst treating continuing and exiting policyholders fairly. The balance at 31 December 2007 represents 9.2% of with–profits realistic assets, a small decrease from the equivalent figure of 9.4% at 31 December 2006.
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