Why we used to love Equitable Life

[Zoe]

Let's not forget why "sensible" investors sought out Equitable Life

Equitable Life was always going to be castigated for taking a losing £1.5bn gamble on its guaranteed annuities and for failing to provide covering reserves. But there was another side to this deeply flawed mutual.

Although the company over-allocated bonuses and did not value liabilities prudently, it also stood out as a paragon of virtue in an industry in which there was widespread malpractice - exploitative charges, surrender values with secret rip-offs, and commission-led mis-selling scandals.

The analyst Ned Cazalet described Equitable in the late 1990s as operationally mega-efficient, with disciplined control of expenses. In 1995 Equitable had a new business ratio - expenses as a proportion of new premiums - of only 17 per cent, way below Standard Life at 51 per cent, Norwich Union at 65 per cent, Prudential at 84 per cent, Allied Dunbar at 106 per cent and Legal & General at 111 per cent.

It is impossible to exaggerate how deeply flawed were the operations of the life and pensions industry in the 1990s. The industry was made up of three groups: companies such as Standard Life selling through independent financial advisers; those whose business model relied on selling direct, such as Allied Dunbar; and the high quality sales force - which was not wholly reliant on commission - at Equitable Life.

When I was investigating the industry for the Office of Fair Trading, companies such as Norwich Union and Prudential gave us good lunches but revealed little, and Allied Dunbar simply stonewalled. At Equitable Life, however, executives emphasised that they were not part of what they saw as an "appalling industry, got at by entrepreneurs in the 1970s". The former joint managing director of another company, which gave nothing back if consumers missed one premium in the first five years, arrived at my office at 9.30, and sat talking about the industry's scams until 4.30.

The industry used an exploitative model with high up-front charges. Allied Dunbar was the exemplar, with a 5 per cent initial charge, a 1 per cent annual charge, a monthly policy fee and initial allocation of premiums as low as 35 per cent for 2 years. Even Standard Life had a 5 per cent initial charge and a 95 per cent allocation rate, so that 10 per cent of your premiums disappeared. With 40 per cent of pension plans lapsing in the first 4 years, one in three pension savers lost money. But savers with Equitable faced only a 3 per cent initial charge and a 0.5 per cent annual charge, so that none lost money.

The older companies focused on with-profits policies. Equitable alone reported its investment performance and the proportion it was allocating to policies. Cazalet recorded, again in the late 1990s, that "Equitable has long made a point of distributing payments close to asset share (the value of invested premiums) on maturity and paid high surrender values". Most of the industry, however, was indulging in the secret practice of paying less than asset value on surrendered policies - a practice known to some as "surrender profits".

In a 1993 OFT report that led to the disclosure of much of this charging structure, I included figures provided by the industry to Money Management showing 10-year surrender values on £50-a-month 25-year endowments of £12,877 for company A (actually Equitable Life), £9,695 for company B (Standard Life), £8,034 for company C (Clerical Medical), and £6,763 for company D (Legal & General).

But it was not until the publication of the Asset Share Survey 2000 by consultants Tillinghast that I realised how widespread the secret practice of surrender profits had become. Two-thirds of companies were lopping 10 per cent, 30 per cent or more off surrender values to boost much publicised maturity values achieved by a small minority of policyholders. This had nothing to do with the smoothing described in with-profits guides, and the secret rip-offs may amount to the biggest uninvestigated fraud ever. The regulators have at last proposed to ban it.

Equitable taunted the industry with marketing that stressed its rejection of the commission sales model. Competition in the industry is perverse, with most companies forced to buy their distribution by increasing commissions to IFAs. When the government abolished a maximum commission agreement in 1990, the influx of salesmen was such that it was calculated that by 2000 half the country would be selling policies to the other half. That led to the pensions mis-selling scandal. The then FSA chairman Sir Howard Davies commented that the growing endowment scandal was also a consequence of the commission culture.

With its super efficiency, low charges, honest surrender values and avoidance of commission-hungry IFAs, Equitable could have been an invaluable tool for a government with broader vision. As a condition of a rescue, Equitable could have been merged with a building society or the Post Office and used to break the current deadlock in selling stakeholder pensions to low/middle income groups. There is a desperate need to move the industry away from its damaging commission culture, and Equitable could have provided a model.

John Chapman is an independent analyst who was assistant director of consumer affairs at the Office of Fair Trading from 1991 to 1996

Financial Times

[hectorajg]

Quote:-

"But it was not until the publication of the Asset Share Survey 2000 by consultants Tillinghast that I realised how widespread the secret practice of surrender profits had become. Two-thirds of companies were lopping 10 per cent, 30 per cent or more off surrender values to boost much publicised maturity values achieved by a small minority of policyholders. This had nothing to do with the smoothing described in with-profits guides, and the secret rip-offs may amount to the biggest uninvestigated fraud ever. The regulators have at last proposed to ban it."
-----------------
Sounds as though this was possibly a bigger scandal even than Equitable.

Quite simply, can the Life Assurance industry survive all this adverse publicity? It needs cleaning up fast. Penrose will start the process, but how far will it go?

[Zoe]

Originally posted by hectorajg

Quite simply, can the Life Assurance industry survive all this adverse publicity?

It is to be hoped not. There appears to be no reason to continue with the packaged products such as pensions and endowments that cream off so much in commissions and charges and in the end are now proved not to guarantee to provide what they are supposed to achieve.

If you are going to gamble, you might as well do it yourself and with as few intermediary charges as possible.