Peacemaker with a broker's touch needed to lead Equitable miasma

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The Independent Online

Call me a naïve and foolish optimist if you must, but I am beginning to see the first faint signs of hope that the crisis at Equitable Life may yet be resolved in a way that does not leave everybody worse off. If it is to happen, it will only come about through the application of those much-vaunted British qualities of common sense and fair play. It has to be said that these qualities have not been much in evidence in this whole sorry saga to date, but they are ones in which I - and it seems many other readers of The Independent, to judge by my e-mails - retain a strange and touching faith.

Call me a naïve and foolish optimist if you must, but I am beginning to see the first faint signs of hope that the crisis at Equitable Life may yet be resolved in a way that does not leave everybody worse off. If it is to happen, it will only come about through the application of those much-vaunted British qualities of common sense and fair play. It has to be said that these qualities have not been much in evidence in this whole sorry saga to date, but they are ones in which I - and it seems many other readers of The Independent, to judge by my e-mails - retain a strange and touching faith.

Any lasting solution will require the policyholders of the Equitable, both the 20 per cent minority who have guaranteed annuity rate policies and the 80 per cent majority who do not, to demonstrate that they really are the intelligent, responsible and financially literate people that they are cracked up to be. On top of that, it will require some strong leadership from within the company itself, and an early opportunity for the members of the society to express a firm opinion about how things should be taken forward.

This is a tough set of criteria to meet, but not impossible. The number one priority is for the society to find and appoint a new chairman to work alongside Equitable's managing director, Chris Headdon. The new chairman must be experienced in corporate recovery work, bring with them a reputation for independence and open-mindedness and a track record of taking tough commercial decisions, and be capable of communicating effectively.

David James, the company doctor who is currently tidying up the mess at the Dome, would be an ideal candidate, though it seems that for various reasons he may not be available. What is clear is that whoever this potential saviour turns out to be, he (or she) must be put on the case as soon as possible, before the whole business starts to disintegrate, to nobody's benefit except the army of lawyers, IFAs and rival insurers who are sniffing around like carrion crows, hoping to profit from the Equitable's problems.

The reason that someone with a background in corporate recovery is needed is that any solution to the current situation has to involve brokering some kind of compromise deal between two groups of policyholders whose financial interests are now diametrically in conflict, thanks to the House of Lords ruling last summer. On one side are the 90,000 policyholders who have guaranteed annuity rates in their policies, who are now sitting on a valuable entitlement, to which they have a contractual claim, but which they have paid nothing for.

On the other side are the 360,000 other policyholders in the with-profits pension fund, who have no such guarantees, and who, thanks to the House of Lords ruling, have been left to pick up the bill for honouring the claims on which the minority are sitting. Somewhere in the middle of all this is the management, administration and salesforce of the Equitable Life, who naturally have their own interests and agenda to sort out.

What adds spice to this situation is that the two rival groups of policyholders are members of the same mutual society. Every pound that one group gains from any settlement can only come out of the pockets of the other group.

The final twist is that hovering in the background is the risk, only belatedly perceived, but a real one nonetheless, that everybody will be left worse off unless some solution can be speedily arranged. Whether you agree with the House of Lords ruling or not, and whatever you think of the way the board of the society has behaved up to this point, you can be sure that the consequences of failing to resolve the mess will be felt by everybody, including the guaranteed rate policyholders themselves.

Viewed objectively, it is clear that the best outcome for everyone involved is now a compromise solution that puts a cap on the open-ended liability which the House of Lords ruling has created. This will allow everyone involved to know with a greater degree of certainty what the future holds, will prevent the financial position of the society and its with-profits fund deteriorating further and will preserve the freedom of the society to invest the with-profits funds in an optimal mix of equities, bonds and other investments.

What is encouraging are the growing signs that the various groups of policyholders are belatedly beginning to see the logic and justice of these arguments. Even among the minority who have guarantees, many are smart enough to see that there are risks in leaving the future open-ended. Some also (though I don't know how many) clearly feel uncomfortable about seeking to profit so ruthlessly at the expense of their hapless fellow members, now that it is clear that this is what enforcing their rights will entail.

I hesitate to say that this has become a moral rather than a legal issue, but it has to be said that not all the lucky policyholders with guarantees are on the breadline. Many of those who will benefit are wealthy professionals who are not going to starve if they willingly agree to forgo part or all of what they have won. A fair number have told me that they did not even know that their policies contained guarantees when they were sold them, which rather defeats the thrust of the House of Lords ruling that it was the most important implied term in their contracts, and one worth consigning the whole of Equitable's business to the scrapheap for.

As far as the majority of policyholders are concerned, the logic of accepting some loss of value in their policies in return for a measure of clarity about their future status needs little explanation. For them, the lack of certainty is the worst aspect of the current situation, though they might rightly also feel aggrieved that the whole mess has developed without their having any chance to express an opinion, or to put their own case to the courts directly.

The next thing that is going to happen is that the Equitable hopes to announce a buyer for the infrastructure of the company, probably by the end of this month. The new owners will take over the sales force, the fund managers and the administration of the company. They will be responsible for administering the with-profits fund, though will not be assuming the fund's liabilities. The proceeds will go to plug part, but not all, of the shortfall in the with-profits fund. That liability is currently estimated to have a present value of £1.5bn (equivalent to some £17,000 each for the average guaranteed rate policyholder). The figure could however easily double or reduce to nothing, depending on what happens to interest rates and investment returns over the next 20 years.

Even if the conditions for a compromise settlement can be met, which I hope they can be, no solution is likely or can be voted on until an extraordinary general meeting is held, which may be some months away. In the meantime, the best thing that anyone affected can do is write or e-mail the managing director of the Equitable (copying it to Sir Howard Davies at the FSA, and myself if you wish) to say where you stand on the principle of a negotiated settlement. The more members who express their views in this way, the more moral authority there will be behind any solution that finally emerges. It is high time that the members were heard.

davisbiz@aol.com

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