Equitable Life's policyholders were kept in the dark for 12 years before they were informed the cost of annuity guarantees (GAR) were taken from their terminal bonuses.
The Penrose report published this afternoon reveals the executive managment of Equitable Life decided as early as in 1983 to cover the costs of the GAR with the final bonus paid out at the maturity of a policy - a move that has become known as the differential terminal bonus policy.
That said, this decision was not actually reported to the Board of Directors until 1993, and policyholders were not informed in ANY WAY about the circumstances until 1995.
Apart from this key judgment, Lord Penrose believes following points may be regarded as the essential conclusions arising from the report:
- The terminal bonus policy was adopted following the decision not to start a new bonus series in 1988 and to market the new personal pension business as more or less a continuation of the earlier retirement annuity business. Lord Penrose believes this exposed those joining the fund to the potential cost of the guarantees while it was NOT adequately known to them.
- With this in mind, the Society adopted a policy, which, to an increasing extent, relied on unguaranteed terminal or final bonuses. Effectively, this led to an reduction of the share of benefits between policyholders.
- Following this, Equitable Life began to over-allocate from the late 1980s and onwards, with the effect the realistic financial position was progressively weakened.
- The financial status of the firm was "bolstered" from the late 1980s onwards by the frequent adoption of the weakest valuation basis, seen as of "dubious actuarial merit" and various other methods which sought to anticipate future returns;
- The Board had insufficient knowledge and skills to effectively challenge the executive on product design and liability valuations. In particular, the internal systems were ineffective in ensuring the Board could form an independent or clear view of the Society’s financial position;
- Previous regulation was over-reliant on the appointed actuary, particularly when the appointed actuary was in a clear conflict of interest between 199 and 1997 as chief executive too;
- The regulator appeared to understand the significance of policyholders reasonable expectations, but there was no consistent or persistent attempt to establish how PRE would affect the Society’s liabilities;
- The regulators also failed to note the various measures used to bolster the Society’s financial position were in fact based on the future surpluses of the firm, and had failed to follow up any failures of regulation the firm had presented;
- Throughout the process, the appointed actuary was able to claim the Society’s valuation practices were consistent with other firms and their applicable professional practices, when this is now found not to be the case.
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