Thursday, January 15, 2009

In-Equitable treatment

Victims of Equitable Life are to be paid off by the taxpayer, says the FT.

Equitable Life ran a with-profits fund, a form of collective investment that only goes up (as long as you maintain it to the end of the agreed term). Once awarded, bonuses on with-profits funds cannot be taken away. EL's undoing was that, like some other companies, they dragged in extra pension business a long time ago on the selling point of guaranteeing (in their case) a 12% annuity rate when the plans matured. That is, for every £100 in the fund, the life time income would be £12 per year.

When we moved from a high inflation/high interest environment to low/low, this promise became a ticking time bomb. When annuity rates generally have dropped to 6% or less, you need to double the fund to create the same income. So since there wasn't enough in the kitty, EL had either to renege on the guaranteed annuity rate (GAR), or take away much of the bonuses already awarded. I believe they tried both approaches and the courts wouldn't let them.

This GAR depth-charge was well known, or should have been known, to actuaries. The IFA network I was with in the 90s used to have a shortlist of approved companies (including non-commission payers) for each product, and at some point EL quietly dropped off the list. If outsiders could see the disaster looming, we have to assume the technical advisers on the inside knew even better what would happen. Yet EL carried on awarding bonuses to investors as though nothing was wrong.

Now, it seems compensation is to be paid because industry regulators failed to spot the coming crisis and step in. It's as though houseowners could sue the police for not stopping Bill the Burglar. Perhaps it helps EL investors' case that so many of them happen to be lawyers and journalists?

However, what is sauce for the goose is sauce for the gander. The same arguments can be applied to victims of the mortgage mis-selling of the past few years. For Equitable Life, read banks; for investors, read borrowers. And in both cases, it's the same regulator now.

Compensation, please.


Anonymous said...

As someone that was caught out by the Equitable Life fiasco I have to say that the reliance on "caveat emptor" that you are using to justify not paying out on compensation to EL claimants is quite wrong. The vast majority of people that paid into EL had no knowledge and no visibility of problems at EL, especially as they were often paying through company pension funds (as I was) and were therefore assured by the trustees of the pension fund that all was fine. However, company pension fund trustees are ordinary folk - they can't necessarily be expected to remove the wool pulled over their eyes by a pension mis-seller which is doing everything it can to keep that wool in place. So you can't blame those that paid into EL, you could blame pension fund trustees (but it wouldn't get you very far) and you can certainly blame the diredctors of EL (but that path was blocked, in my view unfairly, by the courts who claimed that EL was merely a pensions company that sold pensions on a model that turned sour - not true, in fact, because EL continued to sell pensions a long time after it knew that their business model had turned sour). So that leaves the government with not only some shared liability (for not spotting what was wrong at EL through regulators) but also with a weak argument for "Do nothing" given it is bailing out banks with much weaker cases for compensation.

As for mortgages I'm sorry but it is rarely the case that these are being sold "blind" to the buyer. You know pretty early on just how much you are paying. You are warned about losing your house if you don't pay. What is more, if you don't take out a mortgage you can only rent instead - which will cost you the same - so what have you really lost? If the unnderlying value of your home has fallen taking you into negative equity you might be able to claim you never understood that could happen - but you would struggle to find anyone that believed you. But then again if the government is to bail out anyone with printed money it should be those with mortgage debt. They were not to know they were being manipulated in a game to maximise the take-up of debt by the creation of an asset bubble, with the indebted competing with other debtors for the best houses.

Sackerson said...

I don't blame the investor, but I do blame the trustees, actuaries etc. I do sympathise.

As for mortgage vs. rent, the nature of housing means that artificially inflated house prices also drive up rents, so the consumer doesn't have much choice - except to buy a caravan which I wanted to do last year but for some reason my wife wasn't wildly enthusiastic!

Yes, sue the regulators - but not them alone - and let borrowers do the same.

nomzam said...

I agree with you. But now the situation is much better than if we compare 2009 to 2013. Now the annuity rates are much better.