Equitable Life: how could it happen?

If the first, most trusted, and oldest workable life insurance company in the United Kingdom can go bust where does that leave the future of all the rest…?

So much has now been written about the fall of what was the most trusted and reliable institution and yet questions are still being asked as to how this could have happened at all.

The problem is that Equitable life was mutually owned – meaning that there was no-one to specifically blame for the catastrophe that occurred.  In the 1950′s the company began issuing guaranteed amount pension contracts; the point is that in the fifties the guarantee was something like four per cent when annuity rates were around eight per cent – result was that no-one used the guarantee back then.

But by the 1990′s the annuity rates had dropped to around three per cent – below the four per cent guaranteed by Equitable Life. So what happened…?

People who bought their policy in the 1950′s reached retirement age in the 90′s, saw the decrease in annuity rates, and so opted to use the guarantee from Equitable Life. This should not have presented any problems except that Equitable Life decided to pay out the four per cent but reduced the amount of money on which they were paying it.

This could have been avoided if in the early 1980′s EL reduced the amount of allocated return on the pension policies thus ensuring that pensions up to twenty years later would be safe. This action would have seen EL drop out of the top ten performing funds of the time…but they would have survived. In short, from the early 80′s the fund was paying out more money than it could afford to.

Then you had the legal action. EL counted among it’s policy holders lawyers, QC’s, doctors…when they learned of their reduced pensions they chose to take legal action and thus ‘emptied the pot’ of any funds still remaining in EL. They sued themselves so to speak and made the situation worse – like hitting yourself on the head and then taking yourself to court for it…what a waste of money. They ran up astronomical court fees when there was no hope of the company being able to pay out – as a result those already receiving their pensions from EL saw their value drastically cut.

So what now…?

The blame is being placed squarely at the feet of the Govt, and rightly so, but the directors of EL have as much fault to carry. The Ombudsman has ordered the Govt to compensate over one million policy holders within two years – to the tune of some 4.6 billion pounds…can the Govt possibly carry this and will all those people get back some of that money they were entitled to?

Yes, but expect a serious hike in taxes to fund this action – it will be those tax payers thirty years from now who will still be carrying the cost of this whole debarcle.

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