Summary. Sir John Chadwick has issued his report on a compensation scheme for Equitable Life policyholders.

Background. The Equitable Life Assurance Society closed to new business in 2000, and by 2002 had reduced policy values on all with-profit policies including with-profit annuities (WPA). In 2008 the Parliamentary and Health Service Ombudsman issued a report on the prudential regulation of Equitable Life by public regulators. She made findings of ten findings of maladministration against the regulators, which led to four findings of injustice suffered by policyholders. Following this report, the Government asked Sir John Chadwick for his advice on five issues:

  1. the extent of relative losses suffered by Equitable Life policyholders;
  2. what proportion of those losses can be attributed to: (a) the maladministration accepted by the Government; and (b) the actions of Equitable Life and other parties;
  3. which classes of policyholder have suffered the greatest impact;
  4. what factors arising from this work the Government might wish to take into account when reaching a final view on determining whether disproportionate impact has been suffered; and
  5. if the accepted maladministration had not occurred, what difference would it have made to the performance of Equitable Life?

Facts. With regards to the five issues:

  1. WPA holders suffered a relative loss of 25% and all other policies a loss of 20%. Chadwick bases these figures on his contention that without the maladministration, new investments in Equitable Life would have dropped by between a sixth and a quarter.
  2. As the Government accepted the findings of maladministration, these losses could not appropriately be apportioned between Equitable and other parties.
  3. The greatest sufferers were WPA policyholders.
  4. The Government should take into account three factors. Firstly, any policyholders who suffered “real loss”, by receiving less from the policy than they paid in premiums. Secondly, any ability policy holders had to mitigate the results of maladministration. WPA policyholders had the most limited ability to mitigate. Thirdly, Chadwick argues that some policyholders (such as those with guaranteed annuity rates) in fact benefited from maladministration.
  5. With no maladministration, Equitable Life would still have closed to new business in 2000. It would have declared lower bonuses at some points in the 1990s and a slightly weaker solvency position to regulators, but would have declared a better solvency position in 2000.

Comment. This report will be taken into account by the Government in developing the compensation scheme for Equitable Life policyholders.

Source: Advice to Government in relation to the Equitable life Payment Scheme published by Sir John Chadwick in July 2010