How did it all go wrong?
In the 1980s and 1990s Equitable made no provision for the guarantees against low interest rates which were contained in all policies issued before 1986.
But even worse, it declared “fantasy” bonuses which were out of all proportion to its profits and assets. The estimated cost in excess bonuses paid out to retiring policyholders in the 1990s was £1.8 billion.
Equitable Life’s attempt to renege upon its guarantees failed in the House of Lords in July 2000 at an estimated cost of £1.5 billion. But the Society had been so weakened by its previous over-bonusing that it could not pay. Indeed it was so weak that no-one would buy its with-profit business at any price. It closed its doors in December 2000 and the directors resigned.
Bonuses voted for 1990, combined with a falling stock market in that year first created a substantial excess of policy values over assets, running consistently at about £1 billion over the decade. The Society continued to grow its market share by a major sales drive and declaring bonuses that it could not afford.
The stock market performed well over the decade and was still high when the Society had to close to new business. It was not the cause of Equitable Life’s demise. Over the long bull market of the 1990s the Society should (by limiting bonuses) have built up a smoothing fund of surplus assets ready to meet any downturn. EMAG’s actuary reckons this should have been of the order of £5 billion. Instead inflated bonuses continued and at the very peak of the market in December 1999 the Society still had a deficit.
Soon after the closure of the Society to new business in December 2000 a new board was appointed. Within months the new board had slashed policy values by 16% (over £4 billion) in July 2001 and effected a compromise scheme to deal with the GAR problem and to ambush policyholders’ rights to make any legal claims for mis-selling. It is hard to prove whether it was a pre-meditated action to rachet up the pain in increments, but in 2002 policy values were cut by yet another 10%.
With almost none of its money invested in equities, it could not operate as a with-profit insurer and its policyholders did not benefit from the stock market’s rise in 2003 to 2007. The Society is now being better managed but is closed to new business and is in run off.