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Appendix 1

Equitable Life: 1762 - 2001

Equitable Life made headlines in 2001 because the business was at the
centre of the country's professional life with barristers, judges, academics,
politicians and accountants as its main clients who looked to it to provide their
retirement incomes. It had announced in December 2000 that it had closed its
doors to new business and was trying to find a buyer. Its primary product was
with-profit policies. Clients paid in regular payments and the company paid out
less than the investment returns they earned. The company used the
difference to build reserves and to expand.

The origins of the crisis stemmed from the 1950s, Equitable started selling
policies with a guaranteed annuity rate (GAR) that allowed policyholders to
opt for minimum pension payouts and a bonus when their policy matured.

In a typical case, such policies would yield £12,000 a year for £100,000 in
pension savings. The guarantees were made by many life insurers to attract
customers as the policies offered higher than average rates. However, as
retail financial services became more competitive providers vied for new
business by increasing payouts. Equitable found itself locked into paying out
high interest rates promised at a time of high inflation - in the 1970s.
Consequently, the society stopped selling guaranteed policies in 1988. But
with liabilities of about £1.5bn and with the existing low inflation and interest
rates of the late 1990s, they were paying out more than was coming in and
crystallisation was inevitable. Some 800,000 policyholders have lost money.

When Equitable closed its doors it told its policyholders that they would not
receive the full sums they had been expecting. It tried to renege on its
guaranteed payouts in an attempt to maintain payments to the majority of its
million customers who did not hold guarantees. But the House of Lords in July
2001 ruled that Equitable had mistreated the 90,000 guaranteed
policyholders.

The Penrose Report

Lord Penrose’s report was aimed at uncovering lessons to be learned from
the Equitable fiasco.

The primary target for his criticism was Equitable itself. The old board, and in
particular its chief executive Roy Ranson, who had been an actuary for
several years, was accused of being "obstructive" of scrutiny and "dismissive"
of regulators' concerns.

However, the government regulators came in for criticism too, as a secondary
factor, for having been too light-handed in their approach during the ‘bullish’
early 1990s. They were aware of the lack of reserves, had meetings with