Lessons from Equitable Life

    23 May 2015

    My name is Louise and I’m an Equitable Life pension holder. In April 2000 I began putting £1,000 a month into an Equitable Life plan.

    Back in the 1990s, Equitable’s fund managers had a reputation for delivering great returns. But in July 2000 the House of Lords ruled that the society had to pay guaranteed annuity rates to policy-holders: this was deemed a blow, but not sufficient to threaten solvency. In fact it was expected that Equitable might be demutualised, and savers would get ‘free’ shares. For this reason I invested £1,000 in the ‘with-profits’ fund — for the free shares — and the rest in unit-linked. Fifteen years later I have finally got around to looking into this decision, and there are lessons to be learnt.

    We now know that the House of Lords ruling was the final nail in the coffin for Equitable. Paul Braithwaite of EMAG, which campaigns for compensation for Equitable members, says the society was in crisis beforehand: ‘Equitable Life was technically insolvent… from about 1991. But it was kept hidden by regulators and management.’

    I took out my policy three months before the House of Lords decision. But long after it, Equitable was reassuring me as to its financial position. In June 2002, chairman Vanni Treves wrote: ‘We are now in a more stable position. The society is solvent.’ ‘Baloney,’ says Paul Braithwaite.If the society was in such great shape, how come with-profits policyholders lost around £4.5 billion? And why did the government compensate them unless there was significant regulatory and management maladministration?

    But compensation has only been partial. On average, with-profits policyholders have received 23 per cent of what they lost. And that was only in 2012, and only thanks to the change in government in 2010. Analysing my policy now, I’m surprised at the favourable impact of my decision to invest mostly in unit-linked funds, which I thought little about at the time. During 2000 and 2001, I put about £14,000 into the unit-linked fund: by April 2014 it was worth £32,279.

    Lethargy has proved profitable in several ways. It’s only in the past four years that the with-profits policies have been able to pay bonuses, making up for years of none. Chris Wiscarson, who took over as chief executive of Equitable Life in 2010, decided to de-risk the business and release regulatory capital back to members — that is, holders of with-profits funds. The first major distribution was in April 2011, paying back 12.5 per cent; then another 12.5 per cent in April last year and 10 per cent this April. Wiscarson admits that bonuses in the future are unlikely to be quite so large, but that still means my £1,000 turns out to be worth more than £1,300.

    So I have hung on long enough to benefit from Equitable’s recovery under a new boss. But I can’t claim it was a smart strategy. I just couldn’t be bothered to look at the paperwork. And my inactivity has benefited me again. Last year Equitable decided to scrap a 5 per cent exit fee, so I have also missed having to pay a hefty charge to transfer my money out.

    I don’t like to conclude that apathy and ignorance are good investment principles. What my example does illustrate is the importance of compounding, of leaving your money to grow. Although I bought the unit-linked funds near the December 1999 market peak, they have grown at 5 per cent a year, largely thanks to reinvested dividends.

    What other lessons? Super-smart fund managers delivering above-market returns are rarer than hens’ teeth — but I knew that already. Monthly savings were much easier PK (pre-kids). And the saying ‘a cobbler’s children have no shoes’ applies to my financial planning.

    But the last lesson goes to Paul Braithwaite, who has fought all these years for compensation for almost a million Equitable Life policy-holders facing pensioner poverty through no fault of their own: ‘This is a tale of the establishment covering its own arse… No blame has ever been allocated and full compensation has not been paid. It’s a damming indictment of the industry and the devious ways of the Treasury who for 15 years have perpetuated a smokescreen to conceal their own guilt.’

    Paul Braithwaite fights on. I’ve decided to take my money elsewhere and look after it myself. This cobbler is shoeing her children.