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Equitable Life - An IFAs view
By Robert Graham - Independent Financial Adviser
The with-profits system , unique to the UK and provider of reliable benefits for many decades to endowment holders, pensioners and others was invented in 1762 by The Equitable Life.
The system's birth resulted from the establishment of sound actuarial principles. The neglect and manipulation of these principles has led to the death of their august creator. The Equitable Life's refusal to make proper provision for its liabilities along with a remarkable optimism that the legal system would favour its eccentric view of guarantees has resulted in its own demise along with a widespread questioning of actuaries, regulators and, for some, pensions in general. Since The Equitable Life was for many years one of the most respected names in the industry it is tempting to adopt the view that they must all be worthless. The reality however is that many pension funds have continued to serve their adherents very well. Even in the turbulent market conditions we are witnessing those who have saved regularly into the products of a range of providers are pleasantly surprised by the outcome. Furthermore, numerous IFAs saw disaster coming for Equitable policyholders and warned clients at a time when regulators and actuaries were still seeing no danger.
Of course it is easy now with hindsight for us all to say we saw it coming, but in reality the signs were quite clear. Annuity rates are a function of two elements: one is longevity and the other is the level of gilt yields. We all go on living longer so annuity rates would be inclined to fall throughout the nineties once companies adopted updated mortality tables. Gilt yields fall when inflation falls. It has been clear throughout the nineties that the trend of inflation was downward. Was it not then quite apparent that the Equitable's guaranteed annuity rates would be needed? Was it not equally apparent that provision should be made by setting aside reserves? Instead, the Equitable continued to lower charges and attract praise from journalists and regulators for doing so. They were pulling the plug on a bath they should have been filling. As far as I am aware only the IFA community were pointing out that two and two really do make four. Actuaries, for all their mathematical competence, are often not good at arithmetic, especially of the simple type. IFAs who normally are kept well in touch with reality by running their own businesses could see what was in front of their face.
It is apparent now to everyone and has been clear to some of us for many years that the true risk profile of an Equitable Life with-profit pension was not made clear either to the clients or even to the salesmen who advised the clients (of which I was once one). It is also apparent that the DTI and successive regulators who charge heavily under the pretence of protecting the public were not good at doing this. A good IFA nowadays has access to a great deal of information about product providers and has a clear grasp of commercial realities. He is also very vulnerable if a client is dissatisfied. The £13,900 docked from the bonus of Sir Howard Davies, Chief Executive of the FSA for its failings with regard to The Equitable Life is a pittance compared to the liability an IFA can face for improper advice.
Equitable policyholders need advice on the options open to them, the issues surrounding the `compromise` vote, the reason for the 16% bonus reduction, the probable outlook for the fund and the consequences of the movement of assets into gilts. A good IFA can do this and indicate the circumstances in which the various penalties and deductions can be minimised or, in some cases, avoided entirely.
Robert Graham is an independent financial adviser and Associate Partner at The Scottish Financial Independence Group based in Dunfermline. For further information please visit their web site on www.scottishfinancial.co.uk or email Robert direct on email@example.com
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