The UK’s coalition government is the first time in more than a generation that political parties have shared power, but one of its first actions has proved all too familiar. The decision to set up an independently designed compensation scheme for Equitable Life policyholders that was “swift, simple, transparent and fair”, leaves open the potential for the UK taxpayer to foot a £4 billion compensation bill.
Under normal economic conditions this would be a staggering decision, but at a time when desperate measures are being taken to slash the country’s spending in order to avert a Greek-style debt crisis, it is unfathomable. For those unfamiliar with the saga, Equitable Life policyholders saw their pension pots slashed following a series of catastrophic actuarial errors, that left those with-profit policyholders holding guaranteed annuity options (offering minimum guarantees of more than 10%) a very generous retirement, and those without, a lot less than expected.
Equitable Life tried to be, well, equitable about this mistake and, drawing on its basis as a mutual insurer, sought to redistribute some of the guaranteed annuity option holders’ gains to those who had none. Following a high court ruling, Equitable Life was not allowed to do this, and now the state intends to compensate policyholders instead.
Longevity specialists have long noted that holders of life insurance policies live longer – much longer in some cases – than the uninsured, for the simple reason that they are better educated and wealthier than their uninsured peers. So it is no surprise that the coterie of high-earning professionals that made up the bulk of Equitable Life’s policyholders had the means and media savvy to conduct a 10-year campaign for “compensation”.
That actuarial failure is to blame for the Equitable policyholders’ suffering is clear, why this should be a case for state-funded compensation is less so when those suffering from mistakes over investment decisions get nothing.
For example, according to research by BestInvest, Canada Life’s UK Smaller Companies fund managed to turn £100 into £88 in the five years up to 2008. This occurred over a period of a time when the market as a whole had risen by 50%, yet no-one suggests these investors should receive largesse from the taxpayer to make up their loss.
There is a broader significance for the development of Solvency II in this news. Policyholders expected total protection because Equitable Life was regulated by the UK’s Financial Services Authority. Because this ‘failed’, runs the argument, they are now entitled to bill the taxpayer. Similarly, Solvency II is intended to provide greater protection for policyholders, an aim that has become more important following the financial crisis.
Given the UK’s experience with Equitable Life, if this protection of policyholder proves a chimera, and companies fall into problems, will European taxpayers have to foot the bill for a similar transfer of wealth from the working poor to the retired rich?