The warnings Equitable ignored

DAMNING evidence that Equitable Life directors were warned as long ago as 1993 that its controversial pensions policy was heading for disaster has emerged from documents obtained by Financial Mail.

Andrew Soundy, an actuary at the world's oldest insurer, told two directors that Equitable's tactics in trying to sidestep the full financial impact of having sold generous pension policies could be vetoed by regulators, the papers show. But his concerns were dismissed as no more than a 'public relations problem' by one executive.

Until now, it has been thought that Equitable realised only in the late Nineties that it could be heading for serious trouble. But details of a £3bn High Court action mounted last week by Equitable against 15 of its former directors tell a dramatically different story.

Soundy first raised fears formally on 13 January, 1994, in a note to Christopher Headdon and Roy Ranson, who were directors and actuaries at Equitable. The note came less than a month after the Equitable board made the fateful decision to cut the bonuses paid on some of its maturing pension policies - ones where annuity rates were guaranteed.

Soundy said Equitable 'will receive complaints about this approach. The longer the situation continues, the greater the likelihood that the complaints become serious. The worst scenario is that we are forced to change our practice and to compensate those who have already taken benefits'.

The following day, Headdon replied: 'Though our current approach presents us with a public relations problem, I am not sure that your suggestion does not create equally difficult professional issues in the future'. The note was copied to Ranson.

The latest revelations are likely to reignite criticisms that for years Equitable Life management complacently refused to tackle the problem caused by having promised high annuity rates to some pension holders.

The directors - many of them well-known City luminaries - presided over the insurer's policy from 1993 until 2000. Among those alongside Headdon and Ranson were Peter Sedgwick, chairman of investment group Schroders, and Peter Davis, one-time National Lottery regulator. Alan Nash, an Equitable director from 1993 to December 2000, is being sued, as well as Jennie Page, who used to run the company in charge of the Millennium Dome.

Soundy's role in trying to warn Equitable management has never before been revealed. He remained an employee of Equitable until March last year when he moved to Halifax bank as part of its takeover of £750m of Equitable's assets.

Soundy declined this weekend to talk about his warnings. 'I am not prepared to discuss it,' he said. 'I have nothing to add.'

The court documents give the first account from within Equitable about how the life assurer came to adopt and stick with its catastrophic policy of trying to contain the damage from having issued guaranteed annuity rate (GAR) policies.

The idea of reducing bonus payments was first looked at in November 1993. The board voted in favour of the 'differential bonuses' ploy on 22 December, 1993. After Soundy's first warning note to Headdon and Ranson, a second was sent four days later. It said: 'Regarding our current approach, I am suggesting that we may well be forced to change our approach by the regulatory authorities irrespective of the level of our commitment to the approach.'

Equitable pressed ahead with its two-tier bonus policy despite Soundy's objections. After a storm of public protest and legal actions in the late Nineties, Equitable tested its decision in the House of Lords - and lost. As a result of the benchmark ruling by the Lords in December 2000, Equitable was forced to close to new business and put itself up for sale.

It was the Lords ruling that forced Equitable to change its approach. But the new court documents show that Equitable's legal adviser, Denton Hall, warned almost two years before the ruling that it might lose a test case - 'simply because the judge had got out of bed on the wrong side'.

Besides pursuing ex-directors, Equitable's new management, chaired by Vanni Treves, is also suing its former auditor, Ernst & Young, for £2.6bn, alleging that it failed to spot the liabilities it was incurring as a result of the guaranteed policies. Ernst & Young is contesting the claim.

Treves has already acknowledged the legal actions will cost the insurer 'many millions' of pounds in fees and that he might not win the full amount in damages.

While it is believed that Equitable has insurance cover, which it might draw on if the directors lose but are unable to pay, that cover is thought to extend only to about £ 60m. Equitable Life declined to comment on its insurance or the contents of the writ.

Ernst & Young said it was preparing its defence against Equitable's allegations, which it has dismissed as opportunistic. A spokesman said: 'We are surprised they have taken this action at this time, given the various inquiries still taking place, with which we are fully co-operating.'

Policyholder action groups were also not impressed. Paul Braithwaite, chairman of the Equitable Members' Action Group, welcomed the moves against the directors. But he added: 'The amount of money to be recouped in these claims is a drop in the ocean compared with the primary responsibility of regulatory failure - in which the board shows absolutely no interest.'

Neither Ranson nor Headdon was available for comment.