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Getting financial justice will be a costly process.

Byline: John Cranage Business Staff

Publication yesterday of the Penrose Report into the debacle that has afflicted Equitable Life since it lost a vital court case over the payment of guaranteed annuities in 2000 is just the latest chapter in a story that has cast a blight over the UK financial services industry.

While the report highlights mismanagement and deceit on a massive scale, it merely acts as a prelude for what will certainly be a lengthy and costly process aimed at winning financial justice for Equitable's policyholders.

The roots of the misery now afflicting many thousands of people who trusted Equitable Life to provide them with a decent living in retirement can be traced back nearly 50 years.

It was in 1957 that the world's oldest mutual insurer, which had been selling pensions since 1913, began to offer annuities with a guaranteed minimum rate.

These were years of good investment returns and the society, along with many of its competitors, could afford to be generous.

As the 1950s rolled on into the '60s and '70s, high interest rates and seemingly inexorable rises in inflation seemed to have become a permanent fact of financial life -and Middle England, especially its professionals, such as lawyers and accountants, poured their retirement savings into Equitable's apparently rock solid coffers.

Typically, these GARs yielded a worthwhile pounds 12,000 a year income for every pounds 100,000 in a policyholder's pension pot.

Today's annuities pay roughly half for the same level of investment.

Equitable stopped selling GARs in 1988 but the timebomb that was to blow the balance sheet and reputation of one of the world's most respected financial institutions to bits was ticking ever louder.

For the seemingly impossible was suddenly all too real. After the financial mayhem that led to Britain's spectacular and costly exit from the ERM, the protosingle currency, the country entered a period of economic prosperity that saw inflation and interest rates steadily fall.

Equitable consequently found itself having to pay high interest rates on its GARs at a time when investment returns were falling. Other insurers in the same situation did the decent thing. They made provision in their reserves to ensure their promise to policyholders would be honoured.

Not Equitable. Faced with meeting a heavy commitment from funds it did not have, the institution described by one investment manager as an 'enigma' instead appealed to the courts to bail it out. But its attempt to renege on its commitments was eventually squashed by the House of Lords in July 2000.

The ruling left Equitable -whose free asset ratio, or excess of assets over liabilities was always in single figures -with a pounds 1.5 billion black hole in its balance sheet.

From then on the 238-year-old institution began to unravel with a speed that shocked the financial world.

It discredited directors began hawking the business around, but not surprisingly they failed to find a buyer. By December 2000 it had closed its doors to new business. The old guard at Equitable quit and a new management team lead by City lawyer Vanni Treves as chairman and banker Charles Thomson was parachuted in to salvage what they could from the wreckage.

In February 2001 prospects began to look better when Halifax agreed to buy the society's assets for pounds 500 million with the promise of two further tranches of pounds 250 million provided that certain conditions were met.

But by then Britain was in the grip of one of the worst stock market slumps for decades and Equitable was forced to sell its equity holdings for pennies on the pound and divert its funds into fixed interest stocks to stave off insolvency.

Since then it has been a continuous tale of slashed bonuses, cuts in policy values, costly legal wrangles between the society and its former executives and its former auditors, Ernst & Young.

And all the while the wealth of nearly one million thrifty and prudent people has been steadily eroded.

CAPTION(S):

The publication of the Penrose report is just the first step in the fight to win financial justice for Equitable policyholders
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Title Annotation:Business
Publication:The Birmingham Post (England)
Date:Mar 9, 2004
Words:686
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