Submission of the 1988 regulatory returns

Equitable submit their 1988 regulatory returns to DTI. Accompanying those returns are copies of the Society’s annual report and accounts for 1988, prepared in accordance with the Companies Act 1985 and dated 29 March 1989. Equitable also send DTI a declaration under section 94A of ICA 1982 and pay Insurance Fees of £6,500 in respect of their 1988 returns.

These documents include the following information about Equitable’s business and their financial position as at 31 December 1988.

Companies Act annual report and accounts In the President’s Statement, Equitable say that growth of new premium income at £320m had exceeded their target. They say that such growth in the business can be accommodated financially primarily because of the Society’s relatively low selling costs.

Equitable say that they had adjusted final bonus rates slightly by increasing payments on older policies and decreasing payments on newer ones. The President explains: ‘I can assure members of the care taken by your Board in the discussions leading to bonus decisions aimed at achieving a proper balance between the interests of members whose policies are due for payment in the near future and of those whose interest in the financial well being of the Society is longer term’.

Equitable explain that they believe it is increasingly important that ‘existing and new clients should understand the nature of the policies they buy and the business principles which we adopt in relation to those policies. We hope that, through our sales literature, and the information provided by our representatives, there are few policyholders who are unclear about their policies’.

In the Management Report, Equitable say that one element of their philosophy is to provide ‘unit-linked policies for those who wish to take their own investment risk and to offer for those requiring a higher degree of security a with-profits range of products where that risk is both shared and controlled’.

Equitable say that they carry out a full examination of their expense position every year and this continues to demonstrate that ‘the Society’s expenses are properly covered by the allowances contained in the premiums paid under new and existing policies’.

Equitable set out the new regular premium income for 1987 and 1988, which shows a total increase over the period of 43%. They explain:

Much of this success lies in the fact that, unlike many competitors, the Society saw distinct advantages in clients having an “old style” retirement annuity policy as a part of their portfolio of retirement benefits and we brought the benefits of retirement annuities to the attention of existing policyholders and the public alike. Awareness of those attractions led to an unprecedented volume of business in the weeks prior to the introduction of personal pensions, sales of which have been at a healthy level. The personal pension contract itself is in all essentials the same as its predecessor, enabling those in our traditional self employed market and the newly created employee market alike to have confidence in its “no penalty” nature and the consistent track record of performance.

In the Statement of Bonuses section of the report and accounts, Equitable state that their with-profits business is essentially a ‘managed fund’, with investment returns passed to policyholders through reversionary and final bonuses. Equitable say that the level of guaranteed benefits including declared reversionary bonuses tended to impose constraints on the proportion of the portfolio that could be invested in assets other than fixed interest stocks. Equitable say that they have considered recent and prospective investment conditions and have taken into account the balance of liabilities and assets when deciding to maintain reversionary bonuses at the same level as for 1987. For its recurrent single premium pensions business, which constitutes the bulk of its business, the Society’s declared reversionary bonus has been maintained at 7.5%.

The returns Equitable’s regulatory returns are submitted in two parts. The first part covers Schedules 1, 3 and 6 to the ICAS Regulations 1983, being: balance sheet and profit and loss account; long term business revenue account and additional information; and certificates. The second part of the returns covers Schedule 4 and is the abstract of the valuation report prepared for the Society by its Appointed Actuary. This part of the returns includes various forms that provide details and analysis of mathematical reserves, long term business, composition and distribution of surplus and the calculation of solvency margins.

Schedule 1 (Balance sheet and profit and loss account) Schedule 1 of Equitable’s returns is made up of Forms 9, 10, 13, 14 and 16. Form 9 (Statement of solvency), drawing on figures presented in other parts of the returns, summarises the Society’s financial position at 31 December 1988 as follows:

Schedule 3 (Long term business: revenue account and additional information) Schedule 3 of Equitable’s returns consists of Forms 40 to 51. Equitable include various notes to the Forms giving further information about and/or explanation for the figures provided.

Form 45 (Expected income from admissible non-linked assets) shows that 45% of Equitable’s non-linked admissible assets are invested in equities, 14% in land and 35% in fixed and variable interest securities.

Equitable disclose in Form 46 (Analysis of admissible non-linked fixed interest securities) that the gross redemption yields on assets invested in fixed interest securities issued or guaranteed by any government or public authority and with durations of less than 15 years are consistently higher than for those not issued or guaranteed by any government or public authority.

The notes to this part of the returns include a statement that no provision has been made for the contingent liability for corporation tax on unrealised capital gains for non-linked business, which is estimated not to exceed £10m.

Equitable also state that they have been granted a section 68 Order which permits them to include in aggregate form details of their ‘Personalised Funds’ in Forms 49, 50, 51 and 57, instead of the separate details for each individual Personalised Fund required by the ICAS Regulations 1983. (See 14/10/1986.)

Schedule 6 (Certificates by directors, actuary and auditors)

Three Equitable Directors provide the certification required by Regulation 26(a) of the ICAS Regulations 1983. Equitable’s Appointed Actuary provides the certification required by Regulation 26(b) of the ICAS Regulations 1983. As required by Regulation 27 of the ICAS Regulations 1983, Equitable’s Auditors provide their opinion that Schedules 1, 3 and 6 of the returns have been properly prepared.

Schedule 4 (Abstract of valuation report prepared by the Appointed Actuary) Equitable present two valuations of their long term liabilities. The results of the first valuation, which in this report I have called their main valuation, are carried forward unadjusted from Form 58 to Forms 9 and 14 in Schedule 1 of the returns. This valuation uses a bonus reserve (or gross premium) method. This appears in the body of Schedule 4 of the returns. They carry out the second valuation, which I have called their appendix valuation, using a net premium method. Equitable state that the purpose of this second valuation is to demonstrate that the aggregate mathematical reserves in the main valuation are not less than the amount calculated in compliance with Regulations 55 to 64 of ICR 1981. This second valuation appears as an appendix to Schedule 4.

Schedule 4 – main valuation (text) Equitable’s main valuation provides the information required by paragraphs 1 to 19 of Schedule 4 to the ICAS Regulations 1983 and includes Forms 55 to 58 and Form 60. Equitable state that this valuation conforms to Regulation 54 of ICR 1981.

In response to paragraph 3 of Schedule 4 – which required that the following information should be given: ‘For each category of non-linked contract, other than those fully described by the entry in column 1 of Form 55, a full description of the benefits including any premium rate guarantees and options’ – Equitable provide ten pages of information about their non-linked contracts.

Paragraph 3(xi) includes:

The details of the general annuity and pensions business described as with profit immediate annuity are as follows.

The basic contract provides guaranteed benefits increasing at 3½% per annum, which are enhanced by the addition of bonuses, including final bonus.

Under an alternative version of the contract earnings in excess of 3½% per annum up to a maximum of 10% per annum may be anticipated. Annuity payments will remain level if the specified level of earnings were precisely achieved in practice.

In paragraph 3(xiii), Equitable provide a description of their retirement annuity contract, stating:

Pensions business with profits contracts described as retirement annuity, individual or group pension are deferred annuities, the premiums being of the recurrent single premium (or variable premium) type. The premiums provide a cash fund at the pension date, to which is applied a guaranteed annuity rate.

In paragraph 3(xiv), Equitable provide a description of their personal pension plan contract. The description includes:

With profits retirement benefit segments are deferred annuities, the premiums being of the recurrent single premium (or variable premium) type. The premiums provide a cash fund at the pension date used to purchase benefit. There is no guarantee of annuity rates to be applied to the cash fund.

In paragraph 3(xv), Equitable provide a description of their ‘Pensions business termed 2nd series individual pension’, explaining that they are contracts effected since 1 July 1988. The description includes the same statement as for their personal pension plan contract (see above) that premiums provide a cash sum to which no guarantee of annuity rates apply.

At the end of this section, Equitable set out the ‘principal guarantees of terms’ that apply to their policies. The first of these is ‘Guaranteed annuity options’, which are described as follows:

These are associated both with endowment assurances and certain deferred annuities. In the case of endowment assurances an extra premium is charged.

The other principal guarantees set out are: ‘Conversion option’; ‘Option to maintain or increase sum assurance without evidence of health’; ‘Protection option’; ‘Option to effect further policies without evidence of health’; ‘Guarantee of rates’; ‘Guarantee of terms on taking benefits other than at the prescribed terminal date’; and ‘Waiver of contribution facility’.

For their ‘Guarantee of rates’, Equitable explain:

Recurrent single premium or variable premium with profits deferred annuities issued to individuals and [certain other policies] carry a guarantee of terms for future premiums.

For their ‘Guarantee of terms on taking benefits other than at the prescribed terminal date’, Equitable explain:

Recurrent single premium or variable premiums with profits deferred annuities carry a guarantee of the terms that will apply in the event of retirement, whenever it occurs, or death.

In response to paragraph 4 of Schedule 4, Equitable provide 31 pages of information about their linked contracts.

Under paragraph 5 – which required that information be provided on the general principles and methods adopted in the valuation – Equitable disclose that they have tested the ability of the Society to hold reserves which satisfy Regulations 54 and 56 to 64 of ICR 1981 in the changed investment conditions described in DAA1 (see 14/11/1985). Equitable state:

In these conditions the Society would be able to set up reserves which satisfy [Regulations 54 and 56 to 64 of ICR 1981] without needing to have recourse to the assets whose current value is shown at line 51 of Form 14 [in Schedule 1] of these Returns. No provision was made for any mismatching between the nature (including currency) and term of the assets held and the liabilities valued.

(Note: the entry at line 51 of Form 14 was the excess of the value of admissible assets representing the long term fund over the amount of those funds and represented the difference between the market value and book value of those funds.)

In addition, Equitable state that, in determining the provision needed for resilience reserves and tax on unrealised gains, they have taken account of the fact that the long term fund has been valued at book value.

In paragraph 5(1)(e), Equitable disclose that a reserve for the prospective liability to tax on unrealised capital gains is held in respect of policies where benefits are linked to the Society’s internal funds. They also disclose that the contingent liability for tax on unrealised capital gains in respect of other business is estimated not to exceed £10m. The returns state that the Society consider that there are sufficient margins in the valuation basis to cover this amount and, accordingly, they hold no specific reserve.

In paragraph 5(1)(f), Equitable state that, in current conditions, they do not consider it necessary to hold a specific reserve for the guarantee they offer on unit-linked annuities.

In paragraph 6(1) – which required that information be provided on the rates of interest and tables of mortality and disability assumed in the valuation – Equitable disclose that, for certain nonprofit deferred annuities – which does not constitute a large proportion of its business – the valuation rates of interest used were those assumed in the premium basis. Equitable do not elsewhere in the returns disclose the rate used in the premium basis.

Paragraph 7(b) of Schedule 4 required that information be provided on ‘the method by which provision is made for expenses after premiums have ceased or where no future premiums are payable or where the method of valuation does not take credit for future premiums as an asset’. In response to this, Equitable disclose that they maintain a general expense reserve of £10.5m but that this mainly relates to any shortfall of future premium loadings to meet future expenses on regular premium business. They state that no other explicit provision is made for future expenses on their recurrent single premium business or for business where premiums had ceased or were no longer payable. Equitable do not explain the method by which they have made provision in the main valuation for expenses on recurrent single premium business.

In paragraph 7(d) – which required that information be provided where contracts have not been valued in accordance with Regulation 57(1) – Equitable state:

A further valuation has been undertaken using the net premium valuation method. The bases employed are in accordance with Regulations 55 to 64 of the Insurance Companies Regulations 1981. The resultant aggregate liability is less than the aggregate liability on the methods and bases described in this report. The report on the net premium valuation is given in an appendix following Form 60 of this report.

In response to paragraph 11 of Schedule 4, the returns state:

The Society has no business where the rights of policyholders to participate in profits relates to profits from particular parts of the long term business fund.

In response to paragraph 12 of Schedule 4 – which asked: ‘Whether there is any reference to the principles on which the distribution of profits among policyholders and shareholders is made in the constitution of the company or in provisions made thereunder, in any policy issued by the company or in any advertisement by the company and, if so, a description of the principles and a reference to the document in which they are expressed’ – the returns state:

The Society has no shareholders and the principles upon which the distribution of profits among the policyholders is made are determined by the Directors in accordance with the Society’s Articles of Association.

Paragraph 13 of Schedule 4 asked for ‘Particulars of the bonus allocated to each category of contract, including the basis of calculation and the circumstances and the form in which the bonus is payable’. In response, Equitable set out the level of bonus declared for 1988 and record that they had set reversionary bonus for the main policy classes at 7.5%.

In paragraph 13(b), Equitable also disclose that some retirement annuity and individual pension policyholders have been offered loans under a ‘loanback’ arrangement.

Paragraph 16 asked for ‘A statement of the practice regarding any bonus payments (in addition to those for which the company had become contractually liable) to be made on claims arising in the period up to the next investigation together with the rates at which such bonus payments are to be determined’. In response, Equitable set out how final bonuses are calculated for the various classes of business.

Schedule 4 – main valuation (forms) In Form 55 (Valuation summary of non-linked contracts), Equitable set out the mathematical reserves held for the various types of non-linked contracts along with information on the number of contracts in force, the benefits guaranteed and the rates of interest and mortality assumptions used in valuing them.

In Form 56 (Valuation summary of linked contracts), Equitable set out the mathematical reserves held for the various types of linked contracts along with information on the number of contracts in force, the benefits guaranteed and the rates of interest and mortality assumptions used in valuing them. Equitable disclose that they hold reserves for noninvestment options and other guarantees for many of their unit-linked policies.

In Form 58 (Valuation result and distribution of surplus), Equitable set out the valuation result and the composition and distribution of the fund surplus.

Schedule 4 – appendix valuation (text) Equitable explain that the appendix valuation:

… was undertaken solely for the purposes of demonstrating that in aggregate the mathematical reserves determined by the valuation undertaken using the gross premium method, the results of which are reported on the preceding pages, are not less than an amount calculated in accordance with Regulations 55 to 64 of the Insurance Companies Regulations 1981.

Equitable’s appendix valuation provides the information required by paragraphs 1, 5, 6, 7, 9, 17 and 18 of Schedule 4 to the ICAS Regulations 1983. They say that the information required for the other paragraphs (apart from paragraph 19 – being a statement of the required minimum margin in the form set out in Form 60 of Schedule 4 – which, having had ‘regard to the purpose of the valuation’, has not been provided) is identical to that given in the main valuation.

In response to paragraph 5(1)(a), Equitable make the same statement as in the main valuation, that: ‘In these conditions the Society would be able to set up reserves which satisfy [Regulations 54 and 56 to 64 of ICR 1981] without needing to have recourse to the assets whose current value is shown at line 51 of Form 14 [in Schedule 1] of these Returns. No provision was made for any mismatching between the nature (including currency) and term of the assets held and the liabilities valued’.

As in the main valuation, Equitable state, in paragraph 5(1)(e), that a reserve for the prospective liability for tax on unrealised capital gains is held in respect of policies where benefits are linked to the Society’s internal funds. They also disclose that the contingent liability for tax on unrealised capital gains in respect of other business is estimated not to exceed £10m and they consider that there are sufficient margins in the valuation basis to cover this amount and, accordingly, no specific reserve is held.

As in the main valuation, in paragraph 5(1)(f) Equitable state that they do not consider it necessary to hold a specific reserve for the guarantee they offered on unit-linked annuities.

In paragraph 5(1)(g), unlike in the main valuation report, Equitable disclose that retirement benefits on their retirement annuity business could be taken at any age between 60 and 75. The Society explains that policyholders normally select a retirement age at the outset of the policy but can choose to change this subsequently without penalty. Equitable state that they have valued this business on the basis that benefits will be taken at age 60 (or on the valuation date for those aged 60 or over). Equitable also explain that personal pension business has a similar option, but that this is exercisable between the ages of 50 and 75. They state that this business has been valued on the basis that benefits will be taken at age 50 (or on the valuation date for those aged 50 or over).

As in the main valuation, in paragraph 7(b) Equitable disclose that they maintain a general expense reserve of £10.5m but that this relates mainly to regular premium business. Equitable again disclose that they make no other explicit provision for future expenses on their recurrent single premium business or for business where premiums had ceased or were no longer payable. Equitable do not explain the method by which they have made provision in the appendix valuation for expenses on recurrent single premium business.

Schedule 4 – appendix valuation (forms) In the appendix version of Form 55, Equitable set out the mathematical reserves held for the various types of non-linked contracts on the appendix valuation basis.

In the appendix version of Form 56, Equitable set out the mathematical reserves held for the various types of linked contracts on the appendix valuation basis.

GAD complete the A1 Initial Scrutiny check on the Society’s 1988 regulatory returns. GAD note that the cover for the required minimum margin is 3.84. They do not identify any concerns.

(Note: GAD’s A1 and A2 Initial Scrutiny checks (and accompanying forms) and the detailed scrutiny reports for the 1989 to 1999 returns are reproduced in Part 4 of this report.)

GAD complete the A2 Initial Scrutiny check on the Society’s 1988 regulatory returns. GAD reduce Equitable’s priority rating from 4 to 5. GAD answer ‘yes’ to the question ‘Do the interest rates used look supportable in terms of Regulation 59?’. They identify no items that are worrying and no items to notify to DTI, to be taken up immediately with Equitable.

Accompanying the Initial Scrutiny check are two forms (‘Form B’ and ‘Form C1’), tabulating key figures disclosed in the 1984 to 1988 returns. There appears to be no other correspondence on the 1988 returns.

Every Appointed Actuary is sent by GAD a copy of DAA3 on reserves for HIV and AIDS.