Mr Mike Arnold FIA,
Principal,
Milliman,
103-105 Bunhill Row,
By email – hard copy to
follow
22 January 2006
Dear Mr Arnold,
I contacted you as the
independent actuary, charged with ensuring the fair treatment of Standard Life’s
members as the company seeks to demutualise. I’m sorry that you feel you cannot
meet me. Although I understand that you might be reluctant to create a
precedent by meeting individual members, nevertheless there is an important
distinction between your past demutualisation work and your current assignment
with Standard Life. There are important matters of both principle and fairness
which affect all Standard Life members. While I’m sure that you are fully aware
of all aspects of the company’s relationship with its members, nevertheless
Standard Life is your client, not its members. Your terms of reference have
been agreed without any consultation with members. This is a very long way from
being directly accountable to a group of creditors whose interests you
represent.
This is particularly
important given the way that Standard Life has dealt with its members since its
losses occurred. The current demutualisation is based on the principle that the
company can no longer deliver to its members the benefits of mutuality and so
must give them something else. This turns out to be shares in the floated
company. However, there are significant problems with such an analysis.
Members’ policy losses cannot be linked to any significant degree to the
withdrawal of mutuality. Mutuality was always the icing on the cake. Policy
losses can be traced to a catastrophic failure of risk and business management
by the board of Standard Life. Not only did the company fail to protect against
the stock market collapse of 2000.It
then charged ahead, booking billions of new business that Sandy Crombie
and colleagues had to dump in 2005, so incurring further losses.
Yet all the while, the
company failed to alert its members to their increasing risk. Standard Life has
systematically disguised the increase in risk to members, brought on by its own
incompetence. A good example is the duplicity with which it explained Iain
Lumsden’s abrupt departure in January 2004. A mere 23 months earlier, he was
Group CEO designate. He was a long standing employee who had been groomed for
the job. By January 2004, he was leaving as his “planned retirement” would
prevent him from seeing through to implementation the strategic review.
Plainly, without the losses of 2000/03, the review was redundant. No mention of
any of this. It was an outrageous way to communicate with members. It
camouflages management’s incompetence. It deflects attention away from the
destruction of over 80% of Standard Life’s capital, and the consequential
increase in members’ risk. Policy holders’ cash flows have kept the company
afloat. Policy holders’ reserves have been transferred to prop up the company’s
Tier One Capital. Policy holders were lulled into believing their payments were
buying good value. The reverse was true.
Unfortunately, despite all of
this, members have none of the contractual rights which long term funders
normally possess. Fortunately, it does appear from your very interesting and
informative papers on Policy Holders’ Reasonable Expectations (PRE) that the
courts are happy to take an active role in defining members’ policy rights. I
believe that in consideration for their financial contributions to Standard
Life over the past few years, members are entitled to something much better
than a simple distribution of common stock. They have borne a disproportionate
share of Standard Life’s losses. Standard Life’s with profits fund is delivering
much poorer results than better managed competitors, such as Prudential.
A better and more just
solution would be to compensate members with convertible preference shares.
These could qualify as Tier One Capital under the existing FSA rules, and so strengthen
the regulatory balance sheet. Whatever solution is proposed, a discredited
board should not be allowed to set the terms to compensate members without a
judicial review. Such a review should precede any attempt by the board to
determine compensation. Members deserve protection from the Board of Standard
Life.
Please find attached the details
of those Standard Life members who support my arguments.
Yours sincerely,
Michael Hogan
CC: Sandy Crombie, Standard
Life