A High Court ruling in a dispute between policy-holders and a pension company could be bad news for millions.
CONSIDER THIS. You buy a new Volvo Estate, and insure it comprehensively at the same time that your neighbour picks up a TVR, but opts for third- party cover only. When he runs into the back of you, writing off his car, though yours is scarcely dented, the insurance company decides that it is only fair for his damage to be fully covered. To pay for that you must receive less than you had bargained for and foot the bill for some of your own repairs. Strange story, but scarcely true?

Yet this is the outcome of a High Court battle between pension policyholders and the Equitable Life insurance company. Lord Justice Richard Scott has ruled that policyholders who opted for a guaranteed contract had no right to receive more than those without one.

The decision, which looks like a victory for the company, may have far- reaching implications for a good slice of the 43 million life, endowment and pensions policies in force. It could yet prove a poisoned chalice for the rest of the industry.

The row originally erupted between Equitable and about a quarter of its customers when the company, like several others back in the Seventies and Eighties, guaranteed that pensions would be paid at a certain level. But it got its sums wrong. Plunging gilt yields sent annuities tumbling and left quite modest guarantees looking hopelessly generous. Paying them in full might, at its worst, have ultimately bankrupted the company. Equitable decided not to pay. But the contracts said these annuity rates were guaranteed. What was less clear was what else had to be paid.

With-profit policies are hopelessly inscrutable, and most policyholders have no idea how much they will receive until the contract matures. This is because a huge element of the final nest egg comes in the form of a terminal bonus.

This bonus is not actually guaranteed, so Equitable decided it would slice a huge chunk off to make its books tally. This brought the pensions of those with guarantees in line with those with no guarantee, who received the full bonus.

Policyholders argued in court that the company reneged on a pledge. But the court ruled that policyholders had no rights apart from what was legally guaranteed, other than a reasonable and fair share of any other assets. In other words, one group of customers could not have preferential treatment, just because they bought a superior product.

It means more than hard luck for 116,000 Equitable policyholders. Although the industry is anxious to stress that this is an exceptional case, the truth is that it opens the door to the possibility that other companies could renege on their promises of certain benefits.

The company used loopholes in its rules of association to wheedle out of bigger payouts, but another company, equally hard-pressed, could find other terms and conditions to exploit. In the worst scenario, millions of pensions and endowment policyholders could see themselves short-changed when it comes to either settling up their mortgage or on retirement. With- profits were supposed to be a slightly safer option than a stockmarket linked contract but, after this week, they look a much higher risk.

The judgment also reinforced the powers of the directors of the company to pay essentially what they liked to their customers unless specific guarantees were given.

Standard Life and Norwich Union have confirmed that all their pension guarantees will be met and full terminal bonuses paid, although Scottish Widows has already taken steps to curtail its liabilities.

What can customers do? Nothing, although Lord Justice Scott did grant leave for an appeal.

Meanwhile, give with-profit policies a miss and go for transparent investments where you see what you get. For once, the Abbey National got its timing right by choosing this week to launch its ISA mortgage and say "bye-bye" to endowments.