Lots of life left in Equitable Life

Pensions expert reckons the stricken society is rising from the ashes reborn and stronger, reports William Kay

One of Britain's top pensions experts believes that Equitable Life Society could be as financially strong as any other provider in this country. John Turton, head of life and pensions at the London-based adviser Bestinvest, says: "Equitable is now stronger than most life funds, simply because last month's cuts have boosted its reserves by 20 per cent."

On 16 July, Equitable cut 16 per cent off the value of every policyholder's fund, and said the previous 8 per cent annual bonus would be suspended for the first half of this year. It will resume at a rate of 6 per cent a year, meaning policyholders will have a bonus of only 3 per cent for the whole of 2001.

Mr Turton adds: "At the end of last year, their reserves were probably around 5 to 6 per cent, so they are now around 25 per cent, which would be the strongest in the industry. Some of that will have to go in attempting to reach a deal with the guaranteed annuity rate holders, offset by the remaining payment by the Halifax, but they are likely to have a 15 per cent reserve at the end of the day, and that is pretty much the industry average." The Equitable spokesman, Alistair Dunbar, is trying to assure policyholders that their money is now safe, barring a major catastrophe on the stock market. Mr Dunbar says: "The pain has been taken. We are on a sound footing. Withdrawals are not a problem for the fund, and not a problem for those who remain."

Many of the group's near-million policyholders have been considering early surrender in the past three weeks, fearing the society was on the verge of collapse that would be made worse by a high rate of withdrawals. But everyone who does pull out from now on has to take a 7.5 per cent policy deduction, which on balance will benefit those who remain.

Mr Dunbar says: "We are erring on the side of caution in going for 16 per cent, then through the 7.5 per cent recouping the initial expenses immediately as well as ensuring that early leavers do not take more than their fair share. Withdrawals are now more likely to benefit those remaining, by a small margin.

"The 16 per cent cut was driven by fairness more than the need for solvency. People withdrawing had been leaving less money for those remaining. But withdrawals are not an exact science. The society had two major problems: policy values being out of line with underlying market values, which 16 July was designed to correct, and the instability caused by the GAR dispute. But the expected cost of that has already been allowed for, in the seven months' withholding of the bonus last year.

"These cuts bring the value of the fund into line with the underlying value of the assets. We had been allocating 8 per cent a year, but the fund values had been going down because of the performance of the stock market. We said on 16 July that the outlook is not as good as it was, so we are reducing to the annual allocation to 6 per cent a year, after the 16 per cent reduction and the suspension in the first half of this year. We think the trend rate for the fund return is 6 per cent a year long-term. But it is vulnerable to another significant fall in the stock market."

Those already receiving with-profit annuities are not having to bear the 16 per cent cut in one lump, because that would be a radical cut in their income. Instead, their 6 per cent annual bonus will be cut to 4.5 per cent until further notice.