Investment: Pensions ruling is the most Equitable
Wednesday 15 September 1999
The decision by the Vice-Chancellor Sir Richard Scott to back Equitable's stance on guaranteed annuities in the High Court is neither a surprise nor an occasion for outrage. In fact, I see it as a welcome attempt to re-establish the primacy of logic and reason over emotion and (dare I say it?) greed. Although part of Mr Justice Scott's judgement is to go to appeal, I fear that any aggrieved policyholders who are hoping for better luck from the courts in future are going to be equally disappointed.
Readers of this column will, I hope, not have been surprised at the outcome of the case, which was predicted here on 12 May. Even as a layman, it was always obvious to me, having studied the arguments and talked to both sides, that the legal case was about as watertight in Equitable's favour as you could hope to find. And so it has proved. What may not have come out in some of the rather hysterical comments since the judgement was announced last week is that the judge effectively demolished almost all of the arguments put forward by the litigants.
Briefly summarised, his findings were:
t That Equitable Life's decision to cut final bonuses for those with guaranteed annuity rates in their pension policies was not a breach of the pension contracts that the policyholders had signed;
t That the directors of the Equitable were perfectly entitled under the rules of the society to use their discretion to treat policyholders in this way; and
t That the directors had also properly taken into account "policyholders' reasonable expectations" in arriving at their decision.
Although the case sounds complicated, the essence of it is quite simple. Nobody disputes that what Equitable has done is to say to those policyholders with guaranteed annuity rates in their pension contracts that it will not allot them as large a final bonus as it has given to those whose pension policies do not include the guarantee. On the surface, this sounds like a terrible injustice, but in practice it is nothing like the gross breach of promise that the action group would have you believe.
The point that the Equitable has struggled to put across in public, though it was clearly decisive in the judgement of the court, is that in a mutual society any benefits that are paid to one group of policyholders can only come at the expense of others. The only reason that the guaranteed annuity rates have become an issue at all is because the value of the fund that has built up for most of the policyholders with guaranteed annuity rate pensions already exceeds their so called "asset share" in Equitable's with-profits fund.
The asset share is the notional value that has built up from the premiums which have been paid by investors and invested by the society over the years. If you save with the Equitable, it therefore represents the accumulated value, after charges and other expenses, that your savings have earned over the years. Unlike many other life insurance companies, it has always been Equitable's policy to ensure that the benefits paid to its members are as close as practicably possible to the amount of asset share they have "earned" from their contributions.
Two relevant points to notice here are:
First, that the problem with guaranteed annuity rates only arises because current annuity rates have fallen below the rates guaranteed in the pension policies at issue. Yet falling annuity rates are only part of a broader decline in interest rates over the past 15 years. These falling interest rates have also been a major factor in the exceptionally good investment returns that most pension policyholders have enjoyed in recent years. What the guaranteed annuity brigade wants is to gain both the asset appreciation windfall that interest rates have brought and the benefit of higher than market annuity rates - if you like, two for the price of one.
Second, that the concept of "policyholders' reasonable expectations", which was first introduced in insurance company legislation in the early 1970s, and on which so much of the plaintiff's case now seems to rest, is a vague and illusory idea that, while obviously well intentioned, is hard to pin down.
The nearest way most experts can get to it is to say that it means you should be broadly entitled to get out of a pension policy as much as you have put in - in other words that you are entitled to something approximating your asset share in the insurer's accumulated with-profits fund. This is exactly the principle that the Equitable has been trying to uphold in deciding to test the case of its own policyholders in court.
The effect of the aggrieved policyholders' action has been to try to take benefits that exceed in value those that their premiums have earned, and to do so by taking money from the fund that has been built up with the savings of all the other Equitable policyholders. While I have no doubt that these "outraged" savers may be genuine in their sense of grievance, I am equally clear that, viewed in this light, their claims to occupy the moral high ground are dubious. In that sense, they deserve to lose the case.
Having said that, it is clear that the Equitable has found itself caught between a rock and a hard place. While in my view the board has acted both bravely and correctly in sticking up for the rights of all their policyholders, not just a privileged minority, it is clearly not a situation with which it is entirely comfortable. It is also one which in retrospect could - and perhaps should - have been managed more effectively.
However, I do not share the general alarmist view that the Equitable has been mortally wounded as a result. Most media comment seems to suggest that a) the society has suffered a grievous blow to its reputation; b) that its days as a mutual society are probably finished; and c) that its business will suffer as a result of the adverse publicity it has had from this case. My view is that, while the publicity has indeed been unhelpful, it need not be fatal in any of these ways. You have to bear in mind that for every aggrieved policyholder with a guaranteed annuity rate pension, there are three or four times as many who have now been spared having the value of their own pensions reduced to pay for their fellow members' attempt to get "something for nothing" at their expense.
Assuming that the High Court decision is upheld on appeal, as I expect, it is at least as likely that most sensible people will come to the conclusion, on reflection, that the Equitable has done itself some competitive good. It has shown that it is one of the very few insurance companies that is prepared to commit itself to treating all its members as fairly and as equitably as possible, and to have stuck to its guns despite the obvious bad PR that this course of action would create. In my book, when allied to the society's hard-earned reputation for low costs and integrity this is a plus not a negative factor.
Of course, if the Equitable's members do vote against remaining a mutual, that is their prerogative. What many policyholders may feel is some distaste at the fact that a small minority of the policyholders want to destroy the whole concept of mutuality by actively pursuing their own narrow interests at the expense of their fellow members. I said in my May column that those with guaranteed annuity rate pensions had some grounds for grievance, but were not victims of an injustice. I stick to that now. Their real quarrel is with the whole annuity system which forces pension policyholders to access their accumulated pension fund in the form of an annuity rather than some more flexible mechanism.
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