Investment: When paying up is not playing the game fairly - Business - News - The Independent

Investment: When paying up is not playing the game fairly

Equitable Life is trying to treat all policyholders equally, so why are a group suing the mutual society over annuity rates guaranteed over 20 years of selling pensions?

FOR ANYONE who writes about investment, there are few assignments less welcome than trying to defend an insurance company against customer accusations of not doing well. But sometimes justice requires even those of us who hold the industry in a less than favourable light to make an exception.

Equitable Life is being taken to court by irate pension policy- holders over guaranteed annuity rates. They claim Equitable ratted on the promises made for 20 years when it sold them pension policies.

In a conscious invocation of the pensions mis-selling scandal, they want the courts to rule the company was guilty of misrepresentation when it guaranteed minimum annuity rates on tens of thousands of pension contracts. Interest rates have plummeted, and the annuity rates the insurance company guaranteed are substantially above the rates obtainable today.

On the face of it the Equitable has no case. When annuity rates are at 8 per cent, as they are today, it means that anyone with a pension fund valued at pounds 100,000 can expect to receive pounds 8,000 a year as income until they die. Nobody disputes that the Equitable guaranteed to pay much higher rates on thousands of pension contracts it sold in the 1970s and 1980s. Rates of 10 per cent to 13 per cent were typical then. Translated into hard cash, the difference could easily amount to pounds 5,000 a year for every pounds 100,000 accumulated in your pension fund.

If the litigants win, it will be serious indeed for the Equitable, which rightly takes pride in its reputation as the oldest and the lowest-cost life insurance company in the country. In a business not best known for either efficiency or integrity, the Equitable stands apart on both counts (though in the last two to three years its investment performance seems to have dipped rather worryingly).

Both sides seem to be acting from genuine motives. But the closer you look at the arguments, the more apparent it becomes that this "scandal" is actually no scandal at all. It is not about mis-selling, but about wider principles of equity and insurance company practice. Nobody can criticise the guaranteed annuity holders for wanting a better deal out of the company, but it is not clear to me that they have right on their side.

I feel those who are bringing the action have little chance of winning(though they may win concessions in an out-of-court settlement). If they do win, the other 500,000 policyholders with the Equitable will regret it, since it will cost them money, and threaten the end of the principles that make buying a policy from a company such as the Equitable worthwhile.

The real issue is not the rate at which their annuities are guaranteed. Rather it is about the value of the fund to which this rate should be applied. Equitable's case is that it intends to honour its guaranteed rates in full. But it does not intend to apply that rate to the fund value to which the applicants think they are entitled.

Instead, it intends to apply the higher rates of the past to a smaller pot. To do this, it is proposing not to pay the normal level of terminal bonus on the policies of the aggrieved policyholders. As most people know, terminal bonuses can amount to anything from 20 per cent to 60 per cent of the total value of a long-term life fund. These bonuses are, and have always been, set by the insurance company at its discretion.

The bonus system is far from ideal. It allows insurers enormous scope to fiddle around with bonuses so they can, legally, discriminate between one type of policyholder and another, without outsiders being much the wiser. The irony is that the Equitable is one of the few companies that actually tells you each year what the value of your "asset share" of its life fund is.

Equitable operates on the principle that all its policyholders are entitled to be treated as equitably as possible. It undertakes that the benefits policyholders receive when their fund matures will broadly reflect the value they earned through the contributions they made and the investment returns achieved.

The company says policyholders with guaranteed annuity rates have already earned more than their asset share in the fund, so to pay a terminal bonus would be an unreasonable one-off redistribution of the assets in the life fund in favour of one set of policyholders versus another. As a mutual society, only other policyholders pay the bill for the guaranteed annuity rates.

The issue comes down to whether the Equitable is entitled to cut the terminal bonuses to nothing in pursuit of this principle? And is that reasonable and fair? To a layman, the answer to the first question is yes. The second issue is not so clear-cut. True, the affected policyholders stand to receive a lower income than they might expect, but the fall in interest rates that brought down annuity rates so sharply has been one of the factors behind the growth in the stock market, where the bulk of the life fund is invested.

The 20-year returns on the fund have been considerably higher, in nominal and real terms, than anyone who bought a pension policy at the time could reasonably have expected.

The case for aggrieved policyholders now depends on proving in court that the sales literature the Equitable and its in-house salesmen used when selling the policies many years ago failed to make clear the guaranteed annuity rates would be applied to a fund that might not qualify for a terminal bonus. This argument has force - but little merit. The important issue is whether there is underlying injustice. And in my view that case has not yet been made.

News
John Travolta is a qualified airline captain and employed the pilot with his company, Alto
people'That was the lowest I’d ever felt'
Life and Style
healthIt isn’t greasy. It doesn’t smell. And moreover, it costs nothing
News
peopleThe report and photo dedicated to the actress’s decolletage has, unsurprisingly, provoked anger
Property
Home body: Badger stays safe indoors
property
PROMOTED VIDEO
News
The programme sees four specialists creating what they believe are three perfect couples, based on scientific matchmaking. The couples will not meet until they walk down the aisle together
tvUK wedding show jilted
Arts and Entertainment
US pop diva Jennifer Lopez sang “Happy Birthday” to Gurbanguly Berdimuhamedow, president of Turkmenistan
musicCorporate gigs become key source of musicians' income
Arts and Entertainment
You've been framed: Henri Matisse's colourful cut-outs at Tate Modern
artWhat makes a smash-hit art show
News
ebooksAn unforgettable anthology of contemporary reportage
Arts and Entertainment
While many films were released, few managed to match the success of James Bond blockbuster 'Skyfall'
filmsDaniel Craig believed to be donning skis as 007 for first time
Sport
Mikel Arteta pictured during Borussia Dortmund vs Arsenal
champions league
Voices
Yes supporters gather outside the Usher Hall, which is hosting a Night for Scotland in Edinburgh
voicesBen Judah: Is there a third option for England and Scotland that keeps everyone happy?
Arts and Entertainment
Pulp-fiction lover: Jarvis Cocker
booksJarvis Cocker on Richard Brautigan
Arts and Entertainment
Robin Thicke and Pharell Williams in the video of the song, which has been accused of justifying rape
music...and he had 'almost no part' in writing it
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Sales Executive

£20 - 24k (Uncapped Commission - £35k Year 1 OTE): Guru Careers: We are seekin...

Payroll & Accounts Assistant

£20 - 24k + Benefits: Guru Careers: This is a great opportunity for an enthusi...

SQL Developer - Watford/NW London - £280 - £320 p/d - 6 months

£280 - £320 per day: Ashdown Group: The Ashdown Group have been engaged by a l...

Senior BA - Insurance **URGENT**

£400 - £450 Per Day: Clearwater People Solutions Ltd: **URGENT CONTRACT ROLE**...

Day In a Page

Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam
'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

'She was a singer, a superstar, an addict, but to me, her mother, she is simply Amy'

Exclusive extract from Janis Winehouse's poignant new memoir
Is this the role to win Cumberbatch an Oscar?

Is this the role to win Cumberbatch an Oscar?

The Imitation Game, film review
England and Roy Hodgson take a joint step towards redemption in Basel

England and Hodgson take a joint step towards redemption

Welbeck double puts England on the road to Euro 2016
Relatives fight over Vivian Maier’s rare photos

Relatives fight over Vivian Maier’s rare photos

Pictures removed from public view as courts decide ownership
‘Fashion has to be fun. It’s a big business, not a cure for cancer’

‘Fashion has to be fun. It’s a big business, not a cure for cancer’

Donatella Versace at New York Fashion Week