Pension law experts are concerned that a landmark ruling in Equitable Life's favour in the High Court earlier this month could backfire, as it appears to have changed the legal status of some pensions sold before 1981. As a consequence, lawyers believe policy holders - who face smaller payouts as a result of the ruling - may be able to sue the insurers.
Equitable's case hinged on a clause that many insurers inserted in pension contracts sold from the 1950s to the 1980s, which stated that the policy holder would get a guaranteed level of retirement income. This protected them against annuity rates falling by the time they retired. But in recent years, plunging gilt yields have driven down annuity rates and made these guarantees hopelessly generous.
Lord Justice Richard Scott upheld Equitable's decision to allow the company's directors the discretion to decide how much these guaranteed policy holders should be paid. He also ruled that customers could only expect to be paid a "fair share" of any money available in the pot for distribution.
Legal experts say this ruling completely changes the nature of pension contracts sold before 1981. Until then, there were tight restrictions on the types of policies insurers could issue. They had to be based on insurance-style risk, which pools returns and is based on risk assessment. They could not act as fund managers - who have more discretion over returns to investors - until the law was changed in 1981.
Susan Beaumont, at Biggart Bailey, said: "This seems to miss the whole point that these were risk contracts and not fund-management contracts. It has huge legal implications for the law under which any policies written before 1981 were sold."
John Quarrell, a partner at Nabarro Nathanson, added: "If such a huge chunk of a final return is at the discretion of the directors, then this is not an insurance contract at all, but a fund-management policy. And if this is the case, then they could not have been legally sold in the first place according to the law before 1981. The law is the law, and that principle was quite clear."
If this point were successfully challenged in the courts, policy holders could sue any company deemed to have sold policies illegally, and the industry would face compensation claims running into millions .
Many industry observers were surprised when the High Court supported the company's view that its rules of association permitted it to declare whatever final bonus it wanted. Mr Quarrell believes the court must look again at the particular position of policies sold before 1981.Reuse content