Equitable 'faces new crisis over guaranteed returns'

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Equitable Life is teetering on the brink of insolvency and has another potential time bomb ticking inside it which could push it into the red, according to a leading financial forecaster.

Professor David Blake, head of the Pensions Institute at the University of London, warned that the society faced another problem similar to the guaranteed annuity rate nightmare and which has not yet been understood. The new difficulty is the existence of another group of policyholders with a guaranteed return.

This time it is policyholders with a guaranteed investment return (GIR). The policies were written before 1995 and make up about 75 per cent of Equitable members by value. GIRs are promised a minimum 3.5 per cent annual return on the guaranteed part of their fund.

While the return is not that demanding, Professor Blake believes Equitable "has not understood the value of these guarantees or how to reserve to pay for them".

He warned that the existence of the GIRs puts an extra strain on Equitable's already very fragile finances. He also said that the society's financial position was worse than many people thought because Equitable had changed the way it calculated liabilities.

"The society is pretty close to being right on the borderline to whether it can stay in existence," Professor Blake said.

The academic raised the alarm after noticing that Equitable has cut its fund for future appropriations, which provides a cushion against adversity such as a dramatic fall in the stock market. Equitable has reduced the fund by changing the actuarial assumptions on which it is based. The fund now stands at £1.1bn. But if it had used its old assumptions, it would only have £100m in the pot.

"This fund is negligible and at the point where it could not take many more negative returns from the stock market," said Professor Blake, who was asked to scrutinise Equitable by the Equitable Members Action Group (Emag).

Charles Thomson, chief executive of Equitable, said Equitable was solvent but added: "We have never hidden the fact that the fund is not particularly strong."

Separately, Paul Braithwaite, chairman of Emag, called on members to vote against re-electing Equitable's chairman, Vanni Treves, at its forthcoming annual meeting.