Equitable may pull all funds out of equities

Equitable Life is considering moving almost all of its funds out of the equity markets in a move that would, in effect, end its life as a with-profits fund.

The society, which slashed policy values on Monday by a further 20 per cent partly because of the continued fall of the FTSE 100, hinted yesterday that it might reduce the number of equities it holds to practically nothing in an attempt to create some stability for beleaguered policyholders.

Equitable has already halved the amount of equities in its portfolio this year to just 15 per cent, with a further 15 per cent in property and the rest in gilts. In comparison, most life assurers have more than 50 per cent in shares, even in the current conditions of tumbling markets.

Charles Bellringer, the chief investment officer of Equitable, indicated he might transfer almost all of the remaining 15 per cent of equities into gilts.

"One thing that was very, very clear at this year's AGM is that policyholders want certainty and they want the society to remain solvent to meet the minimum margin," Mr Bellringer said.

The main way to do this would be for Equitable to move out of shares entirely, so that it matches its assets in fixed income investments with its liabilities – made up of guaranteed bonuses it must pay policyholders.

Mr Bellringer said he was "considering" the move. But he stressed Equitable is not in a position where it is forced to sell shares to shore up its solvency.

A number of small life assurers have been forced to do this in recent weeks, but Equitable has escaped because it had already moved most of its portfolio out of the stock market through two major sell-offs last year and this spring.

Mr Bellringer said he was "minded" to sell some shares yesterday but dropped the plan because markets weakened further. He added that Equitable's holding in venture capital investments, which make up 3 per cent of the fund, is likely to remain as he believes it has good growth prospects.

Nevertheless, moving out of equities would make sense in many ways for Equitable because it would remove the need for further stock market-related bonus cuts.

This would introduce some welcome stability for policyholders who have suffered numerous bonus cuts and who still face severe uncertainty about whether a group of policyholders who have now left the society succeed in suing Equitable over the guaranteed annuity rate débâcle. If they do succeed, Equitable might have to find yet more compensation from its depleted with-profit fund.

But moving almost completely out of equities would probably stop Equitable behaving like a with-profit fund, because a portfolio of bonds and some property would make it very unlikely to generate enough of a return to pay bonuses above the guaranteed minimum.

Ned Cazalet, an independent analyst of the life industry, said: "Equitable doesn't look as if it can afford to have any equity holdings, and that is not a with-profit fund, because such a fund gives exposure to risk assets."