Vanni Treves, the embattled chairman of Equitable Life, yesterday admitted that there had been a "substantial" outflow of policyholders from the with-profits fund since the society announced last month it was cutting policy values by up to 16 per cent. He also warned that the Government may need to bail Equitable out if members rejected a compromise deal to cap its liabilities in respect of guaranteed annuity rate (GAR) policies.
In an attempt to restore calm amid the increasing hysteria surrounding Equitable, Mr Treves said that only one-third of the people departing from the fund were doing so before their policies reached maturity.
This, he said, was in line with the proportions of customers cashing in their investments since January, the month after Equitable Life shocked the market by announcing that it was closing to new business.
Mr Treves said that in the first six months of the year £650m of the total £2bn which left the stricken with-profits fund was attributable to policyholders cashing in policies early. Since policy values were cut three weeks ago, the number of people leaving had increased substantially but the proportion withdrawing policies early remained the same.
However, Equitable traditionally wrote more open-ended pensions business than other life offices. This means that many people may have opted to cash in their policies earlier than they would otherwise have chosen to.
Mr Treves also tried to quash fears that the with-profits fund was teetering on the brink of insolvency. "We have been solvent and we will remain so. We are a million miles away from being in a position where our assets are worth less than our [sum assured] guarantees," he said.
But Mr Treves warned that reaching a compromise agreement with policyholders over capping Equitable's GAR liabilities was "absolutely necessary" in order to secure its financial stability.
Under the compromise Equitable must encourage GAR customers to forgo their guarantee in return for a 20 per cent uplift in the total value of their fund. If the majority of GARs do not agree, the potential cost to the society could be far higher than observers have predicted.
"We would have to reserve massively if there is no compromise and there would not be a sense of financial security for policyholders," Mr Treves said.
Equitable has already reserved £2.6bn to cover the cost of meeting its financial obligations to GARs. The effect of future reserving, by putting more of the society's assets into cash and gilts, could be a reduction of up to 1 per cent in annual investment returns as the fund runs down over the next 40 years. If this happens, a customer with a 10-year policy in which £200,000 was invested would probably be paid 9 per cent – or £35,000 – less than they would have received had the society been able to plough more assets into equities in coming years.
A draft proposal of the compromise scheme will be circulated to policyholders in early September, with a vote scheduled by the end of the year. In order to push the agreement through, a majority of Equitable's GAR and non-GAR policyholders must support it.
Mr Treves said he had to "consider the possibility" that the scheme would not succeed. In this case Equitable would approach the Government over a possible rescue scheme.
Equitable is also waiting for a report by the end of this month from its lawyers Herbert Smith over the possibility of suing former directors, advisers and regulators.Reuse content