Outlook: Judge opts for equitable solution

THE ROYAL Courts of Justice on the Strand are generally not noted for their common sense, but in deciding in favour of Equitable Life against a surprisingly determined, sprightly and vociferous bunch of aggrieved pensioners, the vice chancellor, Sir Richard Scott, has blown away the cobwebs and arrived at a judgement which seems to be right both in law and in principle.

The detail of this case is both complex and arcane but the underlying issues are relatively simple ones. For some decades up until the late 1980s, Equitable Life routinely offered to guarantee a certain minimum level of return on its pension policies once they matured - a so-called guaranteed annuity rate. Since, at the time, annuity rates were far in excess of these guarantees, they seemed of very little importance.

By the early 1990s, however, annuity rates had declined by sufficient to trigger many of these guarantees, and the claims started pouring in. Moreover, annuity rates continued falling, further exaggerating the size of the problem. Most life offices have decided to honour their commitments, but at Equitable Life and Scottish Widows, the problem was too big to make this a viable option without significantly damaging the interests of other policy holders.

In order to wriggle out of the guarantees without appearing to be in breach of contract, both life offices have therefore adopted the following approach. Policy holders who wish to exercise the guarantee are penalised with a much reduced terminal bonus, the payment and size of which can be decided on a discretionary basis by management. Alternatively they can waive the guarantee and get the full bonus. Either way the net effect to income is much the same.

On the face of it, this would seem dishonest and shabby treatment, even if, as the vice chancellor has decided, the small print of the contract legally entitles management to do it. But as ever, things are not as simple as they seem. Both Equitable Life and Scottish Widows are mutual life assurers, so there are no shareholders to bear the costs of this management failure.

To the extent that these commitments are honoured, it would be other policy holders who suffer. We know the numbers. In the case of Equitable Life it is pounds 1.5bn. At Scottish Widows it was pounds 1.7bn. The anger felt by 90,000 disadvantaged Equitable policy holders at yesterday's judgement would have been more than matched by the relief of the assurer's 400,000 other members.

But there is a more powerful argument still in favour of what Equitable is doing. Low annuity rates are only the flip side of the falling interest rate story, which has given guaranteed annuity holders a spectacular growth in assets which they could never reasonably have expected when they signed up. Annuity rates may be low, but boy has the value of capital risen to compensate.

None of this excuses Equitable directors across the years for what has occurred. It beggars belief that apparently trustworthy managers of other people's money could enter into such guarantees, given the consequences of them ever being called. Management's handling of the debacle has also been crass in the extreme.

Above all, the case has served to highlight once again the shortcomings of this "with profits" form of long-term saving, in which returns and penalties are earned and decided on a discretionary basis according to obscure and opaque rules, understood by few and disclosed to even fewer. The life fund's relevance to today's better informed and more individualistic saver becomes ever more questionable.

u

PROMOTED VIDEO
Life and Style
fashionHealth concerns and 'pornified' perceptions have made women more conscious at the beach
Arts and Entertainment
tv
Sport
Ojo Onaolapo celebrates winning the bronze medal
commonwealth games
Arts and Entertainment
Rock band Led Zeppelin in the early 1970s
musicLed Zeppelin to release alternative Stairway To Heaven after 43 years
Arts and Entertainment
High-flyer: Chris Pratt in 'Guardians of the Galaxy'
filmHe was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
Sport
Van Gaal said that his challenge in taking over Bobby Robson's Barcelona team in 1993 has been easier than the task of resurrecting the current United side
footballA colourful discussion on tactics, the merits of the English footballer and rebuilding Manchester United
Life and Style
Sainsbury's could roll the lorries out across its whole fleet if they are successful
tech
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Travel
The shipping news: a typical Snoozebox construction
travelSpending the night in a shipping container doesn't sound appealing, but mobile crash pads are popping up at the summer's biggest events
Arts and Entertainment
'Old Fashioned' will be a different kind of love story to '50 Shades'
film
Arts and Entertainment
Tracey Emin's 'My Bed' is returning to the Tate more than 15 years after it first caused shockwaves at the gallery
artTracey Emin's bed returns to the Tate after record sale
Arts and Entertainment
Smart mover: Peter Bazalgette
filmHow live cinema screenings can boost arts audiences
Environment
Neil Young performing at Hyde Park, London, earlier this month
environment
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

Project Manager (HR)- Bristol - Upto £400 p/day

£350 - £400 per annum + competitive: Orgtel: Project Manager (specializing in ...

Graduate / Trainee Recruitment Consultant - IT

£25000 per annum + OTE £40,000: SThree: Orgtel are seeking Graduate Trainee Re...

HR Business Partner - Banking Finance - Brentwood - £45K

£45000 per annum + Benefits: Ashdown Group: ** HR Business Partner - Senior H...

PA / Team Secretary - Wimbledon

£28000 - £32000 per annum + Benefits: Ashdown Group: PA / Team Secretary - Mat...

Day In a Page

Save the tiger: The animals bred for bones on China’s tiger farms

The animals bred for bones on China’s tiger farms

The big cats kept in captivity to perform for paying audiences and then, when dead, their bodies used to fortify wine
A former custard factory, a Midlands bog and a Leeds cemetery all included in top 50 hidden spots in the UK

A former custard factory, a Midlands bog and a Leeds cemetery

Introducing the top 50 hidden spots in Britain
Ebola epidemic: Plagued by fear

Ebola epidemic: Plagued by fear

How a disease that has claimed fewer than 2,000 victims in its history has earned a place in the darkest corner of the public's imagination
Chris Pratt: From 'Parks and Recreation' to 'Guardians of the Galaxy'

From 'Parks and Recreation' to 'Guardians of the Galaxy'

He was homeless in Hawaii when he got his big break. Now the comic actor Chris Pratt is Hollywood's new favourite action star
How live cinema screenings can boost arts audiences

How live cinema screenings can boost arts audiences

Broadcasting plays and exhibitions to cinemas is a sure-fire box office smash
Shipping container hotels: Pop-up hotels filling a niche

Pop-up hotels filling a niche

Spending the night in a shipping container doesn't sound appealing, but these mobile crash pads are popping up at the summer's biggest events
Native American headdresses are not fashion accessories

Feather dust-up

A Canadian festival has banned Native American headwear. Haven't we been here before?
Boris Johnson's war on diesel

Boris Johnson's war on diesel

11m cars here run on diesel. It's seen as a greener alternative to unleaded petrol. So why is London's mayor on a crusade against the black pump?
5 best waterproof cameras

Splash and flash: 5 best waterproof cameras

Don't let water stop you taking snaps with one of these machines that will take you from the sand to meters deep
Louis van Gaal interview: Manchester United manager discusses tactics and rebuilding after the David Moyes era

Louis van Gaal interview

Manchester United manager discusses tactics and rebuilding after the David Moyes era
Will Gore: The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series

Will Gore: Outside Edge

The goodwill shown by fans towards Alastair Cook will evaporate rapidly if India win the series
The children were playing in the street with toy guns. The air strikes were tragically real

The air strikes were tragically real

The children were playing in the street with toy guns
Boozy, ignorant, intolerant, but very polite – The British, as others see us

Britain as others see us

Boozy, ignorant, intolerant, but very polite
How did our legends really begin?

How did our legends really begin?

Applying the theory of evolution to the world's many mythologies
Watch out: Lambrusco is back on the menu

Lambrusco is back on the menu

Naff Seventies corner-shop staple is this year's Aperol Spritz