Outlook: Judge opts for equitable solution
Friday 10 September 1999
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.
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