Equitable deal offers 'stability, not nirvana'

Equitable Life unveiled its long-awaited scheme to redistribute assets among policyholders yesterday in an urgent move to save the world's oldest mutual life assurer from what it described as a "bleak future".

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Equitable Life unveiled its long-awaited scheme to redistribute assets among policyholders yesterday in an urgent move to save the world's oldest mutual life assurer from what it described as a "bleak future".

The proposals, which have taken seven months and teams of lawyers to formulate, disappointed many and pleasantly surprised only a few Equitable policyholders. Yet Vanni Treves, Equitable's chairman, said: "There is nowhere else to go, there is no Plan B."

The disappointed included policyholders with a guaranteed annuity rate [GAR]. Under the scheme, Equitable plans to raise the value of their polices by an average of 17.5 per cent, in return for them relinquishing the guarantee. This is below earlier estimates that GARs would receive a 20 per cent uplift.

The level of the increase to GAR policy values has been reduced in order to find some money in Equitable's meagre emergency fund to distribute a sweetener of, on average, 2.5 per cent to those without a guarantee.

This followed legal advice from three QCs, who warned that non-GARs, that account for three-quarters of Equitable's policyholders, could claim that they were misled when purchasing their policies. These claims could devastate the society's fragile finances.

Equitable has formulated the scheme because it wants to end its exposure to expensive GAR contracts, and to receive an extra £250m into its with-profit fund from Halifax, which bought most of Equitable's assets in February.

Last month, the scheme was temporarily derailed when its legal advisers unexpectedly said that all non-GAR policyholders had a potential claim against the society because it did not warn them when they bought their policies that they could suffer substantial losses in future due to the society's exposure to guaranteed contracts.

According to the advice, non-GARs could now be eligible for as much as £850m in compensation for mis-selling. Equitable is offering them £220m, plus a proportion of the £250m from Halifax if the compromise scheme is ratified by 1 March 2002.

In return, non-GARs must agree not to sue the society. But all policyholders can still benefit from any legal actions which may be brought by Equitable itself against its former directors or regulators, which are now part of the Financial Services Authority.

Mr Treves urged both groups to accept the deal, even though it offers far less compensation than certain individuals may be entitled to.

"This represents to me the end of the crisis. It may not be nirvana, but we would have stability and the prospect of satisfactory growth," he said.

Small changes could be made to the proposals before a final version of the compromise is distributed in November, with policyholders having to vote in December, he said.

The FSA, which could still find itself the subject of legal action over alleged negligence in monitoring Equitable, supported the compromise, as did most of the policyholder action groups.

As well as securing £250m from Halifax, the scheme would allow Equitable far greater investment freedom because it would not have to reserve for the cost of covering annuity guarantees in the future, which are widely expected to be even more costly than they are now.

Equitable also hopes it will stabilise the fund, which lost £600m in July and August from policyholders, who wanted to move their investments to stronger life offices. But many who support the compromise are expected to cash in their policy immediately after receiving the increased value.

Craig Wetton, chief executive of the independent financial advisers Chartwell Investment Management, said: "This is the only chance for Equitable to get the compromise to fly. But some of the phrases they have used look like scare tactics as it is very hard to get behind the numbers they have given us."

The exact uplift to policyholders' funds will take into account how long they have held the investment and how old they are, and will be paid through a mixture of guaranteed bonuses and non-guaranteed money. At the top end of the spectrum will be pay-outs of 20.4 per cent, at the bottom will be a benefit of 3.5 per cent.

How the Equitable compromise scheme will worK

What are the details of the plan?

70,000 policyholders with guaranteed annuity rate pensions (GARs) get an average 17.5 per cent increase in their policy values but must sign away rights to the guarantee. 415,000 holders of with-profits pensions without guaranteed annuities get an average 2.5 per cent uplift, but must give up their right to sue Equitable over mis-selling.

GARs were set to get a 20 per cent uplift. Why has that been reduced?

The original estimate was made before potential claims of non-GAR policyholders had been investigated. The reduction will allow the society to increase the value of non-GAR policies.

Why is the deal so crucial?

If both groups give up claims to potential future financial benefits, Equitable will receive £250m from Halifax to be distributed to policy-holders. The society's investment freedom would be increased and it may be able to pay higher bonuses in the future. If the scheme is not supported, Equitable faces further instability and years of expensive litigation for mis-selling.

Wouldn't it better to put the society in liquidation?

Equitable and most advisers say it would not. Creditors would be paid before policyholders and they would only receive at most 90 per cent of the value of their investments. Liquidating the assets could take years, leaving those with a with-profits annuity the prospect of receiving no income over that time.

Where has the money for the compromise scheme come from?

Equitable set aside over £1bn by withholding growth from with-profits policyholders during the first seven months of last year and will get £250m from Halifax if it agrees the compromise before March.

Do I have to vote on the compromise scheme?

Yes, in December. The scheme needs the backing of more than 50 per cent of both GARs and non-GARs to succeed.

Should members vote in favour of the compromise?

Equitable's board is recommending people support the scheme, as is the Financial Services Authority. Most advisers believe it is in the interests of most policyholders to back the proposals.

If the compromise is not accepted by members will Equitable become insolvent?

Unless the stock market falls much further than it has already, Equitable is very unlikely to become insolvent.