Equitable Life's bill for guaranteed annuities could top £2bn

Equitable Life, the beleaguered life assurer which was forced to close to new business last December, is in the process of increasing its estimate of the cost of paying extra sums to 90,000 policyholders with a guaranteed annuity (GAR).

Equitable Life, the beleaguered life assurer which was forced to close to new business last December, is in the process of increasing its estimate of the cost of paying extra sums to 90,000 policyholders with a guaranteed annuity (GAR).

It gives a figure of £2.6bn to cover this cost in its annual report and Treasury returns, which will be filed next month.

Equitable insisted yesterday that it still believed the true cost of the liability would be nearer to £1.5bn, the amount it calculated last July, when the House of Lords ruled that Equitable had to raise the level of its pay-outs to GAR customers. However, the society conceded that the £1.5bn figure would be revised over the next few weeks.

Equitable said the £2.6bn figure had been used because Treasury returns require companies to take account of the possibility of nearly every GAR policyholder making use of the guarantee. The society said it expected a significant number not to do this because they were likely to pursue options including those which are not be available under a GAR contract on retirement.

However, life insurance analysts and some actuaries believe that the liability will be substantially more than £1.5bn, and closer to the £2.6bn figure.

Ned Cazalet, an independent analyst, said: "Many of the other life offices have had to increase their reserves due to the economic climate, so why wouldn't Equitable? It is no good being like Eric Idle and saying 'Always look on the bright side of life'. The whole idea is to be prudent."

The life industry has been hit over the last few months by a further drop in interest rates and long-term gilt yields, which has consequently made the cost of GARs more expensive to the companies. This is because recent economic conditions have depressed ordinary annuities. So guaranteed ones, which often pay 5 per cent more a year than standard annuities, cost more to deliver. Annuity rates have also been depressed by the trend of people living longer.

The trend towards GARs becoming more expensive will make it increasingly difficult for Equitable to carry out its most important task at the moment, which is to persuade the majority of its policyholders to agree to a plan which would cap its liability. If Equitable succeeds, it would receive a further £250m from Halifax, which bought Equitable for £500m earlier this year.

Equitable aims to cap its liability by persuading its GAR policyholders to give up their guarantee in return for a one-off payment. Equitable will recalculate its estimate of the GAR cost as part of its effort to work out the exact terms of its compromise, but yesterday would not say what the new figure might be. However, while the society roughly estimated earlier this year that the single payment to GAR policyholders could be a 20 per cent uplift to the value of their funds, that figure would now probably be higher.

Mr Cazalet cast doubt on Equitable's expectation that a significant number of people would not take up their GAR, saying: "If Equitable members were not going to take up their GAR why would there be a problem with achieving a compromise deal? Clearly most will take up the GAR, especially now as it is more attractive."