Predators circle Equitable Life after Appeal Court overturns payout ruling

Potential predators for Equitable Life were last night preparing to sharpen their knives after the Court of Appeal overturned an earlier decision upholding the right of Britain's oldest mutual life insurer to cut payouts to 90,000 pensioners.

Potential predators for Equitable Life were last night preparing to sharpen their knives after the Court of Appeal overturned an earlier decision upholding the right of Britain's oldest mutual life insurer to cut payouts to 90,000 pensioners.

The decision querying the society's right to cut terminal bonuses to pensioners who wanted to take up their guaranteed annuities was completely unexpected.

When the case came before the High Court last year, the Richard Chancellor, the Vice Chancellor had found comprehensively in the society's favour and had allowed leave to appeal only on the narrowest of grounds.

Equitable has a blue-chip client base and would have no difficulty finding buyers if it were forced to put itself up for sale to meet its liabilities.

Both Axa, the French insurance giant, and Aegon, the Dutch group which owns Scottish Equitable, have experience in taking over mutual business and have expressed a desire to acquire further life assets in the UK.

Yesterday's ruling could mean the Equitable - which had set aside £200m to cover potential liabilities - will have to find an additional £1.5bn to fund payouts from its reserves.

The case concerned so-called guaranteed annuities, which were widely sold in the 1970s and 1980s when inflation was higher.

The annuities which provide a regular annual income to pensioners have, however, become prohibitively costly to honour in full because of falling returns from the gilts market.

Competitors said that the decision had taken not just the society by surprise but also insurance regulators at the Financial Services Authority who are widely believed in the industry to have offered Equitable a high degree of latitude in dealing with the issue.

They may now insist on the society raising its provisions substantially at a time when stock market returns are likely to fall.

Equitable said yesterday that it would be appealing to the House of Lords.

In his earlier ruling Mr Scott said that the society' was well within in its rights in cutting terminal bonuses to those who insisted on their right to guaranteed annuities.

However, in overturning that decision, Lord Woolf, Master of the Rolls said yesterday: "The conclusion I have come to is that it was not a permissible exercise for the Society to declare a differential bonus. To do so is inconsistent with the tenor of the policy."

In a statement, Equitable which had bought the test case itself in an attempt to end the controversy over its guaranteed annuity policy, yesterday said: "The Society took the case to courts to establish clarity. This has not yet been achieved."