Slump in stock market forces Equitable into raising penalties to avoid insolvency

The danger of insolvency loomed larger at stricken Equitable Life yesterday when the chairman, Vanni Treves, admitted the recent stock market slump had forced him to impose further penalties on his 900,000 members.

Mr Treves announced that he was increasing Equitable's penalties, both for those who wished to withdraw their money altogether and for those "choosing to take benefits".

Those surrendering their policies early will now have a fifth of their money deducted, up from 14 per cent before. And policy maturity values for those investors who choose to take benefits will be cut by a tenth. Previously this deduction was only 4 per cent. Existing conventional annuitants are unaffected, but with-profits annuitants may face cuts in their payments.

Mr Treves explained: "The society is solvent and we continue to meet our regulatory capital requirements. The board's primary objective is to act in the best interest of continuing policyholders.

"To do this we must ensure the society remains solvent and that the policyholders choosing to leave the fund do not take more than their fair share. We understand this is unwelcome news for those who choose to go now but the board would be failing in its duty if we did not act." He added that recent market falls had "significantly impacted the value of the fund". The FTSE 100 index has fallen by 11 per cent since Equitable last increased its penalties, at the time its 2001 annual report was published in April.

There will be further deductions from Equitable's with-profit fund when it announces half-year results in the autumn. Other insurers, including Legal & General and Norwich Union, have recently increased their exit penalties.

Ned Cazalet, the leading life insurance analyst who said last month that Equitable was "walking a tightrope in a gale", commented yesterday: "They have probably been selling equities into a falling market, which is a pretty dumb thing to do."

In May the society filed an annual return showing that at the end of December it had only £65m of tangible assets more than the minimum £1bn required to back its long-term liabilities of £24bn.

Equitable added £500m of estimated future profits to bolster that £65m but Mr Cazalet said that although this was permitted by current regulations it should be discounted as there was little likelihood the insurer could produce these profits. And that £1bn of tangible assets has been considerably eroded by the reduction in share prices since the beginning of this year.

Paul Braithwaite of the Equitable Members Action Group said: "I utterly reject the suggestion that this [latest increase in penalties] was caused by the stock market fall. It is a monumental financial scandal. For the third time we have an increase in penalties – we understood the need for a kitchen sink job last July, but we had the right to expect that would be a one-time exercise."

Last year Equitable ceased accepting new business in the wake of a House of Lords decision two years ago that it must meet its guaranteed policyholders' claims. But in February this year policyholders voted to waive those claims in return for one-off bonuses.

The latest statutory return to the Financial Services Authority, published in May, shows that Equitable's assets and liabilities fell by more than £10bn last year, mainly because 230,000 policies worth £6.2bn were surrendered or forfeited.