Equitable may breach solvency margin

Stricken Giant: Outrage as 50,000 with-profits annuities holders face 20% cut in their pension benefits

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Equitable Life, the stricken life assurer, admitted for the first time yesterday that it may no longer be able to meet its minimum solvency requirement.

The admission came as Equitable announced that it is slashing the pensions of 50,000 holders of with-profits annuities by about 20 per cent and may no longer be able to repay £346m in bonds.

The average payment to policyholders who have with-profits pensions is £5,000 to £6,000 a year. Annual payments will fall by an average of £1,000 to £1,200.

Charles Thomson, Equitable's chief executive, wrote to policyholders saying he was "very sorry" that payments were being cut but that the downturn in the stock market had left the society with no other choice.

Equitable was pushed into financial meltdown two years ago after the House of Lords ruled that it had to honour payouts to holders of guaranteed annuity polices. The ruling stretched Equitable's finances and its assets were further ravaged by the massive decline in share markets. Faced with an avalanche of policyholders seeking to remove their funds from the society, Equitable was forced to raise exit penalties to 20 per cent. It is now suing its former directors.

Commenting on Equitable's current position, Mr Thomson said: "We continue to meet our solvency requirements but cannot guarantee it will remain that way if there are further shocks."

However, he added: "The board is determined to keep the society solvent. We have no intention of going into administration."

All life companies have to maintain a minimum solvency margin of 4 per cent – the amount by which its assets must exceed its liabilities. In Equitable's case, its margin has fallen from £1.1bn last December to £382m at the end of June.

If a society's solvency margin falls below the 4 per cent level then it is normally required to close to new business and switch out of riskier investments such as shares and into investments with fixed returns such as gilts.

Mr Thomson said that were Equitable to breach its minimum solvency requirement, it would have little practical effect, other than for bondholders, as the society had already closed to new business and sold off most of its equity investments. The amount invested by Equitable in equities has fallen from £11bn to £1bn. At the end of September, equities made up just 5 per cent of its assets compared with 13 per cent at the end of June.

Fixed income securities such as government gilts now account for 80 per cent of its assets. The remaining 15 per cent is made up of cash and property.

Mr Thomson said the shift out of equities had "massively reduced" its asset risk and made Equitable confident that the value of its overall assets would not fall below its liabilities, rendering the society insolvent.

The warning that Equitable may not be able to repay its bonds stunned bondholders and led to a sharp drop in the value of the bonds. The face value of its eight per cent sterling bond due in 2049 fell by 3 pence to 51 pence in the pound.

Bondholders rank after policyholders so if Equitable is no longer able to meet its minimum solvency margin they will be the first ones to suffer as any spare cash would have to be used to restore the margin rather than pay out to bondholders.