Equitable Life wins annuities test case

EQUITABLE LIFE yesterday claimed that it had been vindicated in its attempts to remain mutual after the Sir Richard Scott, vice chancellor, threw out claims that the firm was wrong to cut final bonuses to 90,000 holders of so-called guaranteed annuity options in response to a sharp fall in annuity rates over the past five years.

The High Court ruling came in a test case brought by Equitable, Britain's oldest mutually owned life and pensions firm, in an attempt to clarify an issue which had been hanging over the business for a number of years.

Sir Richard said the directors of the firm were within their rights in cutting the terminal bonuses to guaranteed options holders although he criticised the society's directors for failing to do enough to communicate the change of bonus policy.

But he did grant the defendant David Hyman, a 67-year-old semi-retired stockbroker with Robert Fleming, leave to appeal and ordered Equitable, which is paying for the cost of the action, to cover the appeal as well.

Independent actuaries have claimed that the effect of the cuts in terminal bonuses was to make the guaranteed annuity options in effect worthless. In one case cited yesterday a policyholder had been offered the choice of staying with his guaranteed annuity rate of 9.5 per cent and waiving his terminal bonus or taking the bonus and taking his chances buying an annuity in the market place.

Faced with the choice of buying an annuity of 7.4 per cent on a pot of pounds 450,000, which would have yielded pounds 33,300 a year, or sticking with a guaranteed 9.5 per cent but on a pot of pounds 290,000, which would have yielded pounds 27,500, the policyholder not surprisingly waived his option.

Alan Nash, Equitable's chief executive, said the judgment was "a very robust endorsement" of the company's stance.

However, Ronnie Sloan of Punter Southall, the actuarial consultants, said he believed the case had been decided on narrow legalistic grounds and that the judgment may ultimately drive the policyholders concerned to call on the board to demutualise - precisely what Equitable has been seeking to avoid.

The case turned on whether holders of guaranteed annuity options were contractually entitled to the same terminal bonuses as other policyholders and whether the size of the payments was fully at the board's discretion. On both counts Sir Richard found in Equitable's favour.

Yesterday's judgment had been eagerly awaited in the City, where it was believed that Equitable, which has pounds 28bn worth of assets, could have been forced to seek further sources of capital either through a stock market flotation or by selling the business to a bigger financial services group if it had lost.

Concern about the impact of the case was a main factor in Scottish Widows' decision earlier this year to abandon mutuality and agree to be taken over by Lloyds-TSB, the high street bank. It has set aside pounds 1.7bn of the pounds 7bn Lloyds is paying to cover its potential liabilities.

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