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Equitable Life - Update 18 July 2001
Following Equitable Life's recent announcement of a reduction in the fund values of with-profit investments, this note sets out our understanding of the current situation.
Reduction in fund value of with-profit investments
Following a detailed financial review, the new Board of Equitable Life has announced that with-profit pension policies will be reduced by 16% of the policy value as at 31 December 2000, subject to meeting all guaranteed values. It has also announced that no growth will be added to pension policies for the first half of 2001, and from 1 July 2001 the growth rate will only be 6% per annum. The Board cites the following as reasons for these reductions:
- The Board have undertaken to put the Society in a more stable long-term financial position.
- Stock markets have fallen heavily over the last 18 months.
- Maturity values now significantly exceed the value of the investments underlying maturing policies.
- As a mature fund, a large number of policyholders are currently retiring and taking their benefits.
How will the reduction be applied?
The policy value is comprised of three elements;
- Contributions to the policy
- Guaranteed bonuses
- Non-guaranteed ("final") bonuses
Contributions to the policy and guaranteed bonuses may not be reduced by the Equitable unless the policy is surrendered prior to maturity. Otherwise, a reduction can only be applied to the non-guaranteed bonuses. In the past, the Equitable has indicated what it expects the non-guaranteed bonuses to be and so now it will appear to policyholders that they are losing out when these non-guaranteed bonuses turn out to be lower than expected.
At maturity, the policy value will be reduced by the lesser of: (i) The non guaranteed element of the policy (final bonuses); and (ii) 16% of the total policy value at 31 December 2000.
If the policy is surrendered prior to the maturity date then the reduction will be 16% of the total policy value at 31 December 2000, regardless of the amount of final bonuses. Normal surrender charges (i.e. the Financial Adjustment) will be applied in addition. The Financial Adjustment has been reduced from 15% to 7.5% because policy values are now closer to the value of the underlying investments.
This effectively means that, if the non-guaranteed element of the bonus at 31 December 2000 is more than 16% of the policy value at that date, then the reduction is fixed in monetary terms - ie it will not increase as a result of future increases in the value of the policy. If the non-guaranteed element of the bonus at 31 December 2000 is less than 16% of the policy value at that date, then future non-guaranteed bonuses will continue to be offset until a reduction equal to 16% of the 31 December 2000 policy value has been reached.
Examples of this calculation are given at the end of this note.
Maturities and surrenders already requested
The press release from the Equitable states that where pension policyholders have already given instructions in writing that they wish to take benefits within 7 days, or to surrender their policy immediately, then the value will be calculated on the old basis provided that documents are received within 14 days.
The effect of these latest developments
An effect of the reduction in policy value is that the rebased policy values will be closer to the value of the underlying assets. Effectively Equitable have decided that, in the light of falling markets, illustrated policy values were too high, and in particular, maturing policies were receiving too large a share of the with-profit fund. They have also effectively reduced the surrender values again.
The whole of the with-profit fund will still be applied for the benefit of with-profit policyholders. From this, it may be inferred that long-term maturity values will be higher than if reductions were not applied to short-term maturity values. In other words it is bad news for those close to retirement but perhaps not quite so bad news for younger members. Younger members are also likely to benefit most if a resurgence in stock markets leads to future bonus increases.
Individuals contemplating whether to surrender their policy should continue to seek independent financial advice, as there are many factors to consider.
There remains the prospect of a compromise being reached with the Guaranteed Annuity Rate (GAR) policyholders which would limit the fund's further exposure to GARs, increase stability and provide substantial further funding from Halifax, according to the terms of the takeover deal described in previous notes. Many policyholders will want to continue to wait for the outcome of this before deciding what action (if any) is appropriate.
The Equitable remains solvent on the statutory basis. Under the worse case scenario of the Equitable becoming insolvent the Policyholders Protection Act will pay 90% of the guaranteed benefits (but not future or terminal bonuses).
Policyholders should receive a letter from the Equitable within the next fortnight giving more information and examples of how this change affects different policies. Updated policy values as at 30 September 2001 should also be made available in due course.
These reductions only apply to holders of with-profit policies with the Equitable.
Examples
| Policy values @ 31/12/00 |
Example 1 |
Example 2 |
| Contributions paid |
£30,000 |
£20,000 |
| Guaranteed bonuses |
£10,000 |
£12,000 |
| Provisional non-guaranteed bonuses |
£10,000 |
£3,000 |
| Old provisional fund |
£50,000 |
£35,000 |
| 16% of provisional value |
£8,000 |
£5,600 |
| Immediate reduction in fund value(lesser of 16% or non-guaranteed element) |
£8,000 |
£3,000 |
| New provisional fund |
£42,000 |
£32,000 |
| Further reduction carried forward (to be offset against future non-guaranteed bonuses) |
Nil |
£2,600 |
| Old surrender value (15% penalty) |
£42,500 |
£29,750 |
| New surrender value(16% reduction, plus 7.5% penalty) |
£38,850 |
£27,195 |
This note is based on our current understanding and the situation may change. Please do not hesitate to contact your usual Barnett Waddingham consultant if you would like further information.
Barnett Waddingham, July 2001.