Home > News > 2002 > March 2002 > Equitable Life - after the compromise
Equitable Life - after the compromise
Rajeev Shah from Barnett Waddingham's Life insurance consultancy team in the London office reports on how the decision reached in the Equitable Life's compromise deal will impact on the Society and its policyholders.
Equitable Life policyholders voted on 11 January 2002 to accept the Compromise Scheme. The Scheme was then sanctioned by the High Court and registered with Companies House on 8 February 2002 making it effective and entitling Equitable Life to the £250m Halifax money payable if a scheme were registered before 1 March 2002.
With the Scheme becoming effective, with profit policy values were increased by 17.5% on average on policies with Guaranteed Annuity Rates (GAR) and by 2.5% on other policies. (For more details on the Scheme see our previous article).
Equitable Life is expected to write soon to all policyholders setting out the timetable going forward and outlining their plans for the future. When practicable, policyholders will also be sent revised statements of policy values showing the increases under the Scheme and, for GAR policyholders, an endorsement recording the removal of their GAR rights.
The effect of the Compromise Scheme is to increase the financial strength of the fund by £1bn. This increase in the financial strength has been possible as the GAR reserves were calculated on a conservative basis and therefore included margins. Compensation for loss of GAR rights, though, was calculated on a realistic basis and the margins were released to the fund when the Compromise Scheme was effected. This will help stabilise the Equitable Life with profit fund, greatly reducing uncertainty and therefore also reducing the incentive for younger and non-GAR members to withdraw from the fund.
Investment strategy for the with profit fund, though, is expected to remain broadly the same due to continuing constraints on investment freedom limiting the proportion of equity type investments. Investment freedom continues to be constrained due to the lack of an inherited estate and the substantial proportion of guaranteed liabilities in the fund due to many with profit policies sold before the late 1990s containing guaranteed rates of investment returns on guaranteed benefits (typically 3.5%). These guaranteed investment returns are high in a low inflation and investment environment and therefore, the asset mix in the fund is expected to continue to be weighted towards fixed interest securities. However, if a significant level of free assets were to be built up, the proportion of equity investments in the fund would be increased, leading to increases in expected future investment returns.
A number of risks remain, particularly associated with the guaranteed investment returns mentioned above and the risk that members who have withdrawn from the fund may still sue the Equitable for mis-selling. These risks, however, are less significant than the GAR risk and Equitable has always reserved for the guaranteed investment return on guaranteed liabilities.
Some issues to consider for policyholders contemplating withdrawing from the with profit fund are set out below but individual circumstances do differ and individuals are advised to consult an independent financial adviser before taking action.
- The with profit fund continues to face risks regarding the high proportion of guaranteed liabilities and the risk of litigation from non-GAR policyholders who left the fund before the Compromise Scheme was effected. Investment performance will also continue to be constrained as explained above. Policyholders may therefore wish to avoid these risks and consider withdrawing from the fund instead.
- However, Market Value Adjustments (MVAs) of some 10% of policy values are currently being applied to non-contractual withdrawals from the with profit fund. Policyholders will need to weigh the cost of these MVAs against any potential increase in investment returns available by investing these funds elsewhere.
- Further, if there is any compensation won by the Equitable from its advisers or its past directors, strengthening the with profit fund, policyholders who have withdrawn from the fund would not benefit.
- Up to another £250m may also be payable by the Halifax to the Equitable with profit fund depending on the ex-Equitable salesforce achieving undisclosed sales targets on business sold on behalf of the Halifax. Policyholders who withdraw from the with profit fund before these payments were made would not benefit from them.
- Also, if a build up of free assets is achieved, perhaps in part through the operation of an MVA on withdrawing policyholders, only the continuing policyholders would benefit.
- Policyholders near retirement may be able to take early retirement without suffering MVAs if their policies include early retirement options without penalties.
- However, Equitable has tightened its policies regarding early retirements. Retirement Annuity policyholders with GARs had previously been allowed to transfer funds to other providers and take pensions without suffering an MVA if they were aged above 50 even though their contractual retirement age is 60. When the Compromise Scheme became effective on 8 February 2002 and policy values were increased, Equitable started applying the MVA on these non-contractual withdrawals.
- Policyholders who hold with profits annuities are not able to transfer out of the fund. However, the Equitable has previously said that it understands the difficulties these policyholders face and would review the options it may be able to provide to these policyholders once the Compromise Scheme had been effected.
Rajeev Shah, March 2002.