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Foolish Special

[ December 15, 2000 ]

The Equitable Life Crisis

By Rob Davies

After 238 years the Equitable Life Assurance Society, the world's oldest mutually owned assurance company, has closed to new business and begun the process of winding itself up. The decision was brought about by the announcement that the Prudential(LSE: PRU) had ceased discussions with the Equitable after concluding that it was not in the interests of either its shareholders or policyholders to proceed with a transaction.

So why would the fact that a takeover not happen prompt the management of Equitable Life to decide to close down?

The decision has been taken because the House of Lords ruled in July that the company must honour the 90,000 guaranteed annuity rate (GAR) policies it sold in the 1970s and 1980s. These policyholders took Equitable to court after it refused to pay the same terminal bonuses on these guaranteed annuities policies as on all its other with-profit (WP) policies. The company had argued that non-GAR WP policyholders would be disadvantaged if it did that. It would have to rob Peter to pay Paul.

After losing the court case Equitable tried to sell itself to get a massive injection of cash to cover the shortfall. In 1999 Equitable estimated that the cost of meeting the guaranteed annuities was about 200m, but that had risen to 1.5 billion after the court case in June 2000. However, it seems that the companies that have been interested in buying the business have concluded that the costs could be very much higher than this, possibly as high as 5 billion.

Equitable has now announced that it will take on no more new business, become a closed fund and run itself down over the next 30 years as its 650,000 policies mature. The company will continue to take premiums from existing policyholders and pay out money owed to them, but bonuses to all policyholders will be lower in the future than they have been in the past because of the need to treat Guaranteed Annuity Rate (GAR) policyholders equally with all other With-Profits (WP) policyholders. As it is a mutual society it is the WP policyholders that actually own the company, and they are the ones that have to fund this liability.

Equitable has about 33 billion of assets, which is currently a mixture of equities and fixed-interest stocks. According to the FSA the Equitable "will now need to review its investment strategy and, as is normal in a closed fund, this is likely to lead to a progressive move away from equities to lower-risk investments over time." This means it will move more money into gilts with the aim of ensuring it meets current commitments, but that will cut the fund's growth and so reduce bonuses.

The question, though, is what with-profits policyholders should now do. Unfortunately this is far from clear. Each year a with-profits fund has a bonus added to it; once the bonus has been allocated it cannot be taken away. However, the biggest bonus is added at the end of the term when the policy matures. The move away from equities as an investment strategy will mean that future growth will all but disappear.

Investors with the Equitable have some choices to make. Those with unit trusts, including PEPs and ISAs, have no need for concern; their investment is not at risk. However, if you are a with-profits policyholder, you will suffer lower bonuses in the future because of the obligation to fund the GARs and the move into gilts.

These policyholders have three choices:

1. Do nothing.
2. Stop any future contributions.
3. Move your funds elsewhere.

The appropriate option depends on many factors, and each WP policyholder must make his or her own decision. To help people the Equitable has issued two telephone numbers for policyholders: 0870 900 8020 and 0870 600 2272. The Equitable also has its own website at www.equitable.co.uk.

For more information you can go to our own dedicated Equitable Life discussion board, where there are a number of helpful posts.

The Frequently Asked Questions are here, and give a good summary of the options open to policyholders.

For more background on the problem, this article in The Independent is good.

As you might imagine many WP policyholders are less than happy about the recent turn of events and some have formed the Equitable Members Action Group. It can be contacted at http://www.emag.org.uk/

Some of the language in all this can be confusing. Our glossary might help with the jargon.

The Equitable was regulated by the FSA. It can be contacted here.

To get Equitable's position straight from the horse's mouth, BBC MoneyBox interviewed Chris Headdon, the chief executive. The transcript of the programme is here, and audio downloads of the interview are also available.

To quickly find the most interesting posts on our discussion board, click here to see all the messages, sorted by the number of recommendations they've received. To see the latest messages ordered by topic ("threaded"), click here.

Some other interesting posts are this one from CXM, taxista's good summary of possible actions for a WP policyholder to take, and a good all-round post from TMFJane.

Where Next?

Government action: FSA to investigate FSA!Equitable Life discussion board
• Equitable Life website
Equitable Members Action Group (EMAG) website