Equitable Life finally floored in highest court
By Simon English, Banking Correspondent (Filed: 21/07/2000)
EQUITABLE Life was forced to put itself up for sale yesterday after the House of Lords ruled it was breaking its contract with customers by cutting bonus rates on pensions.
The end of a two-year row over guaranteed pensions sold to 90,000 people saw the oldest mutual insurer in the world admit it needs a massive injection of cash for the business to remain viable. In a damning and unsympathetic judgment, five Law Lords ruled unanimously that Equitable's stance was illegal. The ruling said, on one aspect of Equitable's defence: "It is devoid of merit. Nothing more need be said about it."
The insurer had been cutting bonus rates to pay for guarantees sold when interest rates were high, promising a minimum level of income on retirement. As interest rates have fallen, the promises have become highly valuable. The case had already been to the High Court and the Court of Appeal before yesterday's final verdict.
Stuart Bayliss of Annuity Direct, the financial adviser that started the campaign, said: "It is a fairly brutal judgment and a good day for the little guy. This group of policyholders are articulate people and they needed to be treated openly and honestly." Equitable will not be short of buyers, although it denied months ago that Prudential had made an approach.
Others likely to be interested include French insurer Axa, Dutch company Aegon and CGNU. Standard Life has made it clear it is not interested in joining the bidding. Before this scandal, Equitable was widely admired for its efficiency and performance. It sold policies under the slogan "You profit from our principles" and is still likely to attract a top price, perhaps of more than £5 billion.
Alan Nash, the managing director, admitted to disappointment that Equitable's mutual history will come to an end under his leadership but said he was left with no choice. He said: "At 10 o'clock this morning, the goalposts moved. The judgment means that those with guaranteed rates will get more than they have hitherto at the expense of other policyholders. If we had tried to deal with this matter on our own the solvency position of Equitable would have been materially affected."
He said the board had assured him that they wanted him and the president John Sclater to continue in their roles. Equitable was keen to play down hopes that windfalls will be paid to members. The cash injection from the buyer will be used to pay existing pensions, rather than compensation for loss of membership rights.
The cost of funding the guarantees has been put at £1.5 billion. Equitable hopes to have found a buyer by the end of this year and has hired Schroder Salomon Smith Barney to conduct an auction. Members trying to log-on to the insurers website to obtain a value for their fund yesterday were told this would not be possible until next Wednesday. The hotline for queries is 0870 600 2272.
The Financial Services Authority noted yesterday that the judgment may have implications for the rest of the industry. Some actuaries make the total bill to insurers £14 billion, although most companies have made adequate reserves.
Scottish Widows has set aside £4.1 billion to meet liabilities relating to 155,000 policies.