Bonuses not as equitable as they seem

At first glance Equitable Life's bonus payment for last year, at 8 per cent for with-profits pensions, seems surprisingly good news for a life office in such dire straits. But, as has happened all too often in the sorry saga of Equitable Life, things are not quite so simple.

Returns will be docked by last year's decision to suspend bonus payouts for seven months in the wake of the House of Lords ruling against Equitable. The ruling meant it had to honour guarantees to guaranteed annuity rate (GAR) policyholders and bonus payouts were stopped in order to balance the books.

The new bonuses, 4 per cent less than last year, are also not guaranteed.

'By comparison with other companies this is not a bad return for 2000,' says independent Edinburgh-based actuary Ronnie Sloan. Returns were actually less than 8 per cent but topped up - normal practice for life companies - to discourage policyholders from leaving.

However, after the seven- month loss of bonuses, Equitable says with-profits pensions funds in force for the whole of last year would have their returns slashed to just 3.3 per cent. The return for life policies, including endowment mortgages and with-profit bonds, is reduced from 6.75 to 2.8 per cent.

Not even these returns are secure. They are being paid as a 'terminal' bonus, giving the insurer discretion to remove the bonus later. Normally a chunk of annual bonuses would be paid in guaranteed form. However, the life office may declare a guaranteed bonus, provided policyholders agree to cap amounts potentially owed to policyholders with GAR pensions. Part of Halifax's bid for Equitable is conditional on the cap being set.

Is a bonus that might never be paid reason enough to stay with the life office, especially given that it does not have much in the way of spare capital to offer bonuses in future?

'The cupboard is bare,' says Sloan, but adds that it's worth waiting to see if a deal is struck with GAR policyholders enabling the 10 per cent exit penalty to be reduced before jumping ship.