Insurer 'starving us out

Investors with Equitable Life received another blow last week, when the insurer announced that it was suspending payment of guaranteed bonuses.

Equitable has given no commitment to reinstating the bonuses; it has hinted that this may depend on it reaching agreement with policyholders to control the cost of the guaranteed pensions that plunged it into crisis (see box).

Paul Braithwaite of the Equitable Members' Action Group accused the firm of trying to starve policyholders into submission. 'They have sold the members and policyholders down the river once again. Pensions are left without any guarantee of nourishment.'

Kean Seager, an independent adviser co-ordinating another policyholders' group, called the latest news 'very, very disappointing'.

Annual, or reversionary, bonuses are the basic building blocks of a with-profits investment. Once added to a policy, normally annually, they cannot be taken away.

Equitable says it cannot afford to pay them this year because it needs to set aside reserves to pay these guaranteed returns in future. This would mean tying up even more money in lower-risk investments, and limiting its ability to invest for growth.

The insurer has already warned that returns on its with-profits fund are likely to be cut as a result of its problems, and policyholders have also lost out on bonuses for seven months of last year.

Bonuses will be restored from August last year, but they are to be paid as terminal, or final, bonuses, which are not guaranteed. Equitable could retroactively withdraw the money.

Equitable spokesman Alistair Dunbar said: 'It is sensible this year to look at total allocation rate and pass it on as a final bonus. They [policyholders] will get more in the end because it won't constrain our investment freedom.'

An announcement is due shortly on the rate of the firm's bonus for 2000.

Seager, representing the Equitable Policyholders' Action Group, believes the decision not to pay a reversionary bonus reflected the 'rather parlous' state of the insurer's reserves.

These are 'very tight,' he said, despite money being injected into Equitable by the Halifax, in a deal hammered out after the insurer closed to new business in December (see box).

Seager and Braithwaite both point out that Halifax has paid so far for the assets of the business only. Further money is forthcoming but only on certain conditions - one of these being a deal to cap Equitable's liabilities for the guaranteed bonuses.

Braithwaite said: 'People breathed a huge sigh of relief that Halifax was going to solve the problem. That was a false sense of security. All that did was buy the assets. The problem is still there.'

The suspension of the guaranteed bonuses will further rattle investors who have not withdrawn money from Equitable. Those who take cash away from the with- profits fund face a 10 per cent exit penalty, imposed when the firm shut to new business last December.

Some people, mainly those with annuities, cannot move. Others, including those with the guaranteed policies that Equitable has been told it must pay out on, are being advised to wait for the outcome of negotiations over the guarantees' future.

Advisers are also telling people within 10 years of retirement to stay put because it will be hard for them to make up for the 10 per cent penalty if they go.

Amanda Davidson of independent adviser Holden Meehan said that, generally, she had been advising younger pension clients to move, and last week's news had reinforced her view.

Actuary Ronnie Sloan, who has devised a computer program to help people work out whether to move their money, said the latest news was not, on its own, a signal to pull out. But investors should be looking at the bonus rate declared by the insurer to compare it with those elsewhere.

Sloan is concerned, however, about the long-term outlook for Equitable's with- profits funds, and is not convinced that the Halifax money will strengthen the fund sufficiently to make it competitive. 'It stops the situation getting any worse. I can't believe it makes it positively better. I would regard it as damage limitation.'

Another independent actuary, Vince Whitefoord, who has written guides for Equitable investors, also feels younger investors should go: 'The 10 per cent it is a relatively small hit on your retirement prospects.'

Seager said: 'A lot of people ought to be thinking about starting a new pension elsewhere.'

Kevin Wesbroom, a partner at actuary Bacon & Woodrow accepted Equitable's view that not paying a guaranteed return could work to policyholders' advantage because it should improve the insurer's freedom to invest for growth.

Policyholders should probably sit tight to see if the insurer could secure agreement to cap its liabilities, but for some emotion might rule. 'Are you sick to your teeth of opening newspapers and seeing something new happening at Equitable?'

• The Office of Fair Trading has told Equitable it is unhappy about the way it imposed the penalty on policyholders wanting to leave.

It believes that such action could contravene the unfair contracts laws, but it is is unlikely to order refunds.

The story so far

Equitable Life closed to new business last
December. It had been forced to put itself up for
sale in the summer after a House of Lords' ruling
said it must pay out on guaranteed pension
policies it had sold years earlier. This group of
policyholders - known as the guaranteed annuity
rate policyholders (GARs) are owed an estimated
?1.5 billion.

But the final bill could be higher and because of
the uncertainty buyers were scared off.

Investors who wanted to withdraw were charged
a penalty fee of 10 per cent, and the insurer
warned that future returns to with-profit
policyholders would be reduced as a result of its
problems.

A deal has since been done with Halifax bank,
but a quarter of the potential price of up to ?1bn is
conditional on reaching agreement to cap the
money owed to the GAR investors and a further
quarter on the Equitable sales force meeting
certain targets.

A new chairman and chief executive are in place
at Equitable and executives are planning a series
of meetings with policyholders, starting on 12
March, aimed at persuading them to accept a
settlement over the GAR policies.

Policyholders who want to attend Equitable's
'roadshow' meetings should write to Equitable's
new chairman Vanni Treves, at: Policyholders'
Meeting (MKT). The Equitable Life, FREEPOST,
Aylesbury, Bucks, HP21 7BR.

• Copies of Vince Whitefoord's fact sheets are available free by writing to him at Ivy House, Upper Ham Road, Ham Common, Richmond, Surrey TW10 5LA.