Trapped in Equitable?s dwindling with-profits

The plight of pensioners relying on their Equitable Life with-profits investment for their retirement income took centre stage at the mutual?s annual meeting this week.

The 50,000 pensioners, who have suffered a cut of 30 per cent or more in their annuity income, are powerless to prevent a continued decline in their pensions and cannot move their money elsewhere.

They are in a unusual position, not only among Equitable policyholders but among annuitants in general. Estimates suggest there are at least twice as many with-profits annuitants trapped in Equitable than in all the rest of the with-profits annuity providers put together.

About 400 have joined action group Equitable Life Trapped Annuitants, that plans to take legal action against the society, and announced this week it has raised enough money to move forward with its action. Anyone else interested in joining the action must do so by May 28.

The claim the annuitants will make, on a ?no win no fee? basis with Bristol-based law firm Clarke Willmott, has not yet been finalised, but is expected to run into ?many millions?.

The issues are complicated and trying to understand how with-profits annuities work and why they have gone so wrong for Equitable investors is no easy task.

But one industry insider, who is also an annuitant, claims the product was flawed from the outset. The way it was structured opened the door for Equitable to raid annuitants? money whenever they wanted, he maintains.

Investors in annuities chose an ?anticipated bonus rate? (ABR) when they bought their annuity, at a level of perhaps 5 or 7 per cent, in some cases as high as 10 per cent. This set the level of income they received and formed their guaranteed basic annuity. Each year, this was reduced by the ABR and increased by the bonus added to arrive at the final payment.

As long as the actual bonus was higher than the ABR, annuitants enjoyed a rising income. But they were living on borrowed money, and when the loan was called in, they discovered part of their basic annuity had been converted into non-guaranteed final bonus that Equitable could cut away.

This is because the actual bonuses paid out were made up of two elements, one guaranteed and one that was not. The guaranteed element was added permanently to the basic value, but the whole amount was then reduced by the ABR. So as soon as the guaranteed element fell below the ABR, the basic annuity would fall.

Your total annuity payment may still have been increasing, but with a growing gap between the total annuity and the basic guaranteed annuity. Equitable called the difference the final bonus, which it can reduce or remove.

Simple really!

Equitable is now only paying non-guaranteed bonuses, further increasing the gap between the total annuity and the guaranteed annuity and leaving annuitants open to further cuts if deemed necessary. The only exception is on annuities taken out before 1996, which enjoy a 3.5 per cent guaranteed bonus rate.

Equitable confirmed that there is no minimum level of annuity payment, although other providers do have such a safety net. For example, Prudential guarantees that, if you choose an anticipated bonus rate of 5 per cent, your income will never fall below 55 per cent of your starting income.

Equitable maintains that annuitants have not been treated any differently from its other with-profits policyholders. It says it delayed the reductions to their income as long as possible by spreading them over a number of years, in the hope that a recovery in the stock market would make future cuts unnecessary. But its move out of equities in 2002 put paid to that hope, and so in fairness to other policyholders, who were effectively subsidising the delay, the cuts were brought forward.

But annuitants are in a different situation than other policyholders for the simple reason that they do not have the same choices: they cannot take their money and run.

Equitable chairman, Vanni Treves, said at the annual meeting on Wednesday that this ?trap? was not of Equitable?s making.

He said it may be possible for individual annuitants to leave some companies, but the same was not true for Equitable. There are legal and regulatory hurdles even if the Inland Revenue has no objections. The only possibility was for all to leave en bloc to another organisation, if one was prepared to take them.

There are rumours that Equitable has had such offers, although the society will not comment on this. It says it is conducting a strategic review and is not ruling anything out.

Commentators suggest now would be a good time to move annuitants, with the completion of the reductions in annuity values, although they would only gain from such a move if it was to a strong provider that could offer some prospects of future growth.

But there are suspicions that Equitable would rather retain the annuitants, just in case it needs to dip into their pots again to shore up its solvency. At the least, say some commentators, it is useful for the mutual to have a group of policyholders who are locked in. ?It would mean the company was in more direct run-off if they weren?t there, and managing the exit penalties and bonuses would be more difficult,? says Stuart Bayliss of specialist adviser Annuity Direct.

There is no doubt that Equitable annuitants are in a difficult position, and no surprise that some have decided that legal action is their only option.

Hopes of government compensation look distant. Equitable members at the annual meeting voted resoundingly against a resolution put by the Equitable Members Action Group (Emag) for ?2m funding for action through the courts.

That leaves hope resting mainly on a re-opening of the parliamentary ombudsman?s investigation. Charles Thomson, chief executive at Equitable Life, says he is confident and ?the moral case for investigating government compensation is now compelling?.