Tens of thousands of Equitable Life policyholders have left the life assurer following the compromise settlement agreed in 2002. But there are still around 50,000 Equitable policyholders who have no option but to remain with Equitable. And to add insult to injury, many of these are suffering year-on-year declines in their retirement income.
The people in question are those who took out with-profits annuities with Equitable Life. In 2002 customers holding these policies were subjected to a 30 per cent cut in their annual payments. In many cases, their annual incomes are still falling as bonus payouts fail to match often demanding performance hurdles.
Most with-profits annuitants have given up on the idea that they might be able to transfer their policy after the board declared that it had looked into this and deemed it too expensive.
Around 2,000 of these annuitants formed the Equitable Life Trapped Annuitants (ELTA) action group in 2000. Of these, 413 formed a limited company to sue Equitable Life in July 2004 for compensation on the charge of misselling policies.
This is the only outstanding collective case against Equitable, which has had almost 7,000 complaints referred to the Financial Ombudsman Service since 2001, according to chief executive Charles Thomson. UK law only allows legal action within six years of a negligent act, and as Equitable closed its doors to new customers in December 2000, from the new year there will be no new large cases started against the company.
With-profits annuities were popular in the early 1990s because customers hoped they could outperform conventional annuities. Traditional annuities promise a yearly income by investing money in government bonds (gilts), whereas with-profits annuities are linked to with-profits funds which often invest heavily in stocks and shares.
With-profits annuities pay a set starting level of income, with future income rises (or falls) determined by the performance of with-profits funds. These annuitants must choose an assumed bonus rate, typically between around 3 and 10 per cent. The higher the ABR the greater the starting income but also the tougher the performance hurdle to maintain that income promise.
Stuart Bayliss from advisers Annuity Direct, says: “Some customers took assumed bonus rates of 10.5 per cent because gilt returns were high at that time.When rates fell, so did their returns. Anyone who assumed a bonus rate of more than 4 or 5 per cent will now have a policy that’s constantly declining.”
Following the financial difficulties Equitable faced with falling returns and declining policy sales it changed the spread of investments for its with-profits fund. The fund now invests just 5 per cent in equities, 15 per cent in property and the rest in cash and bonds. The returns are therefore lower albeit more stable.
Despite various settlements, Equitable says that 600,000 of its current policy holders have an interest in the with-profits fund. The fund has shrunk in the past six years from £25bn to £10bn.
When the with-profits annuitants case was initiated Equitable dismissed it as an expensive waste of time for policyholders. However Robert Morfee from law firm Clarke Willmott, which is representing ELTA, believes the case is progressing well and is fully confident that his clients will receive compensation.
“Not everyone in the ELTA is suing because of the risk factor involved,” says Peter Scawem, spokesperson for ELTA. “If we lose the case the current estimate is that it will cost each individual £12,500. Bear in mind they have already lost a large percentage of their annuity bonuses.
“These are people with no future earnings potential, stuck in a declining pension scheme and the entire process has been very stressful. I don’t think it’s being overly dramatic to say that the experience has speeded up some people’s journey to the grave.”
Elsewhere the number of claims against Equitable are gradually being resolved. David Cresswell of the Financial Ombudsman Service says: “There are various legal cases ongoing and it’s complicated because some people were sold 10 or 20 different policies.
“There is a lot of debate on how to compensate these people. Our measure is to say that if people with Equitable policies hadn’t bought them then they would have bought different pension policies so the redress should be based on an average basket of pension funds.”
In May 2005 Equitable announced that it saw three options for the long-term future of this issue: sell the with-profits business; unitise the with-profits fund and make it easier for policies to be transferred; or keep everything the same. The sale in May 2006 of a £4.6bn annuity book to Canada Life looked to some like confirmation that the first option was a possibility. Equitable’s board said the agreement reduced the risk for the with-profits fund but that a complete solution for the policyholders was still some way off.
The ongoing investigation by the Parliamentary Ombudsman is seen by many policyholders, including with-profits annuitants, to be the most important outstanding decision. The ombudsman is examining whether the Treasury, FSA and FOS failed in their statutory duties when investigating Equitable Life. If so, the government could be expected to pay compensation.
There is another ray of hope and it too depends on the findings of the Parliamentary Ombudsman.
Paul Weir, representative of the late joiners action group, made a presentation to an EU inquiry in April 2006 regarding Equitable Life. Weir believes that the UK government agencies worked with Equitable inappropriately and prevented compensation for customers.
“On December 8 Equitable Life will be cracking open the champagne because complainants will be timed out from suing them. But if someone can prove fraud then the limitations act won’t apply. That’s what I plan to do and I’m hoping the Parliamentary Ombudsman findings might just open the floodgates,” he says.
