Pru deal gives Equitable customers cause to celebrate

Sun 18 Mar 2007

EQUITABLE Life's with-profit annuitants must this weekend feel like they have woken up from a nightmare, with the news that the Prudential is to take over their 62,000 contracts.

I do believe I was the first journalist to write about the possibility of the Pru stepping in and acquiring Equitable's with-profit annuity book. But that was a few years ago.

When no deal was speedily concluded, I received a large postbag from the trapped annuitants, which brought home to me the depth of their bitterness and despair. A couple railed against me personally for raising their hopes fruitlessly only for them to be dashed again.

But the story never went away, and last week it came to fruition. Undeniably, it would have been preferable if a deal could have been struck earlier. Over the past three years, the annuitants have seen their pensions slashed by 40%, but unlike other policyholders they were unable to flee the fund. They had no alternative but to sit and suffer repeated cuts to their income, with the very real prospect that their money might run out before they died.

So last week's announcement that their 20% of Equitable's with-profits fund, worth about £1.8bn, is being transferred to the Pru must be a cause for celebration. Finally their lifeboat has come in.

Not only should the Pru deal offer a degree of certainty and security, but it allows them to be part of a well-managed with-profits fund with a good spread of investments that might lead to a rising income again.

There can be little doubt that the Pru emerged from the stock market crash that occurred earlier this millennium in better shape than many of its competitors.

As one financial adviser said to me on Friday: "They [Pru] know how to manage a with-profits fund. Their managers look ahead, see which way the wind is blowing and take corrective action where necessary."

Scottish Amicable investors must be counting their lucky stars that their cash was taken over by the Pru in the early 1990s, rather than being taken into other groups.

The Pru's with-profits fund has grown 64% over the past five years and 162% over the past decade. In 2006 it was up 12%. This allowed its with-profits policyholders to enjoy a 15% increase in their pensions last year. The highly respected WM survey regularly places the Pru and ScotAm funds in the top two slots.

Equitable will shortly send mailings to all with-profits customers, with a full transfer document later in the year. An extraordinary general meeting will be held in the autumn to approve the plan, with the deal due to go through before the end of the year.

However, the transfer cannot take place without the support of the 250,000 members who will remain in the with-profits fund. Why they are still there when they could easily have escaped by now is a mystery to me, but no matter.

It is possible some may object to the proposal on the grounds that they will be left to shoulder any new compensation claims for mis-selling, should the report from the Parliamentary Ombudsman, due in June, give aggrieved policyholders new grounds to sue. The Pru is not acquiring any liability for past sales.

Call me cynical, but I can't get over how convenient all this is for the government. As we wrote a fortnight ago, if the Ombudsman finds fault, the with-profits annuitants are one of the obvious deserving groups with a strong claim for compensation.

All of a sudden, just ahead of the report which looks set to make more uncomfortable reading for ministers, someone has waved a magic wand and their problems are solved.

Orphans' new homes

IT ALSO emerged last week that the Prudential is to follow Norwich Union in considering distributing some £9bn of surplus funds, known as orphan assets, held in its life fund.

Peter Bloxham, former head of insolvency at City law firm Freshfields Bruckhaus Deringer, has been nominated as policyholder advocate. He will investigate how best to distribute the surplus - money which has built up over decades in the Pru's life fund but is not needed to meet its promises to policyholders.

Laughable behaviour

I HAVE to confess to an overwhelming desire to laugh out loud when I heard the news that the government is to appeal to the High Court to overturn last month's judicial review requiring adequate compensation for victims of the company pension scandal.

It makes you wonder how masochistic one government can be. The score so far is victims four, Department for Work and Pensions nil.

The Parliamentary Ombudsman ruled that the 125,000 company pension scheme members who lost out when their schemes collapsed should be compensated. Her views were largely supported by MPs on the Public Administration Select Committee, by the European Court and by Mr Justice Bean, who conducted the judicial review.

I just hope ministers realise how serious the consequences might be for the rest of us if they lose (again): future governments might be forced to accept every single finding of all Parliamentary Ombudsmen, leaving taxpayers to cough up forever more.

http://business.scotsman.com/index.cfm?id=419952007