20 September 2001 - EQUITABLE LIFE - COMPROMISE PROPOSALS Report

PART I - THE PROPOSALS

HEADLINES

To GAR's for giving up GAR rights, an average of 17.5% uplift

To non-GAR's for giving up mis-selling claims, a 2.5% uplift

The GAR uplift depends upon the type of policy held:

The non-GAR uplift is regardless of age or policy type.

FORM OF UPLIFT

Uplifts are to be (broadly) added to policy values in proportion to existing guaranteed (premium and reversionary bonuses) and non-guaranteed (terminal bonus) elements. For example someone whose existing fund is represented as to 60% by guaranteed element will get 60% of his uplift in guaranteed form. The other 40% of the uplift will be added to terminal bonuses. This is subject to the exception of the policyholder's share of the £250 million due from Halifax (if compromise succeeds), which is always given in non-guaranteed terminal bonus form.

There are some odd effects for people whose guaranteed element is larger than their total policy value, because they have negative terminal bonuses. These are recent entrants with insufficient terminal bonus to immediately withstand the 16% hit of 16^th July.

CUT OFF AND TRANSITIONAL

Uplifts will be based upon values as they stand at the time of the compromise vote (perhaps December 2001) but transfers into the with-profit fund after midnight on 18^th September will not count for uplift.

GAR policyholders, who have reached the age when they can take their annuity (usually 60), may still take that annuity, provided they do so before the scheme becomes effective.

FINANCIAL FIGURES

The current documents contain no Statement of Affairs, which would normally be expected of a company seeking a compromise with its creditors (or in this case policyholders).

LEGAL FORM OF THE COMPROMISE

The compromise is constructed under the auspices of S425 of the Companies Act. S425 is a very powerful tool. It enables a company to re-write (from scratch if appropriate) its arrangements with members and/or creditors (policyholders in our case) and to make those new arrangements legally binding. Because it is so powerful, there are some stringent safeguards. The main ones are:

1. The company must persuade the Court to order appropriate meetings.

2. At those meetings, it must obtain 75% (by value) approval of the proposals from each class of members/creditors (voting in person or by proxy).

3. The Court must approve the final result.

The result is binding upon all those included in the classes of members/creditors involved in the scheme, even if they individually voted against or did not vote at all. It cannot be binding on anyone else. It can only affect rights or claims addressed by the scheme.

The Society's lawyers have advised that there should be only two classes of members/creditors, GAR and non-GAR policyholders.

Voting will be based upon policy values. Those with several policies of the same class will have voting rights equivalent to the aggregate value of those policies. Those with both types of policy will have voting rights in both meetings. Although physical meetings will be held, the decision will probably be made by the postal (proxy) votes.

MECHANICS

The documents being issued this week are consultative. In theory the proposals can be changed (but probably won't).

The intention is:

1. To apply to the court in early November for it to order separate GAR and non-GAR meetings.

2. To issue formal scheme documents, including a Statement of Affairs in mid-November.

3. To hold the compromise meetings in December.

4. To obtain formal court approval of the scheme in January/February.

PART II - THE BACKGROUND

GENERAL

The Society's current situation is unacceptable. The GAR policyholders (representing about 25% of the fund) are entitled to valuable rights under last year's House of Lords decision. These rights extend into the future and cannot be accurately valued. The cost can only be borne by the Society as a whole and a large slice of this cost will fall upon the other (non-GAR) policyholders, representing the remaining 75% of the fund. Many of them claim that their policies were mis-sold because they were not informed of the GAR problem. This view was given considerable weight by the opinion of Nicholas Warren QC.

The background document considers various means of dealing with this problem including doing nothing, liquidation and claims under the Policyholders Protection Act. It concludes that a S425 compromise is the most attractive way forward.

The philosophy of the proposed uplifts is complex and GAR and non-GAR need to be considered separately.

THE GAR UPLIFT

What is proposed is that the estimated actuarial cost of the guaranteed annuity rights is to be apportioned between policies based upon the legal rights contained in the policy.

The crux of the problem is the gap that has developed since 1993 between the high guaranteed rates shown in post 1976 policies and current rates. Whilst guaranteed rates are fixed by the policy, current ones fluctuate considerably. The gap between them depends upon the age and sex of the policyholder and the view of the companies in the annuity market at the time. For the purposes of this note I will assume that 35% more money is needed to buy the equivalent of the contract annuity on the open market. Or put another way, it will cost the Society 35% more money than it has earmarked to a particular GAR policy, if the holder chooses to take the guaranteed annuity.

The documents do not spell out the figures in a form that is understandable to the layman, but the following is a crude attempt to do so:

Having arrived at a total GAR uplift of £900 million this amount is allocated amongst policyholders in a manner intended to reflect their legal rights.

1. Retirement Annuity policyholders with pre October 1975 contracts get a low scale of uplift reflecting the low level of guaranteed rights contained in their contract.

2. Retirement Annuity policyholders with post September 1976 get a flat uplift of 16.3%

3. Other GA policyholders get the highest scale dependent upon age.

THE NON-GAR UPLIFT

Compensation for non-GAR's is a difficult and contentious issue upon which the Society has received conflicting legal advice. The approach adopted for this compromise is:

LEAVERS

The compromise does not include and cannot bind those (mostly non-GAR's) that have already taken their benefits in cash, to another provider or as a conventional annuity. Their rights to claim compensation for mis-selling are unaffected although they will have to pursue them individually and must assume the Society will put up a vigorous defence. It is believed that the same will apply to those who leave before the compromise becomes effective.