The Rectification Scheme

The Rectification Scheme is governed by a scheme document issued in December 2000 by the old Board which was presumably drafted by their then solicitors. The purpose of the scheme is to compensate those who had GARs which they converted into annuities prior to the House of Lords judgment but were not given the opportunity to get the full bonus plus the GAR as required by the said judgment.

However the scheme is NOT offering compensation based on "the full bonus plus the GAR as required by the said judgment". Rather it makes the assumption that the bonus rates from 1994 onwards would have been lower if the House of Lords judgment had been foreseen in 1994.

Clause 4 of the Rectification Scheme reads:

"The House of Lords´ judgment required the Board of the Society to re-exercise its discretion as to the rate of final bonuses to be awarded for those years in which final bonuses were awarded at differential rates. As was recognised in the House of Lords, in exercising such discretion, the Board of the Society would not be able to award final bonuses at the higher rate previously made available on GAR policies where benefits were taken at current annuity rates. There is only one with profits fund, and if GAR policyholders are to receive the same level of final bonuses irrespective of the form in which benefits are taken, instead of higher or lower final bonuses depending on the form in which benefits are taken, then the resultant final bonus will necessarily be set at a level somewhere between the two."

Legally it could be argued that there is nothing in the House of Lords judgment that justifies the above. On the other hand it could be argued that it is a fair way of dealing with things (ignoring the basic unfairness of the House of Lords judgment!). It would be possible to challenge the scheme on this point but one has to have a very deep pocket before one can take the risk of going to law.

The effect of this recalculation of the bonus rates is considerable and will vary from casw to case according to the complicated formula which will be explained in the offer you eventually receive. You might see a reduction of about 40% in the value of the rectification to you.

Many GAR policies had no provision for spouse benefits at the GAR rate. However the offer you receive may well contain an offer of a joint annuity with 50% for the surviving spouse. The reason ELAS may offer you this is not generosity but because it may be considerably cheaper for them if you accept such an offer. The mathematics are complicated but effectively we believe they do a calculation such that they can separate the cost of the first life from the surviving life. The cost of the first life will have been calculated at new bonus GAR rates and the cost of the second life at non-GAR rates.

You are strongly advised therefore to ask for an illustration of a single life annuity and when you get it seek advice on what is the best option. In some cases the single life annuity has proved to provide an annual income double that of the income for the first life of a joint annuity. Now taking out a joint annuity does not have the effect of halving your annuity in normal circumstances so it could well be that the single life annuity is much more valuable to you than the joint life annuity. You can still provide for your surviving spouse by saving some of the extra income each year or by entering into some kind of life insurance contract on your own life which will provide what the surviving spouse would have got under the joint annuity.

However you should be aware of clause 17(b) of the scheme. It is difficult to know what this clause means but in the Deed of Acceptance which you will be asked to sign there may be a clause:

"It is a condition of the Rectification Scheme that you should demonstrate that you would have taken benefits at policy maturity date in a form to which GARs apply if the applicable New Bonus Resolution had been in force at that time. Accordingly, we reserve the right to seek further information to satisfy ourselves that this condition has been met".

It would be better to ask them to clear this point before you sign the deed particularly if you are going for a different illustration than that first offered e.g. single rather than joint lives.

A particular circumstance that might come under this clause 17(b) is where your spouse has recently died but was alive at the time that you took your benefits. They might then hold that you would have taken a joint life annuity and are now only taking a single life because of hindsight. However one could then reply that one might only have taken a single life annuity at GAR rates if that was the only kind of GAR annuity then on offer under the policy.

Other reasons you might advance for having the single life annuity are:

1. Your spouse has ample means or a pension of his/her own.
2. You have ample means to provide for him or her apart from the annuity.
3. You have other annuities adequate for your spouse.

In the Deed of Acceptance you may have to agree to say:

"My acceptance of the Society's offer is in full and final settlement of all claims howsoever arising against the Society in relation to the policy(ies) referred to above. I hereby waive all my rights to make any claim against the Society and any of its directors, employees, members and agents, save for (1) the purpose of enforcing my rights to the benefits under the policy(ies) as amended by my acceptance, and (2) any right which I may have to complain to the PIA Ombudsman (and I confirm that I have no intention to make any such complaint). "

You should be very careful to make sure that the Deed only refers to the policies that are being rectified and not to other policies where you might have a claim against ELAS.

If you decide to decline their offer you are invited to execute a deed declining the offer. There seems no point in doing so as it will probably contain clauses letting ELAS off the hook and there seems to be no point in doing so when you are getting nothing for so doing.

These comments are merely given as helpful guidance as to some of the issues in the rectification and no responsibility can be accepted in relation to them. You would be well advised to take separate legal and/or financial advice before accepting any offer.