EMAG

The independent action group for current and ex Equitable Life policyholders, funded by contributions.

Equitable Members Action Group

Equitable Members Action Group Limited, a company limited by guarantee, number 5471535 registered in the UK

Search
Media Stories: 11/02/2006 - Report by Burgess Hodgson into alternative futures for ELAS

Equitable told not to rush sell-off

The Times February 11, 2006

A REPORT published today urges Equitable Life, the troubled mutual insurer, not to rush into a sell-off of its £10 billion with-profits business, Times Money has learnt.

The study, for the Equitable Members Action Group (EMAG), a 10,000-strong group of current and former policyholders, says that the society’s directors need to provide replies to many questions before members can make an informed choice.

Vanni Treves and Charles Thomson, Equitable’s chairman and chief executive, are considering a break-up of the life insurer, which closed to new business in December 2000 after a House of Lords judgment that obliged them to honour expensive pension guarantees to some policyholders.

However, the report from Burgess Hodgson, the chartered accountant, fuels their fears that a sale of the business may not be in the best interests of the estimated 600,000 people who have a direct or indirect stake in the fund.

It says that a sale to a so-called “zombie” fund that specialises in running off policies until maturity is “unlikely to be of significant benefit to policyholders”. This is because there would be no competitive pressure to put much money into potentially risky, but higher growth, stocks and shares.

Even a transfer of policies to a “live” fund with a stronger insurer, a bigger slice of equities and better growth prospects, might not be the best option, the study says. Despite the possible advantages, a new insurer would have little incentive to restructure the business, so the shackles that currently restrict Equitable’s freedom of operation would remain. These include the problem of guaranteed interest rates (GIRs) that still apply to roughly three quarters of with-profits policies. Policyholders with GIRs are guaranteed an annual 3.5 per cent increase in the value of their policies.

But far from being a bonus, this has become a straitjacket because the only way for Equitable to be sure of delivering on this pledge is to keep the fund in fixed-interest investments, thus forgoing the opportunity of greater growth in stocks and shares.

A second headache is the plight of with-profits annuity holders. These people have chosen not to convert their pension pot into the standard fixed or index-linked pension chosen by most annuitants, but to have their payments linked to the performance of Equitable’s with-profits fund.

This strategy might have provided a steadily rising income had the with-profits fund performed well, but instead its mediocre showing, shackled to fixed-interest investments, has resulted in a highly damaging cut in the payouts. Colin Slater, of Burgess Hodgson, says: “Since 2002 the value of the average with-profits annuity has been cut from £6,000 to £4,000 a year. As things stand, the annuitants can do nothing about it, they have nowhere else to go.”

Paul Braithwaite, general secretary of Emag, says: “We want Equitable to consider a restructuring of the society, including a new deal for its GIR policyholders and with-profits annuitants that reflects the current realities. Equitable has the opportunity to do this whereas a new company taking it over would have little incentive.”

But first, Emag members want answers to questions raised in the report, such as:

  • Could a deal be reached to phase out the GIRs?
  • Could a similar deal allow with-profits pensioners to be switched into conventional annuities?
  • Could the society switch some of its money back into equities? A spokesman for Equitable Life says: "We have not seen the report and think that most policyholders would see the sense of waiting for the facts before trying to reach any conclusions about the way ahead for the with-profits fund."

http://www.timesonline.co.uk/newspaper/0,,175-2033209,00.html