“It is time for members to have their say”

Paul Farrow, Sunday Telegraph 30th September 2007

Equitable Life’s Vanni Treves wants to sell the stricken insurerer’s with-profits annuities to the Pru. But should policyholders approve the offer”

Paul Farrow investigates

Nearly 400,000 Equitable Life policyholders are to get their chance to vote on the proposed transfer of £1.8 billion of with-profits annuity policies to Prudential. If the deal goes ahead, it will free Equitable to "go out to the market" in a bid to find a buyer to bail out the remaining policyholders stuck in its with-profits fund. Equitable Life wants to transfer to Prudential all of its with-profits annuity policies, representing about 20 per cent of the with-profits fund with an estimated value of about £1.8bn. If approved, around 62,000 with-profits annuities will be transferred into an actively managed fund that has greater bonus-earning potential than the current Equitable Life fund.

Over the next few days, all Equitable policyholders will receive information on the deal ahead of an extraordinary general meeting due to be held on October 26.

All voting members of the society will have the opportunity to vote on the proposed transfer either at the EGM or by post. The deadline for postal voting is Wednesday October 24.

Equitable Life with-profits annuitants were the worst hit of all policyholders because they were not allowed to move and so have been stuck with the beleaguered insurer.

They have seen their retirement income plummet as bonuses have slumped. At the moment, the income from Equitable Life’s with-profits annuities is cut each year, partly because the society must keep such a large part of its assets in bonds in the hope of safeguarding returns.

Prudential has committed to maintaining the same policy terms, benefits and charges to Equitable’s with-profits annuity policyholders if they agree to the transfer.

Advisers says the decision for Equitable’s policyholders boils down to whether they are likely to get better investment returns from Prudential or Equitable.

There is no doubt that the Prudential with-profits fund is one of the very strongest in Britain, and typically holds around 70 per cent in equities and property. By contrast, the Equitable fund is at the weaker end of the scale and holds around 20 per cent in equities and property, with the rest predominantly in fixed-interest securities. This is why Vanni Treves, Equitable’s chairman, and Charles Thomson, its chief executive, believe that the holders of with-profits annuities stand a chance of getting better returns from Prudential’s ownership.

Treves says: "It is time for the Society’s members to have their say on the transfer of with-profits annuity policies to Prudential. This transaction represents a critical milestone in the recent development of the Society and I very much hope that policyholders will decide to support it."

The Pru’s £75bn with-profits fund is one of the few to have delivered decent growth; it has returned 10.5 per cent a year, compared with the Equitable’s return of 6.5 per cent over the past five years.

Over the past decade the Pru fund has returned 10 per cent a year versus the Equitable’s return of 7.5 per cent a year.

But the Equitable Members Action Group (Emag) doubts that the deal is in the interest of all policyholders and reckons that the remaining 80 per cent of investors will bear the brunt of the extra costs.

It also highlights comments made by Nick Prettejohn, the Pru’s chief executive, that its with-profits fund "may be more volatile" than a fund more heavily invested in fixed-interest assets.

"The Pru articulates the downside risk, which is very real, the chief executive uses the word volatility but Equitable glosses this over and talks only of potential better returns," says John Newman, the chairman of Emag.

"Why? The new Prudential fund has no smoothing kitty from elsewhere or in it already. So there is every prospect of most annuities for with-profits annuitants continuing to go down.

"The remaining policyholders are to bear all remaining risks and overheads on fewer shoulders. Isn’t it asking the with-profits policyholders to be altruistic and self-sacrificing to allow the with-profits annuitants to move?

Newman says that "any clever deal was beyond Treves", who he claims has failed to deliver what annuitants want – the ability to covert their with-profits annuity into a fixed annuity.

"The one aspect we have heard from with-profits annuitant policyholders is convertability: some want to be back in equities and have the product they bought into some years ago. Others would like to opt out for security, so would the Pru allow with-profits annuitants to convert into fixed annuities?

Equitable rejects Emag’s suggestion and says it is not glossing over the facts.

"The downside risks are clearly mentioned in the Q&A. There will be a increase in administration costs because we will be a smaller society, but it has been taken into account. We plan to hold back some of the funds that will go to the Pru to compensate for the loss of the with-profit annuitants," says a spokesman.

"With-profits annuities are complex but once they are out of the way our with-profits fund will be similar to the rest of the industry – this will enable us to seek a better deal for our members."

Patrick Connolly of Towry Law, says: "While there are no guarantees, the proposed transfer does represent a good opportunity for policyholders to improve their investment prospects."

Geoff Tresman of Punter Southall, another adviser, says:

"I urge policyholders to vote in favour of the proposal. Equitable Life has demonstrated its incompetence consistently since 2000 and before in managing with-profits funds and the Prudential option represents a good opportunity to escape."