Future of Equitable Life Remains Uncertain, Say Analysts

LONDON -- The future of Equitable Life Assurance, the troubled British mutual life assurer that fell foul of a mixture of strategic and legal hazards, remained uncertain in late January.

UK pension industry analysts say Equitable's fate remains delicately poised amid the conflicting interests of possible buyers of the company, of policyholders considering shifting to another pension provider and of other policyholders thinking of maximising the advantages granted them by a UK legal decision.

Equitable, the world's oldest mutual life assurance company and the favourite pension provider of Britain's professional classes, is still solvent. But it had to close its doors to new business in December.

This was due to its £1.5 billion ($2.2 billion) of uncovered liabilities to one group of policyholders following a judgement in the UK's highest court, the House of Lords (see Operational Risk, January 2001, page 6).

Lower retirement incomes

Pension industry analysts estimate some 1 million people can expect lower retirement incomes as a result of the law lords obliging Equitable to honour in full the guaranteed annuity rate (GAR) with-profits policies sold to some 90,000 policyholders between the 1950s and 1980s.

GAR policies in effect gave their owners a call option on interest rates -- the right to be paid on conversion at interest rates ruling at the time of purchase. This has made these policies very valuable in today's low interest rate era.

The law lords last year struck down Equitable's argument that in order to ensure fair returns to its non-GAR with-profits members, it was entitled to reduce final bonuses on GAR policies where annuity guarantees made them expensive.

The lords' decision surprised many in the insurance industry and Equitable had insufficient reserves to meet the obligations imposed on it by the court.

Equitable was in talks in late January with AMP, the Australian insurer, on a possible sale of the UK company. The sale is dependent on GAR holders agreeing to a cap on the liabilities to them. Talks with the Netherlands-based insurer Aeon earlier in January came to nothing.

GAR holders have the right to top up their policies, which -- if exercised -- would increase Equitable's liabilities.

Meanwhile, some financial advisers were recommending non-GAR policyholders to move their funds out of Equitable and place them with other pension providers, despite the 10% penalty charge Equitable had quickly imposed on deserters precisely in order to stop a mass exodus.

The legality of the 10% penalty is itself the subject of an inquiry by UK consumer watchdog bodies.

Dangerous situation

Industry analysts say the most dangerous situation for Equitable would be if GAR members were to seek to maximise their position by topping up their policies, while non-GAR members increasingly moved their money out. That would frighten off potential buyers of the company and put severe pressure on Equitable.

The Financial Services Authority, the UK's principal financial watchdog, and the treasury committee of parliament are investigating the debacle.

The UK Institute of Chartered Accountants, the auditors' professional body, is looking into the conduct of its members in relation to the affair.

Equitable's auditors are Ernst & Young, who say the company's accounts were true and fair on the information available at the time.

--David Keefe