Dear Policyholder

I promised to keep you informed of progress and developments, this is the second of my updates.

The sale process is going well. On 22 December 2000, Permanent Insurance Company was sold for £150m, which compares with our total investment of £82m since 1995. We are now in negotiations with several parties which should lead to offers for the sales force, the administration business, our systems and the asset management operations, as a whole or separately. The FSA, as our regulator, is being kept fully informed. The overriding priority is to generate value swiftly in order to strengthen the with profits fund for the benefit of all members, whilst ensuring policyholders continue to receive high quality administration and investment services.

We are also in discussion with various groups of members to explore ideas for achieving an arrangement with Guaranteed Annuity Rate (GAR) policyholders which could enable the Society to cap GAR liabilities arising from the House of Lords' ruling. The aim is to benefit all policyholders. This is a complicated matter but we are working hard on it and will keep you informed of progress.

Some members have asked whether the House of Lords' decision can be amended. Our legal advice is this is not possible. However, to reassure members that all avenues are fully explored we are arranging for further independent legal advice on this question.

There has been much comment about the 10% financial adjustment applied to early withdrawals from the with profits fund. The aim of the financial adjustment is to allow members leaving the fund to have fair value for their policies whilst ensuring that their departure will not hurt the interests of those who remain with the fund. I can assure policyholders that our surrender values are in line with the average for the industry. Whilst the number of policy surrenders has inevitably increased from our traditionally very low level, the amounts involved are not significant in relation to the total fund.

Egon Zehnder, Europe's largest recruitment consultancy, has been engaged to lead the search for a new chairman of the Society which is an immediate priority. We have received a number of suggestions from members which have already been passed on to Egon Zehnder. If other members or groups representing members wish to make suggestions please contact Julia Budd at Egon Zehnder, her contact details are given below. Following the appointment of the chairman, new non-executive directors will be sought. When a new Board has been appointed the existing non-executive directors will resign, as indicated in my previous update. The search for a new Appointed Actuary is also under way following Chris Headdon's appointment as Chief Executive.

Finally, I am sorry that some of you who have tried to contact the Society may still be experiencing delays in getting information. We know that this is frustrating and inconvenient. We are doing everything we can to cope with the greater demand for information by increasing the number of staff to answer your questions and by making more information available on the website.

I will be providing a further update next week which will include information on the investment returns achieved in the with profits fund in 2000. On our website you will find further specific information and clarification on a number of current issues which have been raised in the media.

Yours sincerely

John Sclater
President

Policyholders who have access to the Internet may wish to register for the Society's On-line Client Service facility, either by visiting the site or by telephoning 01296 385959. The facility provides the responses to many common enquiries.

If policyholders need to contact the Society, they can do so via their usual Equitable representative at their local branch or via the helpline: 0870 900 8020. For general information policyholders can listen to the pre-recorded helpline: 0870 600 2272 or access the website.

The contact details for Egon Zehnder are:

(By Post) Egon Zehnder International (for the attention of Julia Budd)
Devonshire House
Mayfair Place
London W1 5FH

(By telephone) Julia Budd
020 7943 1904

The following is an extract from the Equitable Life Web Site which can be found at:

www.equitable.co.uk

Clarification of items in Press Reports
We thought it would be useful to clarify some items reported in the press that concern Equitable policyholders.

Investment Returns
There have been some commentators that have claimed the impact on long-term investment returns which results from the change to Equitable's investment policy could be as much as 3% per annum or more. It is not clear what financial information they are using to support these claims.

While it is impossible to predict future returns, the Society has looked carefully at the expected impact of the asset realignment based on the historic outperformance of equities against fixed interest stocks. Many commentators would suggest an outperformance of equities over bonds of the order of 3% to 4% per annum. If equity and bond markets achieve this in coming years, our investment returns (given we are shifting of the order of 1/6 of the portfolio into bonds) would be expected to be in the order of 0.5% to 1% per annum lower on average compared to the portfolio without the realignment.

The total value of a policy in future will also be affected by the level of charges and Equitable's are some of the lowest.

Financial Adjustment on Surrender
There has been much comment about the financial adjustment on surrendered policies. The aim of the financial adjustment is to allow members leaving the fund to have fair value for their policies while at the same time ensuring that their departure does not injure the financial interest of those who remain with the fund. We believe that we are now providing surrender values that are largely in line with the average for the industry. For example - based on a Money Marketing Focus survey published in June 2000 for a with profits personal pension plan with monthly premiums, the surrender value for an Equitable policy using the current financial adjustment would place us:

16 out of 30 providers at 5 years
16 out of 29 providers at 10 years
13 out of 26 providers at 20 years

"Specials Deals"
There has been some recent comment that there are providers offering "special deals" to Equitable policyholders.

It has been suggested that some of these deals which "reimburse" the 10% financial adjustment associated with the (non-contractual) transfer of a policy will simply recoup this reimbursement through higher charges later on. Therefore it is important for members to fully assess all the financial elements of any new policy including future charges.

Delays to Requests for Information
Much has been said about delays policyholders are experiencing in receiving requested information.

The increased requests for information means that Equitable's normally high standard of response is not at the level you or we are happy with. We have been continually upgrading staff training and re-deploying staff to get our service back to the levels that members are accustomed to and rightly expect. We apologise for any delay and are doing our utmost to improve the situation.

In addition to writing to or telephoning us to request information about your policy, you can also access your own policy details, including current fund values, directly through this site (www.equitable.co.uk) via our online Client Service facility.

National Association of Pension Funds
A range of different views in the press have been attributed to the NAPF.

The NAPF has made clear to the Society that some of these reports do not reflect views of the NAPF.

Drawdown Transfers
Reports that transfers from income drawdown policies would not be permitted by Equitableare incorrect.

While at present the law does not allow transfer of drawdown or managed pensions, it is expected that this will be changed in coming months.

Once this is in effect, the Society will allow such policies to be transferred. As with other policies transferring at non-contractual times, these will be subject to financial adjustment.

Useful links :

A full copy of the Appeal Court judgment can be downloaded, in pdf format, by following the link below.

• Appeal Court Judgment on Guaranteed Annuity Rates

A full copy of the original judgment can be downloaded, in pdf format, by following the link below.

• Court Judgment on Guaranteed Annuity Rates

Contacting the Fund ~ by letter, fax, telephone or email ~ How Can We Help?

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