Updated 31/1/06

EQUITABLE LIFE

Letter from the Chief Pensions Officer to Scheme members with Equitable Life AVC policies.

13 December 2000

Dear Scheme Member

Additional Voluntary Contributions (AVC’s) to Equitable Life
You may have heard on the news that Equitable Life has not been successful in its sale process following the adverse court case in the summer, and as a result has closed to new business with immediate effect.

Lack of success in selling the business as a full going concern does not mean that members’ money will be lost, but it does reduce the potential for future investment returns.  This is a very disappointing outcome for an organisation that has for many years been the most successful provider in the country of AVC facilities to contributors to Pension Funds.

The likely outcome is therefore that the existing AVC funds will be run off over many years, collecting premiums from those prepared to continue payment and paying benefits as they fall due.  Guaranteed payments are likely to be made, but prospects for bonuses are significantly reduced.

Your Contributions
The Pension Fund has been consulting closely with its advisers over the past few months as the situation has developed, and has now concluded that the Equitable Life With-Profits Fund is no longer appropriate for investment of future AVC’s.  The Pension Fund is therefore considering, on an ongoing basis, what additional action should be taken.

You may wish to stop making further contributions during this difficult period.  If you wish to stop making further contributions to Equitable Life you should inform your employer’s Payroll Section immediately and confirm this in writing to Equitable Life.  Your tax allowable contribution is determined for the tax year as a whole; therefore, it would be possible to catch up prior to 5 April after a long term decision is taken on AVC investment.  Alternatively, you might consider the alternative AVC investment options available through Equitable Life (telephone 01296 384335) or the Prudential (telephone 0845 607 0077).

Your Existing Funds
Your existing With-Profits AVC fund value was subject to a 5% reduction in July, expressed as a reduction in the rate of fund growth to nil for the period 1 January to 31 July 2000. 

The Equitable have now announced that this cut is unlikely to be restored, and future returns may be reduced by the need for the closed fund to invest more conservatively.  The potential consequences for future returns are being considered by our advisers, but in the meantime we have been advised to leave the funds where they are.  It should be stressed that your AVC guaranteed fund has not “disappeared”, nor is the Equitable “bankrupt”; it is the potential for returns based on future bonuses that has reduced.

When you retire or if you leave
The implication of the Equitable’s statements is that payments on retirement or on death will continue at present levels, following the reduction of 5% in July.  As this is now unlikely to be restored, there is no reason why your retirement plans, if imminent, should not continue. Any quotation issued since July will have been on this reduced basis.

A transfer under any other circumstances from the With-Profits AVC fund will be subject to an additional 10% deduction.  Whether this can be made up by additional investment
performance in a new vehicle depends on the circumstances, and you would need to ask the adviser assisting you with the transfer for advice.

Equitable Life Unit-Linked and Building Society Funds
If your AVC’s are being invested in one or more of the Equitable Unit-Linked Funds or the Building Society Fund then the decision has no direct implication for the future investment returns on your Funds.  For the present therefore AVC payments to the Unit-Linked and Building Society Funds will continue to be invested as before.

In due course these AVC options will also be reviewed to determine what arrangements are considered to provide the most appropriate options for members of the Pension
Fund who wish to pay AVC’s.

Announcement from Equitable Life
A copy of the Equitable’s announcement is shown below.  There are inevitably a number of unanswered questions but we thought it important to share as much information as
practical with you without waiting for further details to emerge.  We will keep you informed, and we understand Equitable Life will be writing to policy holders in the course of the
next few days.

Future Updates
We will be updating this site whenever additional information becomes available.

Yours sincerely
Mike Woodall
Chief Pensions Officer

 

EQUITABLE LIFE TO STOP WRITING NEW BUSINESS
8 December 2000 Summary
The Equitable Life Assurance Society announces today that it will stop writing new business with immediate effect. The Society remains solvent and will continue to pay out benefits and accept premiums under existing policies.

What does this mean for policyholders?
Closure of the Society to new business leaves the existing with profits fund and existing unit-linked funds intact. Regrettably, however, the loss of growth in with profits policy values from 1 January to 31 July 2000 is unlikely now to be restored. All policyholders' benefits will continue to be paid out in line with the contractual obligations under their policies. Growth will accrue to with profits policies in the normal way in line with the investment performance of the with profits fund. This investment performance is now likely to be impaired by the fact that the with profits fund will need to be invested to a greater extent in bonds and gilts rather than equities which historically have generated higher returns in the longer term. The with profits fund will be re-balanced to this effect over an extended period lasting at least several months. The Board has no reason to change its best estimate of the likely cost of the Guaranteed Annuity Rate ("GAR") liability arising from the House of Lords' decision, however, the actual cost of the GAR liability could be more or less depending on a number of factors, most importantly future interest rates. Were the actual GAR liability to exceed the current best estimate, there would need to be a further transfer of value from non-GAR policyholders. Unit-linked funds are invested separately from the with profits fund and therefore the investment strategy for these investments will be unchanged as a result of the Society's closure to new business. Because the Society will not be writing new business, those of its operations involved with new business will be sold or reorganised. These and other measures will, over time, lead to reduced costs for the Society. Policyholders who are making regular contributions to their policies, or who are entitled to make additional contributions to their policies, can continue to do so. However, in the case of with profits policies, policyholders should consider the impact of the likely lower investment returns on their savings over time.

Background
In July, the Board of The Equitable announced that, as a result of the House of Lords' ruling on GARs, it had decided that it was in the best interest of members to commence a process to find a purchaser for the Society. Following that announcement, the Society received a large number of expressions of interest and received indicative proposals from three companies. The Society then held more detailed discussions with these three companies, who were invited to make firm proposals by the end of November with a view to announcing a formal offer for the Society before Christmas. No firm proposals have been received and, yesterday, the last of the parties who had submitted an indicative proposal withdrew from the process.

The Society and its advisers continue to have discussions with a number of parties who have expressed an interest in acquiring some of the operations of the Society. However, these discussions are of a preliminary nature. The Board has concluded that it is unlikely that these or other discussions will result in sale proceeds and/or capital support sufficient to restore the capital strength of the with profits fund. Without this, the investment freedom of the with profits fund will be constrained with a consequent impact on long term performance. In view of this, the Board has decided that the Society should stop selling new business. The Board's decision has the full support of the Financial Services Authority.

The Society remains solvent and also continues to satisfy the statutory requirements as to capital strength. The decision to stop selling new business is as a result of the constrained investment freedom referred to above, and to avoid the additional financing demands on the with profits fund which would arise from writing new policies.

Continuing sale process
The Board has tried to sell the Society in its entirety, including the transfer of the with profits fund.  The Board believed that this was likely to achieve the best immediate value for members and the best long term security for policyholders. The Board and its advisers will now explore the sale of some of the Society's operations, including the Society's highly regarded sales force and the Permanent Insurance Company, but it is expected that there will be no transfer of the with profits fund which will be closed to new business and continue on a mutual basis.

Impact on the with profits fund
The Board has no reason to change its best estimate of the likely cost of the GAR liability arising from the House of Lords' decision of around Ł1.5 billion. The actual cost of the GAR liability could be more or less depending on a number of factors, most importantly future interest rates. To meet the estimated cost, there was a reduction in policy values equivalent to seven months' growth-hence, were the actual GAR liability to exceed the current best estimate, there would need to be a further transfer of value from non-GAR policyholders. It was hoped that a sale of the Society would restore the lost growth. Regrettably, it is now extremely unlikely that the continuing sale process will achieve
this.

In addition to increased reserving for GARs the recent tightening of regulatory reserving requirements and poor returns in investment markets in the year to date are likely to mean that the capital strength of the with profits fund at 31 December 2000 will be weakened. As a result, it will be necessary to reduce investment in equities and increase holdings in fixed interest securities through an orderly re-balancing of the investment portfolio over an extended period of time. Policyholders should be aware that bonuses for the current and future years are likely to be lower than in previous years.

In order to protect the interests of continuing policyholders, the Society has increased the financial adjustment made on with profits policy transfers and surrenders to 10 per cent of current policy values. The previous financial adjustment represented approximately 5 per cent of policy values. Policies that mature on normal contractual dates will suffer no such adjustment. There is no impact on guaranteed values at contractual events (e.g. retirement or death). Those values are not guaranteed at any other time and therefore the amount realised on transfer or surrender may be lower.

Advice for policyholders
The Society will not write new business but will continue to accept premiums that policyholders are entitled to make under existing policies and issue new policies arising from options under existing policies (such as the purchase of an annuity at retirement). Policyholders should consider their individual circumstances when considering whether to pay additional premiums under their existing policies. Those policyholders who may need to take early decisions are those who have taken out a policy within the last fourteen days, those who pay regular premiums or those who have an option to make additional payments within the next few days. Those policyholders who have effected policies within the preceding 14 days, and are therefore within the statutory cooling off period, have the option of cancelling their new policies. The Society will extend this period to 22 December 2000 to allow such policyholders time for proper consideration of the impact of this announcement on them.

Where policyholders require advice as to what action they should take, they should contact their usual Equitable representative at their local branch or telephone 0870 900 8020. For general information policyholders should telephone 0870 600 2272. This announcement has been posted on the Society's website. All policyholders will receive a letter as soon as possible detailing this announcement and containing further information.

Management Changes
Given that a sale restoring members' benefits has not been achieved, Alan Nash, the Society's Managing Director, has tendered his resignation and that has been accepted by the Society's Board. Chris Headdon, currently the Society's Finance Director, has been appointed as Chief Executive, subject to regulatory approval.

The Society's President, John Sclater, said: "This is a very sad day for all in the Society - members and staff - but the Board decided that closing the Society to new business is the only realistic option now available. The intention of the sale process had been to make good the transfer of value from non-GAR policyholders which resulted from the House of Lords' judgement. In the event, this loss of value is unlikely to be restored to policyholders."

"I apologise most sincerely on behalf of the whole Board to members, policyholders and staff that this has come about. We remain committed to generating the greatest possible value from the sale of some of the Society's operations and providing the best possible service to policyholders."

The Equitable Life Assurance Society, Walton Street, Aylesbury, Buckinghamshire, HP21 7QW.

POLICYHOLDER QUESTIONS & ANSWERS Immediate impact

1. Will ELAS restore my loss of seven months growth (including interest)?
No

2. If I take my benefits now will I get my seven months growth restored?
No

3. I have just taken my benefits, when will I get my seven months growth?
There will be no repayment.

4. How much windfall will I get?
There will be no windfalls.

5. What will be the impact of future constraints on investment freedom?
Future returns will be affected by the Society having to take a more cautious investment stance on with-profits business. This will have an impact on future levels of bonus but it is difficult to say exactly how much they will be reduced due to uncertainties in future economic conditions. If the historic out-performance of equities against fixed interest stocks was repeated in future, investments returns might be in the order of ˝ to 1% p.a. lower on average than would have been the case without the realignment.

6. Will my policy suffer from any further drain from GAR liabilities?
The loss of seven months growth covered our estimate of the cost of giving higher benefits to GAR policies in the future. This estimate is based on realistic assumptions regarding future economic conditions, future premiums and the number of policyholders who will exercise their GAR option. The failure to sell the business does not affect the estimated cost. The actual cost of the GAR liability could be more or less than the estimated cost depending on a number of factors, most importantly future interest rates. If the final GAR liability exceeds the current best estimate there would need to be a further transfer of value from the non-GAR policyholders.

7. Have you altered your "financial adjustment" on surrenders now?
The Society has increased the financial adjustment made on with profits policy transfers, surrenders and switches to 10% of the current policy value. This is to reflect further falls in the level of markets since July when the previous adjustment was imposed and to further protect the interests of continuing policyholders. The previous financial adjustment was approximately 5%, on average, of policy values (20% of final bonus).

8. Have final bonus rates been changed?
No.

9. I just bought a policy (after 20 July). Can I have my money back?
Those policyholders who have effected policies within the preceding 14 days, and are therefore within the statutory cooling off period, have the option of cancelling their new policies. The Society will extend this period to 22nd of December 2000 to allow such policyholders time for proper consideration of the impact of this announcement on them.

For other policies normal transfer or surrender terms apply.

Future terms

1. Should future premiums be invested in the Equitable?
The Society will not write new business but will continue to accept premiums that policyholders are entitled to make under existing policies and issue new policies arising from options under existing policies (such as the purchase of an annuity at retirement). Policyholders should consider their individual circumstances when considering whether to pay additional premiums under their existing policies. Where policyholders require advice as to what action they should take, they should contact their usual Equitable representative at their local branch or telephone 0870 900 8020 (Direct). For general information, policyholders should telephone 0870 600 2272.

2. Will you alter the low charges/terms on my policy?
Charges will need to be reviewed in the light of emerging experience. No immediate changes are planned.
 

3. Who will provide customer service in future?
At present, the Society's field force and customer service staff can give advice. Our intention is to continue to offer policyholders advice on their policies.

4. Will Equitable now be completely free of the GAR problem?

The loss of seven months growth covered our estimate of the cost of giving higher benefits to GAR policies in the future. This estimate is based on realistic assumptions regarding future economic conditions, future premiums and the number of policyholders who will exercise their GAR option. The failure to sell the business does not affect the estimated cost. The actual cost of the GAR liability could be more or less than the estimated cost depending on a number of factors, most importantly future interest rates. If the final GAR liability exceeds the current best estimate there would need to be a further transfer of value from the non-GAR policyholders.

5. Will your with profits bonus policy change going forward?
As a result of the re-balancing of the investment portfolio by an increased holding of fixed investment securities, it is likely that bonuses for the current and future years are likely to be lower than in previous years. (see also answer 5 of 'Immediate Impact' above)

6. Will my unit-linked policy be affected?
No changes are planned. The closure to new business leaves existing unit-linked funds unaffected. Unit linked funds are invested separately from the with profits fund and therefore the investment strategy for these funds will be unchanged as a result of the Society's closure to new business.

7. Will my term assurance/conventional annuity policy be affected?
No.

8. Will you honour the terms of my policy in full?
Yes.

9. Will Equitable launch its own Stakeholder product?
No, we are closed to new business.

10. Will future premiums to my GAR policy still entitle me to further GAR benefits?
Yes, provided the conditions for the payment of premiums are met.

Management

1. What will happen to the existing management/Board? When?
Alan Nash has resigned and Chris Headdon the Society's Finance Director has been appointed as Chief Executive.

2. What benefits will the existing management/Board get?
There are no special arrangements for senior management or directors.

The future

1. Will a vote take place?
As the Society will now remain a mutual, no vote will be necessary.

2. What happens next? When?
We will be writing to policyholders in the next few days to give more information about the impact of closing to new business.

The Society will carry out a review of its operations to see what changes are appropriate now that new business is not being written. We shall also be talking to companies who may be interested in purchasing parts of the operation. The objective will be to continue to provide high quality, low cost service for members and to take opportunities to realise value from the operation where possible.

3. What are your intentions with regard to future products and service for group
schemes?
The Society will no longer accept new business unless it arises from the exercise of options under existing policies. A full service for existing business will continue.

4. Will customer service suffer?
We aim to maintain our comprehensive customer service.

Miscellaneous

 

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

West Midlands Pension Fund ~ Statement 10/12/00

Equitable Life to Stop Writing New Business

www.equitable.co.uk

 

 

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