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Advisers warn Equitable Life policyholders over mass exit fears

Advisers have warned 400,000 Equitable Life members against ditching their with-profits policies as the closed-book life insurer prepares to boost payouts to people who leave.

Later this month Equitable will announce how it plans to distribute hundreds of millions of pounds of surplus capital created after the firm struck a deal with Legal & General to insure the liabilities of its defined benefit pension scheme.

Equitable Life chief executive Chris Wiscarson says the deal allowed it to free up around £200m in capital and, as a result, its surplus will be “significantly more” than the last reported figure of £580m.

This is likely to be distributed to policyholders through an increase in the 12.5 per cent enhancement they currently receive when their plan matures or they cash it in early.

Wiscarson says: “We had huge amounts of capital set aside for the pension scheme. The deficit on the scheme was £100m, but if you stress test that it is two or three times that figure.

“This time last year we agreed with the trustees to settle the pension deficit through a bulk annuity deal with Legal & General. That means assets of the staff pension scheme are now L&G guaranteed annuities, so we do not need to hold capital against it.

“The moment that happened it transformed the capital position of the society and essentially released £200m of capital.

“Our strategy is to give money back to policyholders and there is now hundreds of millions of pounds of surplus. We need to discuss how we will do this with the Prudential Regulation Authority and the FCA and we will make an announcement at the end of March.”

Money Marketing understands an independent focus group study of Equitable policyholders has raised concerns about a possible run on the firm if enhancements are increased.

Wiscarson says a large number of exits would actually improve the insurer’s capital position but warns policyholders they could miss out on future distributions if they decide to leave.

He says: “It is quite difficult to predict with any certainty what policyholder behaviour is going to be after this announcement. We recommended to them in our communication to them that they seek independent financial advice.

“It is important that IFAs and their customers are thoughtful about the announcement and the starting point is not ‘take your money and run’.

“If a policyholder isn’t thinking about retirement, IFAs should be very careful in advising them to take the money now simply because we have made this announcement.

“If we were to increase the capital distribution in future, we never want our policyholders to turn round to us and say ‘if I’d have know that, I wouldn’t have taken my money’.

“That is the balance that needs to be struck.”

Hargreaves Lansdown head of financial planning Danny Cox says: “If someone in a with-profits fund has five to 10 years to go until retirement, most people should probably stay where they are.

“People need to weigh up the balance of the unknown of potential future surpluses with whatever the bonus policy currently is and whether it will stay as it is.

“A surplus distribution will make people think about their position but they should not simply rush into exiting.”

Investment Sense marketing manager Phillip Bray says: “Policyholders need to be very careful here. There is a risk that the incentive of short-term gain will see people pull out of a fund that is actually right for them over the long-term.”


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