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Equitable Life to rethink adjuster in FSA crackdown

Equitable Life says it will have to consider whether it can continue to levy a “financial adjustment” on policyholders that leave the fund following the FSA’s clampdown on market value reductions.

This month, the regulator moved to prevent with-profits providers from charging an MVR if they suffer liquidity problems as a result of members leaving the fund.

An FSA spokesman said: “Under the revised rules, providers cannot retain an MVR if too many people are leaving the fund, but they can if people leave during folding markets and are walking off with more than their fair asset share. That is to protect existing policyholders.

“Under the old rules, you could apply an MVR under both. We are now saying the liquidity of the fund is an issue for the firm to manage.”

Equitable Life levies a financial adjustment, effectively an MVR, on policyholders who leave the fund before their contract term expires. It currently stands at 5 per cent but Equitable can increase or lower the charge.

One of the considerations that Equitable applies when determining the size of the financial adjustment is to recoup losses if large volumes of surrenders cause a “forced sale of illiquid assets at impaired values”.

Speaking to Money Marketing, Equitable Life chief actuary Martin Sinkinson concedes the closed with-profits fund could need to review this aspect of its principles and practices of financial management in light of the FSA policy paper.

He says: “The society at the moment has fairly large amo-unts of liquid assets so liquidity is not an issue for us and does not have a significant imp-act on the 5 per cent financial adjustment.

“We carry out annual reviews of the PPFM and if things change in terms of rules and regulations then we will take account of those changes. That is something we will have to consider.

“But we think the financial adjustment itself is still appropriate in light of the FSA’s proposals. It is there to protect existing with-profits policyholders because as a mutual organisation we do not have any other source of capital.”

AWD Chase de Vere head of communications Patrick Connolly says: “If Equitable’s with-profits fund is sensibly managed then it should not have any liquidity issues.

“This is only likely to be a problem if it holds large amo-unts of illiquid assets such as property, though as the fund is primarily cash and fixed interest it should not be an issue.”

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