Equitable Life's compromise scheme proposals promise to settle the uncertainty of its liabilities but have managed to raise yet more questions about the society's future.
Misselling claims for non-guaranteed annuity holders on the grounds that they were not told of the potential cost impact of GARs have become a nasty thorn in the deal's side.
Equitable's legal team has been split over how much the claims could be and, as there is only one pot of money to divide, compensating these claims means that the amount available for GARs is reduced.
Under the scheme, GAR holders get an average uplift of 17.5 per cent in exchange for their guarantee. They are also given a greater level of flexibility on retirement to take open market options.
Equitable estimates the GARs to cost £1.06bn, which would give an inc-rease of 20.5 per cent to each GAR. But this is reduced to 16.2 per cent to fund the payoff to non-GARs. The £250m from Halifax payable on completion of the compromise brings the average GAR uplift to 17.5 per cent.
The non-GAR payoff totals £220m, which is Equitable's estimate of the total misselling claims.
This works out at a 2.5 per cent increase to non-GAR policyholders, including the Halifax injection.
The Halifax contribution, however, is added as a non-guaranteed value, meaning it can be lowered in the future.
Even the FSA, which has yet to publish its internal inquiry into its role in regulating Equitable, says there “is no simple template for determining the overall fairness of the proposed scheme”.
The proposal does not place any monetary value on what GAR holders are being asked to give up in return for 17.5 per cent. For people retiring now, holding on to their guarantee could be worth double the amount being offered.
Income Drawdown Bur-eau director Ronnie Lymburn says: “The GARs are worth a lot more than they were four years ago and might be even more valuable five or six years down the line. This is the worst time to broker a deal because the value of GARs is very high.”
Equitable claims it does not know what the GARs are worth but says this is why agreeing a scheme is critical.
Chairman Vanni Treves says: “We do not know what the GARs cost. They are a moving target and we can never know what they will cost with accuracy.”
Policyholder groups have reacted with caution to the proposals, saying there are still holes in the scheme.
Equitable Members Action Group chairman Paul Braithwaite described the proposals as a curate's egg. He says: “In principle, we support using a compromise to stabilise the fund. But there are gaping holes in it, given the lack of provision of a proper statement of financial affairs.”
Braithwaite wants to see the offer strengthened for non-GAR holders and for with-profits annuitants.
But IFAs are encouraging members to accept the deal as the only realistic amount on offer. Many believe policyholders will vote for the deal but will then leave once the compensation is paid.
Wentworth Rose director Philip Rose says: “There is only a certain amount of money available. It does not matter how much you argue over how it is divided, there is only one cake. Policyholders will get some compensation and they will no longer want to be associated with the company. If they get it agreed, they can put it behind them and move on.”
Equitable has already seen £600m leave the fund between July 16 and the end of August after the bonus cuts were made. The fund had come down to £22.8bn at June 30 from £26bn at the end of last year.
The scheme is only at consultation stage but it is clear there is not much room for changes. Equitable is resolute there is no plan B.
Without the compromise, Equitable says the prospect of further guaranteed bonuses being declared is “rem-ote” and its final bonus policy, which we have already seen cut massively, is even more uncertain.
As Lymburn puts it: “Unfortunately, this is about as good as it gets.”