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Equitable strife

These rates ensure there is a minimum level of pen-sion which the policy

will provide. Typically, the form of the annuity guaranteed was limited,

for example, single life, payable quarterly or annually, level.

More attractive forms of annuity, such as with-profits annuities or even a

spouse&#39s pension, are excluded.

In some cases, the guaranteed annuity is also only available on certain

dates, for example, birthdays.

Until around 1993, the guaranteed annuity rates were lower than the rates

available in the market so there was little interest in them.

Policyholders bought annuities at the more attrac-tive rates in the market

and have been able to choose from a wide range of products to suit their

particular cir- cumstances.

More recently, interest rates have fallen substantially and market annuity

rates are now well below the guaranteed rates.

If no particular action is taken following this change in market rates,

policyholders face a choice between a more valuable annuity in a very

restricted form, for example, level, single life or a less valuable annuity

in a form suited to the needs of the customer.

Different companies have responded in different ways to that scenario.

At Equitable Life, we responded by introducing a “differential” final or

terminal bonus, that is, where the policyholder chooses not to exercise the

guaranteed annuity option, an additional final bonus is made available.

The company considers each policy as having a notional share of the

with-profits fund based on the premiums paid and the investment returns

achieved – described as the asset share.

The basic level of final bonus is intended to bring the guaranteed annuity

benefit under a policy up to its asset share. If the guaranteed annuity is

not selected, the additional final bonus brings the value of the

alternative benefits up to asset share.

This means policyholders are able to select from a wide range of benefits

to suit their needs without having to accept a value that is less than the

asset share. Following some public debate about the issue, Equitable

decided to take the matter to the courts to obtain a clear ruling on its

approach.

As a mutual, Equitable argues its approach is the fairest way of sharing

the with-profits funds among its members and also gives members the

greatest real flexibility as to the form of the benefits they can choose.

Over the last 18 months, legal teams have pored over a mountain of

evidence covering a wide range of policy documents, bonus notices,

marketing leaflets, illustration forms and even a 1970s training manual to

ensure the issue is given the most thorough examination possible.

The courts are being asked to confirm that the society has the powers to

use final bonuses in this way and that those powers were correctly

exercised.

The Case

The representative action was initiated by Equitable Life when it served

an originating summons on January 15, 1999.

The court has ordered that, for the purposes of the representative action,

Mr Hyman should be the representative for all Equitable Life policyholders

or former policyholders with guaranteed annuity rates in their policies and

that the society should represent all its other policyholders.

The case was first heard before Sir Richard Scott, the vice-chancellor, in

the Chancery division of the High Court from July 5-7, 1999.

The vice-chancellor handed down his judgment in favour of the society on

September 9, 1999.

The Court of Appeal hearing took place before Lord Woolf, Master of the

Rolls, Lord Justice

Morritt and Lord Justice Waller from November 30 to December 2, 1999.

The Court of Appeal handed down its majority judgment, 2-1, against the

society on January 21, 2000.

The full text of the judgments of the High Court and the Court of Appeal

are available on the society&#39s website at www.equitable.co.uk.

The final appeal to the House of Lords is scheduled for June 12 and is

expected to last four or five days.

Lord Slynn, Lord Hoffman, Lord Cooke of Thorndon, Lord Steyn and Lord

Hobhouse will hear the appeal.

Although the opinion of the Law Lords could be given on the final day of

the hearing, it is much more likely at a later date.

Mr Hyman&#39s costs in the representative action are being met by the society.

Most with-profits pension policies issued by life offices up to 1988 –

when personal pension plans were launched – included guaranteed ann-uity

rates.

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