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's 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
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
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's 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's 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