What a difference a few months make! Looking back to July when the Parliamentary Ombudsman called for compensation for Equitable Life policyholders, the implementation of such a scheme seemed almost uncomfortably unprecedented. In terms of context with other ‘day-to-day’ financial losses and any historical precedent there seemed to be no compelling rationale to compensate policyholders, even while acknowledging their often unfortunate circumstances.

However, fast forward to today, after the UK government’s undertaking to make good any losses by individual UK policyholders in failed Icelandic banks. Today, to Equitable policyholders, anything less may seem scandalously unfair.

Contrast the two: Equitable Life – a long-established, well-known UK insurance institution offering ‘low’ risk products and ‘closely’ regulated by the Financial Services Authority versus an unknown overseas bank, new to the UK and offering higher rates over the internet. There is always risk with any financial product, instrument or transaction, but Equitable policyholders might reasonably be forgiven for thinking the risk they took was far less then than that now being fully underwritten elsewhere by government. The government’s response is due this autumn but Equitable’s policyholders should not bank on it being a positive one.

Review implications

Equitable Life is but a shadow of its past, post-closure and disposals of significant books. Things have steadied, albeit not at a great position and with limited prospects. Taking due consideration for any guarantees, advisers may consider reviewing holdings in the fund as a priority segment based on the fund’s financial strength, future performance and transparency position. The following extract covering the Equitable Life Assurance Society – Ordinary Long-Term fund is drawn from AKG’s 2007 UK Life Office With-Profits Reports (full details can be found at www.akg.co.uk).

Company financial strength

The society remains solvent and continues to satisfy regulatory requirements by virtue of £167 million of subordinated debt as at 31 December 2006, but without a future profits implicit item. The subordinated debt has since been redeemed. As a closed fund, its realistic balance sheet now reveals zero working capital after the inclusion of £884 million of planned enhancements. Ongoing de-risking of the fund continues, the transfer of the annuities being a prime example. Although it is in the process of resolving a variety of issues, a number remain and it is still relatively weak, albeit at a relatively steady level particularly for a with-profits office.

Discussions about the appropriate level of capital the society should hold under the Individual Capital Assessment (ICA) regime continue.

In Equitable’s 2006 Annual Report, the auditors emphasise the potential detrimental impact on solvency of the contingent liabilities and uncertainties, although the accounts are not qualified in this respect. Discussions about the appropriate level of capital that the society should hold under the ICA regime continue.

Fund background

Within the ordinary long-term business fund, the society operates notional sub-funds for each currency. The Sterling With-Profits fund represents the majority (98%) of the liabilities. It contains three types of with-profits policies:

• Recurrent single premium (RSP) policies (75% by value as at 31 December 2006).
• With-profits annuities (23% by value and proposed to be transferred to Prudential).
• Other policies including endowments and whole life (2%
  by value).

Investment

The society operates a conservative investment policy as a result of its solvency position and its need for liquidity. It invests mainly in fixed interest securities and is unlikely to be able to alter this policy unless financial strength increases significantly. This strategy helps to reduce risk and to maintain solvency.

Market value reductions (MVRs)

Following the ruling by the House of Lords, the society has adopted an active MVR response, which has brought considerable adverse comment. Whatever decisions are made with regards to financial adjustments, policyholders who take their benefits in accordance with contractual terms will receive a minimum of their accrued guaranteed benefits.

On 1 October 2005, the financial adjustment for individual pension policies was 8% [2004: 11.1%]. It was maintained at 8% until April 2007, when it was reduced to 5%. The financial adjustment does not apply to regular pension payments under with-profits annuities, withdrawals of income from managed pension policies or regular withdrawals up to a certain amount on certain life policies.

Guarantees

The society’s guaranteed annuity rate (GAR) compromise scheme addressed most of its well-documented annuity guarantee problems. However, some problems still remained and the society withdrew the scheme as potentially unfair to continuing policyholders. A revised scheme was launched in November 2003.

The majority by value (around 70%) of the with-profits portfolio contains a guaranteed investment return that adds 3.5% to guaranteed policy benefits each year. About 20% of the portfolio has a guarantee that benefits can never reduce except in extreme circumstances, such as liquidation of the society. The society has estimated that, and is taking an ongoing margin of 0.5% per year, deducted from the net return on the fund, would be sufficient to meet the cost of guarantees and provide some additional risk capital.

 

Fund Information

 Fund Ordinary Long-Term fund - Sterling with-profits fund

Group Equitable Life

Company The Equitable Life Assurance Society

Fund size £13.7 billion (by realistic value of assets)

Fund open to new business? No

Are assets ringfenced from other business? No

Fund type Conventional and unitised with-profits, plus non-profit business

Fund classification UK fixed-interest fund

AKG Verdict

Transparency 1/5

Sterling With-Profits fund: Historically, the society was considered to be one of the most transparent. It now releases little information above that required at a statutory level. Its approach to the governance of the fund is particular inward-looking. The report to with-profits policyholders is, however, reasonable in its content.  

Future performance 1/5

Sterling With-Profits fund: Future performance prospects cannot be considered as good. The fund has a very low ongoing equity backing ratio of 16% (mainly property). The society is not in a position to increase this so will not be able to benefit to any great extent from any gains in the stock market. Performance prospects are further hampered by the need to match guaranteed investment returns, the lack of a significant estate and the declared aim to retain a margin (currently 0.5%) to meet guarantee costs and build risk capital.

Financial strength 1/5

The fund remains weak, although the society has acted to stabilise the position by removing a significant amount of risk through actions such as the annuity transfers. There is little hope for support from elsewhere as things currently stand. As a closed fund, its realistic balance sheet reveals zero working capital after planned enhancements of £884 million (2005: £668 million). It also reveals that there are no other assets potentially available if required. With-profits annuitants, should the proposed transfer proceed, should benefit from moving to a stronger fund and all the implications this brings.

In Equitable’s 2006 Annual Report, the auditors emphasised the potential detrimental impact on solvency of the contingent liabilities and uncertainties, although the accounts are not qualified in this respect.

Note: AKG accepts no responsibility for investment decisions taken as a result of information supplied – all reviews and prioritisation of reviews must be subject to overriding consideration of individual policy and policyholder circumstances.