Equitable Life Assurance Society -v- Hyman

United Kingdom

Prior to 1988, Equitable Life issued with profits retirement policies which, on maturity, allowed the policyholder to take an annuity at a guaranteed annuity rate ("GAR"). A major part of the benefits under such policies is provided by the final bonus based on the policyholder's share in the assets of the society at maturity. The level of final bonus is in the discretion of Equitable Life's board - it is not guaranteed nor does a policyholder have a contractual entitlement to any particular level.

As a result of interest rate falls, the GAR exceeded market annuity rates. In response to this Equitable Life declared differential final bonus rates; where a policyholder took a guaranteed annuity rate they would receive a lower final bonus.

Equitable Life justified their action on the grounds that they wanted to achieve equality between their policyholders; if a larger bonus was granted to policyholders with a GAR they would receive more than their fair share of the society's assets, money which would in effect come from the bonuses of policyholders without GAR.

Equitable Life sought and obtained a declaration from the High Court that their actions were in accordance with both their articles of association and the policies. The Court of Appeal has, however, just reversed that decision (on 21 January), although the judges were split 2:1.

The two judges who allowed the appeal had slightly different reasoning:

(1) Lord Woolf found that setting a differential final bonus was not directly contrary to any terms of the contract but that it was an improper exercise of Equitable Life's discretion. The discretion was not provided to reduce or increase the attractiveness of particular contractual rights. The differential bonuses declared since the GAR issue arose had also reduced the policyholders' reasonable expectations.

(2) Lord Justice Waller decided that final bonuses which differed depending on the choice of the policyholder were against the terms of the policies themselves. However, he did not see any reason why different levels of final bonus should not be awarded to different types of policyholder to reflect fair shares in the assets of the society. This would allow Equitable Life to declare lower final bonuses for GAR policyholders.

Equitable Life are appealing to the House of Lords. Given its importance, it may be heard as early as March this year.

For further information, please contact Mark Atkinson or your usual contact in the pensions team on 0171 367 3000. Alternatively, e-mail Mark Atkinson at maa@cms-cmck.com.