Court of Appeal rules against equitable life

The future of the Equitable Life Assurance Society has been thrown back into the melting pot by the Court of Appeal’s unexpected recent ruling against its controversial treatment of around 90,000 policyholders who hold “retirement with profit” policies with guaranteed annuity rates (“GAR”) (Equitable Life Assurance Society v. Hyman [TLR 26th January 2000]).

Several years ago, the Society decided to award smaller financial bonuses to GAR policyholders who exercised their option of an annuity at a guaranteed rate than those they awarded to policyholders who took one of the other options under the same policy. This decision followed the fall in current annuity rates (“CAR”) in 1993 below the level of the GAR, and was based on the fact that the final bonus was not guaranteed until the maturity of the policy and the policyholders had no contractual right to it. The Society said that they needed to adopt this policy in order to achieve equality between policyholders.

The Court of Appeal ruling has overturned the original High Court decision to grant the Society a declaration that it was entitled to adopt this policy of declaring differential rates of final bonus on the retirement policies, as this was in accordance with the Society’s Articles of Association (the “articles”) and the terms of the policy, and was, therefore, within the Society’s legitimate powers.

Mr Hyman had originally submitted that this policy was contrary to the policy terms and was an improper exercise of the board’s powers conferred on them by the articles because they did not allow the board to treat policyholders differently because of the way they exercised their individual rights.

Lord Woolf, in making his judgement, said that the Society’s Directors had acted wrongly, given the details of the GAR policies sold, and had exceeded the discretion given them by the articles. He continued by saying that if decisions were taken which were inconsistent with or disregarded policy terms, the Courts could intervene and require the decisions to be taken again in very much the same way as they intervene in Judicial Review cases.

The decision of the Court of Appeal has been seen by many policyholders as a victory for common sense and natural justice. Lord Woolf has appeared to defend the much battered concept of a guarantee and to strengthen the rights of policyholders by putting pension companies on notice that the Courts have the power to ensure that they properly exercise their fiduciary duties to their customers.

However, it is still early days. The Society has leave to appeal to the House of Lords and a final outcome is not expected until the summer. In the meantime, Lord Woolf has warned against further policyholders bringing claims, which often happens and will only mean, in his words, further unnecessary litigation.

From a commercial point of view, the ruling could see the Society faced with a future bill for £1.5 million in respect of the GAR bonuses. Current speculation suggests that this could force the Society into merger talks because, as it distributes its investment gains, it has no build up of surplus capital to pay this sum. The Society has also lost business due to the adverse publicity surrounding the case. The Society denies being under pressure to consider a merger, but it is thought that both its customers and its systems would be attractive to its competitors.

The possibility of a large payout has also had an affect on the London markets, with the London Gilts market rallying on hopes that the Society and other life companies will now be forced to make provision for larger bonus payments in the future, which will require larger Gilt holdings now.

The Society has commented only to express its disappointment at the split decision of the Court of Appeal (2-1), saying that the clarity it hoped would be achieved by taking the case to Court has not yet been established and that the mixed ruling still leaves several legal issues unclear.

For further information please contact Rob Moulton on Tel: 0171 367 3742 or e-mail: [email protected]