House of Lords delivers Equitable Life judgement 1

The House of Lords has delivered its much awaited judgement in the Equitable Life case. A copy of the judgement can be found at www.equitable.co.uk

The case was brought by a member of Equitable Life who had a retirement annuity policy offering guaranteed annuity rates. Equitable Life had proposed to pay lower bonuses to members who made use of such guaranteed annuity rates to those members who did. The overall intention was to place an equal value on the annuity regardless of whether the policy offered a guaranteed annuity rate.

Equitable Life argued that a provision contained in its articles gave the directors a discretion as to the basis on which any bonuses would be allocated.

The House of Lords found in favour of the member. The discretion in the articles was subject to an implied restriction that it would not be exercised in a way which would override or undermine Equitable Life's practice of offering some members guaranteed annuity rates.

It has been suggested that the decision could cost Equitable Life £1.5 billion. Equitable Life has consequently announced that it is putting itself up for sale.

Some likely implications of the case are:

• Policies which offer guaranteed rates will attract the same level of bonus as policies with no guaranteed rates;
• In theory, it follows that members with policies containing no guaranteed annuity rates should get commensurately lower bonuses. However, Equitable’s decision to try to sell itself may be motivated by a desire to reduce this adverse effect on such members.
• Demutualisation may trigger windfall payments for policy holders but there has been press speculation that the size of payments will be relatively small.
• If the arguments put forward by Standard Life in relation to their possible demutualisation are correct the sale of Equitable Life may lead to lower bonuses in the long term.

For further information please contact Simon Pilcher (020 7367 2593 e-mail [email protected]) or Mark Grant (020 7367 2325 e-mail [email protected]) or your usual contact in the pensions team.