The Equitable Life Assurance Society - Guaranteed Annuity Rates, Article 65 and The Hyman Case

Guaranteed Annuity Rates, Article 65 and The Hyman Case

“Many of Equitable's with-profits policies were designed to provide a pension for the policyholder on retirement” and the lump sum available for annuity purchase depended on the sum assured, the reversionary bonuses and the larger terminal bonus. Both types of bonus were allocated at the discretion of the directors in accordance with Article 65 of the Articles of Association, the total being intended to reflect the investment return over the lifetime of the policy, subject to smoothing. Between 1956 and the advent of Personal Pension Schemes in July 1988, Equitable sold policies with an option to select either a Guaranteed Annuity Rate (GAR) or the Current Annuity Rate (CAR). The latter reflected the anticipated investment return on the lump sum over the annuity holder's lifetime and could change with interest rates or longevity. No additional premium was charged in respect of the guarantee. In 1979 legislation allowed the lump sum to be transferred to another annuity provider. As a result, communications with policyholders increasingly focused on the lump sum rather than annuity benefits.

The GAR assumed 4% interest until 1975 when it was increased to 7%. By May 2001, of Equitable's 1.1m policyholders about 16% held a GAR option. During the 1980s and 1990s Equitable experienced a further period of rapid growth. It developed market leading personal pension and additional voluntary contribution plans while maintaining its record of operating with one of the lowest expense ratios in the industry. Its success was "partly based on its reputation, its strategy of paying no commissions to insurance agents or independent advisers and its tactic of always keeping reserves low and returning to its members more money than other companies.".

In 1993 the CAR fell below the guarantee prompting GAR policyholders to exercise their rights. According to actuary Christopher Headdon, policies issued from 1975 to 1988 were worth approximately 25% more than CARs, a cost if paid of £1B -£1.5B.

Based on an affidavit sworn by Christopher Headdon, on 28 June 1999 “from the 1980s onwards, Equitable was aware of the GAR risk. ... At no time did Equitable ever hedge or reinsure adequately against the GAR risk to counteract it. The reason for this was Equitable's belief that it could ...neutralise the potential effect of the GAR risk through the exercise of its discretion to allocate final bonuses under Article 65. In 1994 Equitable exercised its discretion under Article 65 to reduce the terminal bonus of policies with Guaranteed Annuity Rates, negating any benefit from the guarantee but preserving the assets of non GAR policyholders. By July 1998 there were a number of complaints to the Personal Investment Authority Ombudsman and it was decided to seek a declaratory judgement. Alan Hyman was selected as the representative GAR. Hearings started in July 1999 and in September, the High Court ruled in its favour but this was reversed by the Appeal Court in January 2000. Equitable now sought a ruling by the House of Lords.