FOOL'S EYE VIEW
Equitable Life -- the Saga Continues

By Rob Davies
January 24, 2001

Carburton Street, London -- Last week The Equitable Life Assurance Society gave us some hard numbers for the first time since announcing in December that it was closing to new business.

It was forced to put itself up for sale after being told by the courts it could not reduce terminal bonuses to holders of Guaranteed Annuity Rate (GAR) policies. The cost of doing that would have jeopardised its reserve ratios and it therefore needed to increase its holding in gilts. As all Fools know, more gilts and fewer equities will mean lower long-term returns and that is bad news for all the investors in the with-profit fund. Lower future returns meant that the Society was forced to close to new business and that, in turn, meant that a sale represented the best way of realising value for investors.

Even so 3,558 policyholders have surrendered with-profits policies (I have to say that I am one of them), representing an aggregate value of £240m. Both those numbers are modest compared with the total of 450,000 policyholders, 6,000 company schemes and a valuation of £26b on the with-profit fund. Surrender requests are currently running at £50m a week, four times the level of last year. Once many holders of small policies have gone the surrender rate will probably slow down.

The Society also told us that it made a total return of 2.7% in 2000. That doesn't sound very much, and it isn't, but it was a lot better than the 8.0% fall in the FTSE 100 and the 5.7% decline in the FTSE All-Share index. Moreover, the return looks even better when we read that according to CAPS, the median pooled pension fund had a negative return of 3.8%. What is surprising about the Equitable's performance is that it was achieved before the company increased its holding of gilts. At the end of December 1999 the fund had 68% in equities and property with 24% in gilts (and 8% in "other"). Over time the Society says it expects to reduce its equity and property weighting to 50%. As a consequence it expects its long-term returns to be around 0.5% to 1.0% lower than would otherwise have been the case.

Its historic returns have been good, as this table shows, and in the past it has used the good years to bail out the poor years. Policyholders have also benefited from an annual management charge of only half a percentage point, one of the lowest in the industry.

Year    Actual Return   Pension Return    Life Return

1990        -8.3%            12.0%           11.5%
1991        13.5%            12.0%           11.5%
1992        17.1%            10.0%            8.0%
1993        28.8%            13.0%          10.25%
1994        -4.2%            10.0%            8.0%
1995        16.6%            10.0%            8.0%
1996        10.7%            10.0%            8.0%
1997        17.2%            13.0%          10.75%
1998        13.3%            10.0%            8.5%
1999        16.0%            12.0%          10.25%
2000         2.7%                ?               ?

The next event that policyholders can look forward to, if that is the right phrase, is the annual bonus declaration in February. Last year's investment return of 2.7% is not an encouraging start, but life assurance firms do smooth earnings so the declared bonus might not be too bad. However, we need to remember that bonus payments were suspended between January and July last year to make up some of the shortfall. Assuming it would have declared a 10% bonus, as it did in previous years of low or negative returns, we could perhaps expect a bonus of around 4.2%. That would make it the lowest allocated rate for 10 years. Even so, 4% or thereabouts is not bad given market conditions and the problems that the Society faces

The critical issue for many policyholders remains the one of withdrawal. On that point it is impossible to give specific advice, but the Equitable Life discussion board covers most of the options thoroughly. The key issue is whether the investor has sufficient time in a new fund to make good the 10% he will lose by taking his money out, given that investment returns are forecast to fall by around 0.5% per year. A further confusing factor depends on whether you have a "contracted premium policy" or a "variable premium policy". In the former case, stopping contributions amounts to an automatic surrender of the entire policy (and the resulting loss of 10%). In the case of variable rate policies, though, it is possible to stop contributions without affecting the status and accrued value of the policy. There are more details about the differences between these two types of policy on the Equitable Life website.

If that isn't enough, things are further complicated by speculation over the sale of all or parts of the business. While the press has been full of stories, the only hard news from the company dates back to the 11th of January when it said that it was in talks with various parties about selling specific parts of the Society such as the sales force. Any deal to take over the main fund would almost certainly have to reach an agreement with the GAR holders to cap their claim, otherwise the liability cannot be quantified. But the biggest uncertainty in that equation is falling interest rates and few companies would wish to take on that bet. So rumours of a deal for the whole Society remain just that. Were any deal to evolve, it would presumably need the approval of all parties at an EGM and this would obviously take time.

Everything comes together to produce a very confusing picture and it is hard to say who should do what. Equitable is working to provide a solution which, within the law, is fair to all. On that basis, if you're in any doubt, the best answer is likely to be to sit tight until the situation becomes clearer.

After 238 years the Equitable Life story is not about to go just yet.

What next

The Equitable Life Assurance Society discussion board
The Equitable Life Assurance Society web site