In doing so it has made a series of other proposals, including a ‘capital distribution’ to their with-profits policyholders. The headlines have portrayed this as a ‘£6,900-a-head windfall’, but the value of the pay-out will differ from client to client. Below is some background to Equitable Life’s situation, and the recent proposals to be voted upon by its policyholders.
Background
Prior to 2000, Equitable Life were one of the biggest mutually-owned life insurers in the world, attracting approximately 1.5 million policyholders by promising better returns than many of its competitors. Many of these policies had Guaranteed Annuity Rates (GARs) attached to them, which guaranteed a favourable minimum rate of income for policyholders upon retirement.
After an attempt by Equitable Life to renege on its promised returns in the courts, the House of Lords ruled that Equitable Life would have to remain accountable for its guarantees, and would need to set aside an additional £1.5bn to do so. Equitable Life lacked the necessary assets to meet this, and closed to new business, cutting the values of its policies in the process.
With-Profits plans in particular took a hit. High penalties were put in place for leaving the fund, and much lower returns were provided as assets were moved to much safer, but lower yielding, fixed interest funds and securities.
Over the following 18 years Equitable Life has been through the process of selling sections of its business to other insurance providers, and seeking to settle its liabilities. On 15 June 2018 it was announced that this process would now reach an end, with the transfer of all its remaining policies to Reliance Life.
What was proposed?
The board of Equitable Life have proposed several steps which will form the transfer as a whole:
- Provide a ‘Capital Distribution’ of between 60% to 70% to all with- profits policies;
- Close the with profits fund;
- Convert all remaining with-profits policies into Unit[CD1] -Linked (i.e. directly invested) policies, crystallising any final bonuses which may apply in the process;
- Commence the transfer of all policies to Reliance Life.
What is a Capital Distribution?
A Capital Distribution is a non-guaranteed bonus applied to With Profits policies, which applies when the policyholder either surrenders the policy, or converts it into a Unit Linked policy. This bonus is not based upon the current value of the plan, but the value at a set date, decided upon by the board.
Equitable Life have previously announced a Capital Distribution of 35%, based upon the value of its policies as at 31 December 2014. This meant that for every £1,000 the policy was worth at that date, a bonus of £350 would be provided upon surrender.
The 60% to 70% which is being proposed includes the 35% already announced, so it is in effect an increase of 25% to 35%. Equitable Life have not yet made clear the date the monetary value of the Capital Distribution will be based upon.
As the proposals include converting the with-profits plans to unit-linked plans, this Capital Distribution would be paid at that point, before the transfer to Reliance Life.
What happens now?
The proposals will now be reviewed by an ‘Independent Expert’, and their report will be made available before any proposals are voted upon. This vote is open to all current with-profits policyholders.
The board have stated ‘Mid 2019’ as their estimated date for the vote, and have said they will provide further information in October.
If the proposals are agreed by policyholders, the High Court will then need to approve the proposals.
Once confirmed, the board estimate that the conversions, Capital Distributions, and transfer to Reliance Life, will be completed by the end of 2019.
Conclusion
This will be good news for many policyholders who have held on to their policies for the last 18 years, and if you have a with-profits policy with Equitable Life you were thinking of transferring, this is certainly a reason to reconsider your options.
We will continue to watch these developments with interest, and provide updates as and when they are announced.