The Equitable Life Assurance Society
The Equitable Life Assurance Society, founded in 1762, is a life insurance company in the United Kingdom. The world's oldest mutual insurer, it pioneered age-based premiums based on mortality rate, laying "the framework for scientific insurance practice and development" and "the basis of modern life assurance upon which all life assurance schemes were subsequently based". After closing to new business in 2000, parts of the business were sold off and the remainder of the company became a subsidiary of Utmost Life and Pensions in January 2020.
At its peak in the 1990s, Equitable had 1.5 million policyholders with funds worth £26 billion under management, but it had allowed large unhedged liabilities to accumulate in respect of guaranteed fixed returns to investors without making provision for adverse market changes. Many policyholders lost half their life savings, and the company came close to collapse.
Following a July 2000 House of Lords ruling and the failure of attempts to find a buyer for the business, it closed to new business in December 2000 and reduced payouts to existing members. Lord Penrose's 2004 Equitable Life Inquiry found that the company had made over-generous payouts leading it to be under-funded. A 2007 European report concluded that regulators had focused on solvency margins and failed to consider the increasing risk of accrued terminal bonuses. In 2010, government announced compensation to policy-holders of £1.5bn.
In June 2018, Equitable Life announced that Life Company Consolidation Group had agreed to buy the company for £1.8bn, with most policies to be transferred to Utmost's Reliance Life subsidiary and converted to unit-linked. Some of the proceeds of the sale would be returned to the remaining 400,000 policyholders in the form of increased bonuses on their policies. The sale completed at the end of 2019.
History
The society, established via a deed of trust in September 1762 with the name of the "Society for Equitable Assurances on Lives and Survivorships", offered both whole life and fixed term policies. Premiums, which were constant for the duration of the policy, were based on a method devised by the mathematician James Dodson using mortality figures for Northampton and the amount payable on death, the basic sum assured, was guaranteed, a major advantage at the time.As Dodson had died five years earlier, Edward Rowe Mores became its chief executive officer with the title of actuary—the first use of the term—though he was an administrator rather than a statistician.
The first modern actuary, William Morgan, was appointed in 1775 and served until 1830. In 1776 the Society carried out the first actuarial valuation of liabilities and subsequently distributed the first reversionary bonus and interim bonus among its members. It also used regular valuations to balance competing interests. Its products therefore met the description of a modern with-profits policy.
The society sought to treat its members equitably and the directors tried to ensure that the policyholders received a fair return on their respective investments. Throughout the society's history, the allocation of bonuses was a carefully thought-through decision based on actuarial advice, designed to promote fairness and equity between different groups and generations of policyholders.
Its methods were successful enough for it to be able to reduce its premiums by 10% in 1777, and there was a further reduction in 1781. By 1799 the society had assets of £4m and its 5,000 membership subsequently doubled to 10,000 in 1810. Famous 19th-century policyholders included Samuel Taylor Coleridge, William Wilberforce and Sir Walter Scott.
The Life Assurance Companies Act 1870 was passed, "requiring all life offices to publish financial data on the lines so long followed by the Equitable."
In the 20th century, Henry Manly devised the concept and theory of staff pensions, which the society marketed from 1913. Pensions became available to the self-employed in 1957 when the society launched the Retirement annuity plan. Corporate pension scheme members included employees of the NHS, Unilever and the Post Office.
Organisation
The society's first offices were in the parsonage of St Nicholas Acons in Nicholas Lane, London, moving to Blackfriars in 1774. Approval of policies, the main business of the Society, was undertaken by the Court of Directors; whilst resolutions had to be approved at two meetings of the General Court which all members were entitled to attend. From 1786 this court also dealt with grievances, and there was early tension between initial subscribers wanting a return on investment and those wanting to recruit new members. In 1816 a waiting period was introduced for new members, and only the oldest 5,000 policies were entitled to bonuses. In 1893 the memorandum and articles of association were adopted, incorporating the society as "The Equitable Life Assurance Society" and transferring power to the directors; the 1816 membership and bonus restrictions were removed.The society moved to Mansion House Street in 1863, to Coleman Street in 1924 and then to new offices, opened by Prince Richard, Duke of Gloucester, in Walton Street in Aylesbury in January 1983. The archives of the society from 1762 to 1975 are held by the Institute of Actuaries.
The society acquired the University Life Assurance Society and the Reversionary Interest Society in 1919 and the Equitable Reversionary Interest Society in 1920.
Guaranteed Annuity Rates, Article 65 and the 1999 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 to buy an annuity 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 earned 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 choose at the retirement date between a fixed Guaranteed Annuity Rate or the Current Annuity Rate . The latter reflected the anticipated investment return on the lump sum over the annuity holder's lifetime and often changed depending on long-term interest yields and views on future 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 was calculated using an interest yield of 4% per annum 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 guaranteed annuity rate, thus 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; the total difference amounted to some £1 billion to £1.5 billion.
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 that Article to reduce the terminal bonus of those policies with Guaranteed Annuity Rates, negating the 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 judgment. David Hyman was selected as the representative policyholder. Hearings started in July 1999, and in September the High Court ruled in the Equitable's favour; but this was reversed by the Appeal Court in January 2000. The Equitable now sought a ruling by the House of Lords.
House of Lords ruling on the Hyman case
On 20 July 2000 the House of Lords upheld the Appeal Court ruling. They concluded that GAR policies required that the guaranteed rate was applied to calculate the contractual annuity; and that the effect of the differential terminal bonus rates was that the annuity was calculated at current annuity rates, not at the guaranteed rate, and was not lawful. "The self-evident commercial object of the inclusion of guaranteed rates in the policy is to protect the policyholder against a fall in market annuity rates... The supposition of the parties must be presumed to have been that the directors would not exercise their discretion in conflict with contractual rights."Even before that stage, Equitable, which had long claimed to be more transparent than its rivals, had assets worth £3 billion less than communications with policyholders had indicated.
Aftermath of the Hyman case and partial sales, 2001–9
Having not insured against losing the case, and with no other way to make provision for the immediate £1.5 billion increase in long-term liabilities, Equitable put itself up for sale. By the end of July, about ten companies, including the Prudential, had considered, but rejected a bid. Equitable had intended using money from the sale to allocate bonuses for the first seven months of 2000, but now this was not available.On 8 December 2000 it closed to new business, and immediately set a Market Value Adjustment of 10% which was later increased to 15%.
On 19 December, HM Treasury announced a review of the Financial Services Authority 's regulation of Equitable. The following day, Equitable announced that their President and seven non-executive directors would step down. Vanni Treves became Chairman in March 2001, with Charles Thomson as Chief Executive.
On 4 February 2001 the Halifax agreed to buy Equitable's operating assets, salesforce and non-profit business for a payment of up to £1 billion into the with-profits fund, subject to policyholder agreement. On 20 September 2001, compromise proposals were published offering 17.5% increase for GARs in exchange for the guarantee and 2.5% for non-GARs in exchange for abandoning any legal claim. The deal was accepted by 98% of GAR policyholders, and was sanctioned by the High Court in February 2002.
Both groups of policyholders received further bad news. In July 2001 deferred pensioners were angered to be told their savings had been reduced by 16%, and then in November 2002 pensioners were told that "with-profits annuities, like yours, are now out of line by about 30%." 50,000 annuitants suffered a 20% reduction in income.
In February 2007, Equitable completed the transfer of £4.6 billion of annuities to Canada Life, and in November transferred all £1.8 billion of with-profits annuity policies to Prudential, a deal accepted by 98% of members voting at a meeting.
In November 2008, Equitable announced that the sale of the Society would be put on hold and that the Board would instead review the arrangements to run off its existing business. Gross assets as of December 2008 were £8,754 million, around 25% of the value in 2000.
Treves stepped down as chairman in September 2009 and was replaced by Ian Brimecome.