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Last Updated: Wednesday, 9 June, 2004, 09:35 GMT 10:35 UK
The death of Equitable
Equitable Life was once Britain's classiest insurer, before its bosses made one promise too many to policyholders and then tried to get out of paying. Their broken promise not only destroyed their company, it hit the retirement dreams of a million customers.

Equitable Life was the world's oldest insurer. It was the company the well known, the well heeled and the well informed relied on to provide them with their pensions.

Then its bosses promised too much to policyholders, and tried to get out of paying. When the law lords ruled they were wrong, a gaping hole in their accounts opened up, and a million policyholders lost out.

Equitable victims

Sir Michael Hirst thought Equitable was a sure bet. Trained as a chartered accountant, he became leader of the Scottish Conservatives. But his connections and expertise didn't stop him losing a quarter of his savings.

"It's a very substantial sum of money and represents a permanent impairment to my expectations in retirement," he says.

Not all Equitable clients are well-to-do. After a long career in nursing, Linda Brown has just learnt that her Equitable pension is to be slashed by a massive 30%.

"I actually felt physically sick. It is going to make me poor instead of a generous granny that can take her kids out."

The 'guarantee'

The disaster that has hit Linda Brown and hundreds of thousands of other Equitable policyholders has its roots in a benefit designed to deal with the major unpredictable factor that people on private pensions face.

The higher the interest rate when you retire, the higher your income, and vice versa. To protect people retiring when interest rates were low, in the 1950s, Equitable and other insurers came up with a minimum rate of pension or annuity for every pound policyholders had saved.

For decades, these guaranteed annuities weren't needed. From the 1960s interest rates rose, and through succeeding governments, stayed well above the level where Equitable guarantees would be triggered.

Just as well, because unlike other insurance companies, Equitable hadn't made any provision for paying its guarantees.

Reality bites

Reality set in when the late eighties boom became the early nineties bust and interest rates started falling. In October 1993, when rates reached the trigger level, 100,000 Equitable policies with guarantees were already in force.

In 1993, a few days before Christmas, Equitable chief executive Roy Ranson put a one-sentence resolution before the company's board. Couched in impenetrable language, the resolution effectively neutralised the guarantee.

Of the lump sum policyholders got on retirement, part was a final bonus. If they bought a normal annuity with it, no problem. But if anyone asked for the higher annuity their guarantees offered, Ranson claimed the right to cut their final bonus so that they'd end up with exactly the same annuity they'd have got without the guarantee.

Ranson was so confident with his resolution that he didn't even check it out with the lawyers.

Equitable also came up with another new pension product - called income draw down. This allowed people to access their retirement savings early but it also had the very handy side effect of getting rid of those troublesome guarantees altogether. By 1997, the insurer was selling vast numbers of them.

Ranson retired in August 1997, to be replaced by his protégé, Alan Nash, who continued Ransom's policy of keeping quiet about the guarantees.


But in August 1998, Stuart Bayliss, a well-known pensions adviser became convinced that Equitable guarantee cancelling device was unfair and alerted the press. An action group of unhappy policyholders was also formed.

Nash decided to ask the courts to uphold the Equitable device.

In September 1999, at the High Court, Equitable won, but in January 2000, the case arrived at the Court of Appeal, where Equitable lost. The Law Lords also found against them in July of that year.

Equitable guarantee-cancelling device was unlawful and the house of cards started tumbling. The company was staring at a black hole of £1.5bn.

The insurer tried to find a buyer for the business and embarked on a new sales drive. But when potential purchasers looked at the state of Equitable £26bn with-profits fund at the heart of the company, they walked away.

Equitable admits defeat

With no buyer, there was no cash to plug the hole in the accounts and, at the peak of the biggest stock market boom in living memory, Equitable Life was finally forced to close its doors.

Alan Nash resigned. The company did finally find a buyer in HBOS, but they bought everything but the with-profits fund. Meanwhile, to prevent panic withdrawals, the new Equitable management introduced exit penalties.

The government has asked Lord Penrose, a leading Scottish judge, to investigate the Equitable mess. After 18 months work, he hopes to report this summer.

Pensions industry blow

One of the key questions policyholders hope will be answered is just how much government regulators are to blame for letting the Equitable disaster happen under their noses.

Confidence in the pensions industry is already low, but if Lord Penrose's report concludes that regulators failed, there will be a further massive loss of confidence.

All that now remains of Equitable Life is a shell.

A recovery in stock markets might ease the pressure on other struggling insurers, but 240 years after it gave birth to the insurance business, the death of Equitable cannot be far off.

This programme was first transmitted on Thursday 27 March 2003.

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