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Thursday, 31 January, 2002, 16:15 GMT
Scottish Widows boosts pensions
Scottish Widows' web site
Thousands of Scottish Widows' pension holders could see their pensions increased by up to 30%, following a change in the way the insurer calculates its final or "terminal" bonuses.

They were two unconnected issues. We did not cut our bonuses because of this [GAR payments] but because the markets have gone down

Ian Naismith
Scottish Widows

About 23,000 policyholders with guaranteed annuity rates (GAR) who have already taken their retirement benefits could see their pensions increase by up to a third, after bonus payments are backdated.

A further 174,000 with-profits policyholders (GARs) which have not yet matured should also benefit from the change in policy, which takes effect from February 1.

The decision by Scottish Widows - now part of the Lloyds TSB group - is expected to cost the insurer 1.4bn and follows a House of Lords ruling into Equitable Life, which concluded that GAR payments must be honoured.

However, the announcement could be overshadowed by a recent decision taken by the insurer to cut annual and terminal bonuses by similar amounts.

Another Equitable?

The company said that money needed to meet its liabilities would be covered by a reserve account, which is currently valued at 1.7bn - and other with-profits policyholders would not suffer as a result of the decision.

Ian Naismith, head of technical marketing at Scottish Widows told BBC News Online: "We are quite different from Equitable. The money is just there to pay for it, and there is no need for a compromise deal."

It has taken 18 months for Scottish Widows to make the changes - and the company defended the delay.

It said the Equitable ruling was "complex" and only parts were relevant to Scottish Widows' policyholders.

Mr Naismith said: "We have got a lot of policies going back 30 years and had to look back and see how it applied. We then had to consult the FSA, and Inland Revenue and make computer system changes."

"We wanted to get it all sorted before making any announcements," he said.

With-profits cuts

The move by Scottish Widows is likely to be dampened down by an earlier decision to cut annual and terminal bonuses by up to one third.

It stressed that there was no connection between the two announcements.

Mr Naismith said: "They were two unconnected issues. We did not cut our bonuses because of this [GAR payments] but because the markets have gone down."

Bonus procedure

When a policyholder with a GAR retires and buys an annuity - an income for life - they can normally choose between opting for their guaranteed annuity rate, one set by the company or buy one on the open market.

With annuity rates so low, people with GAR pensions should get a much better return than buying on the open market.

Scottish Widows is backdating the benefits to GAR policyholders who have taken their retirement benefits between 1 January 1999 and 31 January 2002.

It is now writing to all policyholders affected by the review and expects to complete the review by the end of the year.

The decision does not affect unit-linked or non-profit policies.

Other repercussions

Many Scottish Widows policyholders received windfalls following the life insurer's demutalisation.

But ordinary with-profits policyholders - those without GARs - are now unlikely to benefit from any further payments.

The surplus left over will now be used to meet GAR liabilities.

Other life insurers are expected to follow Scottish Widows' decision, as low annuity rates combined with the Equitable ruling will force other life insurers to review their GAR procedures.

Philippa Gee of Torquil Clark, a Wolverhampton-based independent financial adviser, said: "This is not the end of the story.

"I would presume that any company offering GARs will have to revisit the structures of the schemes in response to the Equitable ruling."

See also:

09 Jun 01 | Business
Windfall winners urged to pay up
16 Jan 02 | Business
Endowments hit further
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