Goodbye, Equitable Life

A well-known UK Life Assurer is disappearing for good and, if you are unsure of your options, then you should seek financial advice…

  • Equitable Life is being bought by Utmost Life
  • Investors need to choose whether to accept the proposal
  • A contribution towards receiving financial advice may be available – but you must act fast!

The near collapse of Equitable Life in 2000 was one of the UK’s biggest financial scandals. At the time of its downfall, Equitable Life was one of the country’s largest mutual life assurers and had an impeccable reputation with professionals – particularly bankers, solicitors and doctors. Equitable’s descent into chaos was sudden and disastrous for many of its pension savers.

The background to Equitable’s woes was the high guaranteed annuity rates that were promised to many Equitable savers and which proved to be unsustainable over the long term. The technology crash of the early 2000s and the ensuing stock market collapse laid bare Equitable’s inability to meet their long-term promises. The results left Equitable on the brink of collapse.

As a consequence of Equitable’s problems, many ‘with profits’ policyholders were left locked into contracts which left them with the dilemma of whether to stay or leave.

For many of these ‘with-profits’ policyholders, the pill was sweetened somewhat by Equitable offering a long term annual guaranteed bonus rate, typically around 3.5% per year. Whilst this seems generous enough in today’s low interest rate world, many pension investors would have achieved a much higher return by investing in a typical ‘unit linked’ managed fund.

However, much of the typical Equitable Life ‘with profits’ policyholder’s value was tied-up in a Terminal Bonus payable at the end of the contract. Therefore, many investors had to accept the 3.5% per year guarantee until the policy matured and the Terminal Bonus (often representing around a third of the policy value) became available.

Equitable Life plans to transfer all business as the name disappears

Fast forward to 2019 and Equitable Life has now drawn up plans to transfer all of its ‘with profits’ business to Utmost Life and Pensions. The name ‘Equitable Life’ will disappear, as will the guaranteed growth rates – assuming that policyholders vote for the deal.

Should policyholders vote for the deal (which requires 50% of all policyholders to approve it, along with 75% by value) then, in exchange for giving up the guaranteed growth rate, a typical uplift of around 35% will be applied to policy values.

Many Equitable Life policyholders will be faced with a dilemma: to vote for or against the approval.

The deadline for online and postal votes is 30th October.  As part of the process, Equitable are offering to help meet some of the costs of financial advice for those who are unsure about whether to approve or vote against the offer. However, the deadline for applying for the ‘advice subsidy’ is quite short so policyholders need to ask fast so as not to miss out.

Without straying into the area of advice, my thoughts on the proposal are that it seems quite reasonable and I suspect that the vast majority of Equitable policyholders will go for it, based on similar exercises by other life assurance providers in the recent past.

Whilst a guaranteed growth rate at 3.5% per year would appear quite generous in today’s ultra-low interest rate world, based on empirical evidence on past performance of assets over the medium to long term (i.e. 10 years +), a typical medium risk investor could expect to receive a return of around 5.5% per year.

It should be noted that, in addition to the 3.5% per annum guarantee, there may also be a Terminal Bonus payable which could enhance returns further. However, past experience suggests that Equitable do not have a great track record in paying overly generous Terminal Bonuses and I suspect that most medium risk investors would have been better off being invested in a ‘unit linked’ fund where the performance can be assessed much more easily.

Equitable Life policyholder? Seek financial advice

So, with time running out, I would urge all Equitable Life policyholders to talk through their options with a financial adviser before deciding which way to vote.

Of course, for many, there simply won’t be time to do so before the vote takes place but even after the vote has taken place it would still be well worth seeking financial advice to help understand some the following questions:

  • How does this pension plan fit in with my other pensions?
  • How good is the new scheme being offered by Utmost Life and Pensions? Are the investment options suitable for me and does the new contract do what I want it to do for the long term, e.g. provide flexible income benefits?
  • Once the policy uplift has been applied, can I afford to retire?

Overall, the proposal from Equitable Life sounds like a good idea with a significantly uplifted pension value and a conversion to a much easier to understand and transparent ‘unit linked’ pension.  Whereas once the disappearance of the name Equitable Life would have saddened many, I suspect that for many the offer will provide welcome closure.