Contact: Chris Sharratt, ext 7506

1 Summary

1.1 This report updates the Panel on developments since their meeting on 30 October 2001 in respect of Equitable Life.

1.2 At that meeting the Panel agreed that the County Council, as trustees for an occupational pension scheme, should accept Equitable Life's "proposed compromise" to settle claims by those individuals with guaranteed annuity rates (GARs) policies in the with-profits fund and those with non-GAR policies, but reserved the right to vote against it if it was decided that was in the best interests of members of the Hampshire Pension Fund paying additional voluntary contributions (AVCs).

1.3 With the chairman's agreement, the County Council voted in favour of the "proposed compromise" based on unequivocal advice from our consulting actuaries. This was also supported by the National Association of Pension Funds. Contributors were notified of this decision in January 2002 (Appendix A).

1 The Compromise Scheme

1.1 On 28 January 2002, Equitable Life announced the results of the Compromise Scheme vote. The voting requirements were that, of those voting, approval was needed from 50% by number and 75% by value in each of the voting classes. The vote was overwhelmingly in favour and this result was widely publicised in the media.

1.2 On 8 February 2002, the Court sanctioned the Scheme. It refused any appeals against the Scheme but allowed applicants to make a claim directly to the Court of Appeal. None were made and the Scheme became fully effective.

1.3 As the effective date was before 1 March 2002, Halifax plc paid £250 million into the with-profits fund. A similar sum would be due in 2005 if the Halifax Equitable sales force meets certain targets in 2003 and 2004 but the most recent indications are that this now seems unlikely.

2 Uplifts to policies

2.1 The uplifts to policies in the with-profits fund were based on policy values and guaranteed values as at 11 January 2002 but subject to reductions for switches or transfers out after that date. For those with GARs the increase is between 16.5% and 20.4% of total policy and guaranteed values. For those without GARs including contributors to the Hampshire Pension Fund, the increase is 2.5% of total policy value and 4.0% of guaranteed value.

2.2 Equitable Life did not intend to issue additional fund statements for individuals following this increase. They did intend to issue normal fund statements for individuals as usual. In previous years they were issued in May. The most recent indications are that they will be issued in June. (The Panel will be advised if these have been received at the meeting).

2.3 As contributors had already been notified of the consequences of approval of the Compromise Scheme in January no further announcement has been sent, pending receipt of their individual fund statements.

3 Surrender terms

3.1 In view of the continuing uncertainty last year, many contributors chose to withdraw early from the with-profits fund, incurring a 10% penalty from 12 September 2001, as reported to the Panel on 30 October 2001.

3.2 In December 2001, bulk surrender terms were offered to AVC contributors, who suffered a penalty of 7.5%. Five hundred and eighty five took this option, about a third of all AVC contributors.

3.3 The proceeds could be switched into the unit-linked or building society fund, or to Eagle Star, the alternative AVC provider, or used to purchase service in the Local Government Pension Scheme. One hundred and sixty took this last option.

3.4 On 15 April 2002 the penalty was raised to 14% as a result of poor returns on equities in 2001 according to Equitable Life. Individuals still asking to withdraw are told the current rate before proceeding.

3.5 The County Council has not so far prohibited payments into Equitable Life's with-profits fund. Instead it has urged individuals to reconsider doing so very strongly. In view of the poor prospects for that fund it is proposed to prohibit such payments in favour of the building society fund instead, the safest option.

4 Other matters

4.1 Equitable Life has said that the outflow of assets from the with-profits fund has decreased significantly. It was £777 million in October 2001 and £237 million in March 2002. The fund value fell from £22.8 billion on 30 June 2001 to £18 billion in April.

4.2 There is a very remote risk to unit-linked funds if Equitable Life were to become insolvent and a low-cost switch to Clerical Medical is being explored by Hewitt Bacon and Woodrow on behalf of the Fund.

4.3 Equitable Life has started legal proceedings against their former auditors, Ernst and Young, for £2.6 billion and against former directors for £3 billion. This is likely to take a considerable time to resolve.

4.4 The Pemrose and Treasury Select Committee enquiries are still continuing.

5 Bonus rates

5.1 Last year, Equitable Life revised the estimated annual bonus for 2001 down from 8% to 6%. These estimated bonuses were only payable for the last six months of the year. Equitable Life has advised the final bonus rate for 2001 will be 4%, again only payable for six months of the year, giving a (non-guaranteed) final bonus of 2%. The returns for 2002 will be set after the year end to reflect investment returns that are earned over the year. Hewitt Bacon and Woodrow estimate the underlying return on the with-profits fund in 2001 was minus 6%.

5.2 Equitable Life itself says the with-profits fund is financially weak but solvent.

6 Scrutiny

6.1 The Leader has responded to questions on the progress and action taken concerning Equitable Life at both the County Council and the Policy and Resources Policy Review Committee.

Recommendation

1 The Panel is asked to note the latest developments with Equitable Life.

2 The Panel is asked to agree that Equitable Life be instructed that in future AVCs should be invested in the building society fund rather than the with-profits fund.