Three years after Equitable Life lost the legal battle over its decision to cut payments to pension investors with guaranteed annuity options, thousands of savers have lost out.
The latest blow to investors came this month when the British parliamentary ombudsman refused to recommend compensation for Equitable's investors and cleared the City regulator of failing to police the society properly in 1999 and 2000.
The ombudsman, who investigates complaints about public bodies, warned investors not to put too much faith in the ability of regulators to protect them.
The ruling has incensed Mr Paul Braithwaite, the general secretary of the Equitable Members' Action Group (EMAG). He accuses Ms Ann Abraham, the ombudsman, of ignoring the unique nature of Equitable policyholders' "reasonable expectations" - what they could reasonably expect to get from their investments.
Mr Braithwaite says: "The ombudsman ignores the reality that Equitable policyholders had unique reasonable expectations. Every year I got a statement saying my policy value had gone up. No one else quantified what that bonus was."
Mr Braithwaite adds that these reasonable expectations mattered because they encouraged investors to expect a set payout. "If someone sends you a statement saying your asset value is £90,000, that's your reasonable expectation."
Mr Braithwaite believes Equitable strengthened these expectations by enabling investors to see the value of their policies on the internet. "You could watch your policy grow online," he says.
Mr Braithwaite argues that Equitable's history reinforced these expectations. The oldest mutual life assurer had never cut non-guaranteed bonuses or slapped exit penalties on investors who wanted to take their money out of the fund, he says.
He argues that reasonable expectations matter because they were at the heart of the ombudsman's decision to rule out compensation for investors. "She used it as the bedrock for her conclusion that there was no breach of regulation," he says. "She won't look back or entertain compensation."
An aide to the ombudsman refused to comment.
EMAG plans to launch a court challenge to the ombudsman's ruling. But its complaint is not the first time that reasonable expectations have surfaced. The House of Lords ruling in July 2000, which was the catalyst for the crisis at Equitable, did not hinge on the details of Equitable's contracts. Instead, it applied broad principles of what policyholders could reasonably expect a guarantee to mean.
The life assurer and several competitors had sold pensions offering a guaranteed minimum annuity rate (GARs) by the thousands in the 1970s and 1980s, when interest rates were high. But in 1993, prevailing rates fell below Equitable's guaranteed rate for the first time. By 1998, the gap had grown to 25 per cent.
The life assurer reacted by cutting the final bonus paid to people with guarantees, so they got no more than people without. But the 90,000 people with guarantees were furious, and Equitable took a test case to court in an attempt to stem the surging complaints.
The High Court backed the mutual, the Court of Appeal was divided but the House of Lords unanimously ruled that Equitable acted unlawfully in cutting final bonuses paid to 90,000 investors. - (Financial Times Service)
