with-profits annuitants at troubled life office face drop in pension pay-outs of up to 29%
Equitable Life with-profits annuitants are facing a drop in their pension payments of up to 29%.
The beleaguered life office said the cuts had been forced by investment losses on the stock market coupled with the fact that it has had to set aside more money for potential claims of compensation.
The Society said its with-profits annuitants had so far been shielded from the cuts it had imposed on its other policyholders as, being annuity holders, they had no option but to stay with Equitable.
Now however, Equitable has said in a letter to its with-profits annuitants that its policy of reducing annuitants benefits gradually in the hope of better investment conditions was unsustainable and it would have to bring them into line with other with-profits policyholders. With-profits annuitants, it said, were now out of line from other policyholders by around 30%.
The cuts came as the society said it was no longer fair on other policyholders to phase in the effects of these reductions. The actual level of the cut depends on when the annuity was started and the anticipated bonus rate that was assumed.
Pensioners' overall payment will be reduced in three ways. From 1 February 2003, Equitable will reduce the value of annuities by up to 20%. This replaces the current approach of reducing the overall rate of return over the term of the annuity. Income payment could be reduced again in 2004 if investment performance falls short of what is needed to meet the revised levels.
The second step Equitable is taking that will reduce overall pension payments is bringing the rate of return for with-profits annuitants down to zero ' into line with other with-profits policyholders. The third step is to up the rate at which it has been recouping the 5% cut applied following the House of Lords decision in July 2000 from 1% each year for five years to 1.5% for the remaining amount.
Only bonuses to the with-profits annuities are affected and guaranteed portions, such as the basic annuity and declared bonuses, are unchanged.
Equitable Life policyholder groups reacted angrily to the news and questioned the reasons given by Equitable for the cuts. Paul Braithwaite, from the Equitable Members' Action Group, noted that there had been two cuts to policyholders' funds totalling 10% in the first six months of 2002 and yet the FTSE 100 had fallen by just 10.7% and Equitable had just 25% in equities.
Braithwaite also noted that Equitable had admitted in its interim report it may breach its solvency requirement. While the FSA has said it will tolerate short-term breaches Equitable will be expected to put its house in order.' This means that further cuts could not be ruled out, said Braithwaite.
Equitable also published the asset allocation within its with-profits fund for the end of September, which showed that equity levels had fallen to 5%. This had fallen from a 25% equity level as at the end of December 2001 and 13% as at the end of June this year. Capital had been shifted from equities into gilts and corporate bonds bringing this asset class up to 80% of the fund as at 30 September. Property and cash holdings remained constant at 9% and 8% respectively since the end of 2001.
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