Jonathan Davis: A raw deal is better than no deal for Equitable members

I never thought I would find myself saying this, but after the horror, drama and shock of the past fortnight's events in America, it is almost a relief to drag oneself back to the subject of Equitable Life and its guaranteed annuity rates. Some three years after it first hit the headlines, it is still predictably grinding its interminable way towards a necessary but far from certain outcome.

I never thought I would find myself saying this, but after the horror, drama and shock of the past fortnight's events in America, it is almost a relief to drag oneself back to the subject of Equitable Life and its guaranteed annuity rates. Some three years after it first hit the headlines, it is still predictably grinding its interminable way towards a necessary but far from certain outcome.

It seems fair to say that only the legal system, in all its wisdom, could have produced such an absurd triumph of process over outcome. The irony is that the cost in uncertainty, misery and emotional distress for most policyholders now clearly outweighs any conceivable financial benefit that even the favoured minority, those with guaranteed annuity rates in their policies, stand to gain from the whole dismal and unnecessary episode.

Whatever the outcome of the public inquiry that has now been set up to look into the whole sorry saga, it is devoutly to be hoped that nobody will ever again have to endure this kind of drawn-out nightmare of a process in which finding an acceptable solution is more painful and damaging than the initial problem. There have been some winners of course – step forward, m'learned friends and the actuarial profession – but precious few of them.

As I have noted before, the real mystery and tragedy of the whole business is how a relatively simple issue, which should have been resolved in a grown-up way by the management and members of a successful mutual society, ever came to be the legal plaything of the judiciary, with all the unintended and collateral damage that such a course has inevitably produced. It does not help that the denouement of the Equitable saga should be playing itself out against the background of the worst market downturn in a generation. This has undoubtedly muddied and confused what were already murky waters. The 16 per cent cut in policy values announced by the Equitable's new board in July was a nasty shock which many policyholders have naturally blamed on the society. But they conveniently ignore the fact that such reductions were the consequence of two things, one being market conditions and the other the enfeebled state of the society's with profits fund, both of which the current management can no longer (after the House of Lords judgment) be fairly held responsible for.

Anyone with a pension fund of any description has suffered from the current bear market. As the weakest and most exposed of the big with profits funds, Equitable just happens to be the one forced to act in the most visible way. But most other pension funds are suffering in a similar way – and those clever bods who switched into unitised funds or paid a penalty to switch from Equitable to another provider are in many cases even further underwater than the poor souls who decided to sit it out and hope the Equitable situation could be stabilised.

Now at least we have a timetable for knowing whether common sense is going to prevail and policyholders can bring down the curtain on this long-running affair. The compromise solution unveiled last week by the Equitable management will be the subject of roadshows over the next few weeks before being cast in legal format and presented to policyholders for a vote sometime before Christmas.

By then, both the Financial Services Authority and the independent actuary should also have given their stamp of approval to the proposed compromise. If sufficient votes are cast in favour – the deal needs the support of two thirds of policyholders by value and 50 per cent numerically – the Halifax will chip in its final £250m and the whole issue can be put to bed, at least for policyholders. (The public inquiry and political inquest will drag on much longer.)

Of course, the big question is: will the compromise solution get through a membership which by now is understandably punch drunk with so much undigested and often misleading information? At this stage, it is still too early to give a definitive answer. Any thoughtful person will readily agree that a compromise solution in principle is the most desirable outcome, but the devil, as always, is in the detail, where individual circumstances (and prejudices) inevitably come into play.

Now that I have read through the documentation, and talked to the society and some professional advisers, my first impressions are that the proposal is workable but by no means assured of success. My comments at this stage are:

First, it is worth reading the documents Equitable has sent. They are hard going, but the society has made a reasonable effort to explain the position as openly as possible. Be warned: the final formal documentation, when it comes to a vote, will be written in legalese and probably incomprehensible. It is not safe to wait for illumination at that stage.

Second, remember that this is – as it has to be – a compromise solution. By definition that means nobody is going to get all they think they deserve. One Sunday newspapersaid: "whichever way policyholders vote, it seems that they are getting a raw deal" – which, of course, is exactly what they have to think if a compromise has any chance of being achieved.

Third, don't forget that the proper comparison is not between what is on offer today and what you might have received if none of this had ever happened, but between what is on offer now and what will be the outcome if the deal is rejected – however uncertain and unclear that alternative now appears to be. (Do not, for example, assume that today's forlorn market conditions will continue forever; what we are living through is a very unusual and unsustainable period indeed.)

Fourth, the strength and weakness of the proposed compromise stem from the fact that the board of the Equitable has based its calculations almost entirely on the estimated present value of the respective claims and rights of the various competing policyholder groups, rather than on any tactical considerations as to which group might most need buying off. This approach is fair and high-minded, but may prove short on realpolitik.

As to the relative positions of GARs and non-GARs, I see no reason to change my admittedly perverse-sounding point of view, which is that those with the biggest incentive to accept the deal are those with the guaranteed annuity rates. If most GAR policyholders reject the average 17.5 per cent uplift in values in return for abandoning their guarantees – a benefit which they have never paid a penny for, which many did not even know they had in their policies and whose value crucially depends on stabilising the with profits fund and removing future uncertainty – then, in my view, they are brave to the point of folly.

The bigger threat to the compromise deal stems from the dispossessed majority, which is the much larger group that don't have a guarantee in their policies. (I am one of them, in a very small way, though I would not change my view if I had a GAR policy.) Is a token 2.5 per cent uplift in policy values for potential mis-selling claims going to be sufficient to compensate for the many indignities heaped upon them so arbitrarily over the last two to three years? Many, I fear, could be tempted to take their chances in voting no, though the premium on ending uncertainty will remain a powerful countervailing factor.

davisbiz@aol.com