News: 05/04/2012 - Equitable contemplates a buy–out for its 3.5% GIR guaranteed annual return

Many of Equitable's with–profits policies commenced before 1996, when every with–profits policy had an embedded 3.5% annual return. With the new Solvency 2 requirements, the board's investment flexibility is more restricted by the increased capital reserving required. Simultaneously, because of ever–increasing quantitative easing, long–term gilt returns are low, creating a tension. The ELAS board is consulting its members on whether they'd be willing to give up their embedded GIR guarantee in return for a boost to their policy value, to facilitate greater investment flexibility for the with-profits fund which currently has only a small proportion of the £6 billion fund invested in equities.

See ‘Equitable considers guarantee buyout’ — Financial Times, by Josephine Cumbo 23rd March 2012:

Equitable considers guarantee buyout

Equitable Life is considering plans to buy out valuable guarantees that give its 400,000 with–profits policyholders a buffer against poor investment returns.

Many Equitable Life savings, investments and pensions policies bought before 1996 included guaranteed investment returns (GIRs) which pay a minimum 3.5 per cent if actual returns on assets fail to reach this level. Plans bought after 1996 have GIRs which will prevent the policy from falling in value if investment returns are negative.

These guarantees, which were written into contracts, have provided a safety net against poor markets for hundreds of policyholders who typically hold the plans for 20–25 years.

GIRs are paid out at the end of a policy term and are separate from guaranteed bonuses and guaranteed annuity rates on pensions.

But the mutual life insurance company has begun testing appetite for change by asking focus groups of customers whether they would be interested in exchanging their guarantees for a cash lump sum of 12.5–25 per cent of the value of their plans.

Equitable says the move is being driven by the forthcoming introduction of more stringent capital adequacy requirements, known as ‘Solvency II’, which will force it to hold hundreds of millions more pounds of reserves to cover these guarantees.

Cash for the buyout would come from the solvency capital pot, currently worth about £800m, releasing funds for policyholders and also reducing the need for steeper solvency reserves.

Chris Wiscarson, chief executive of Equitable Life, told the FT: "What's on our mind is that these solvency rules will require us to hold more capital reserves. What we are asking is: how can we fairly distribute this capital...so we don't need to take on bigger reserves to cover existing guarantees?"

This is not the first effort to release cash for policyholders. At the end of 2010, Equitable Life announced it would enhance policy values by 12.5 per cent for with–profits policyholders leaving the society from April 2011.

Equitable has made it clear in the past that it is a ‘driving intention’ of the board to distribute all of the society's assets, including its solvency capital, to with–profits policyholders as fairly as possible over time.

"About a third of our 400,000 policyholders are due to retire in the next five years and they will quite properly be saying ‘how will we get our hands on the capital?’," says Wiscarson. "This swap is one of the ways we are considering getting more capital back to shareholders and getting cash in their hands.

"What we have been doing with the focus groups over the past month is asking: ‘If we paid you a lump sum of money to increase your policy value, with possibly some of that coming as a cash sum in their hands, would that be of interest to you in return for giving up the guarantee?’ We are testing whether this can be explained in a way that policyholders will understand.’

Equitable says it is still in the very early stages of exploring whether there is appetite for an offer, with any proposal having to be put to policyholders formally. Their average policy value is £10,000 or less, says the society.

How large a cash sum is offered in return for giving up the GIRs would depend on a policyholder's age, how long he or she had held the plan and when the policy was due to mature.

"To get capital back in the hands of policyholders fairly and simply must be the right thing to do," says Wiscarson. "We are going to spend a lot of time asking policyholders what they think."

Financial advisers say that if Equitable did formally offer to buyout guarantees, then policyholders would need to think ‘long and hard’ about whether giving up an investment safety net was in their best interests.

"From an individual policyholders point of view, do you stay and accept the valuable guarantee or do you take the cash and invest or save it elsewhere where you have more control?" says Alan Highman, chairman of Annuity Direct, the independent financial advice firm.

Over the past two years, Equitable has paid guarantees to between a quarter and a third of all policyholders when their plans matured, typically when they retired.

If there is little appetite for the guarantee buyout, Wiscarson said another option would be to increase the 12.5 per cent enhancement. Currently, policyholders who claim their guarantees cannot also take the enhancement.