Calls for wind-up as Equitable risks technical insolvency

More bad news came gushing from pensions provider Equitable Life on Friday, when 50,000 annuitants were warned that they could see their pensions slashed by nearly a third and the company issued a dire financial statement indicating that it was seriously at risk of becoming technically insolvent.

Frail, elderly pensioners will have been distraught at the notification that their income will be cut by a fifth from February 2003 and again the following year. Some will be worse off by as much as a third.

This will boost the numbers who have already been forced to make dramatic changes to their lives because of Equitable's failings. More will be forced to sell their homes or drastically alter their lifestyles at a time when they should have been enjoying peace and security.

But they will not have been the only members shocked at the information contained in the interim report, not least that the company is barely meeting its minimum solvency requirement, without which it cannot function. Worse still, it could fail to meet it in the future.

The financial position revealed in the report, has become dire over the past year. Its excess capital, which protects policyholders' investments, has fallen by two-thirds, from (pounds) 1.1 billion to (pounds) 382 million, rendering it powerless as a safety net. The company has sharply increased bad debt provisions to cover compensation claims, staff pension costs and stock-market losses. It also says there is a risk it may default on 346 million junk bonds when they come up for repayment in 2007.

More worrying still is the fact that Equitable's current financial position is even worse than the picture the report paints, because the data relates only to the first six months of the year and ends at July.

This means that the true position today may have deteriorated further. Even at July's cut-off point, the board admits in the report, there can be "no absolute assurance" that the Equitable is a going concern.

And it warns that the company may have to be kept afloat in the future by "painful actions such as increasing the financial ad- justment to address investment losses and reducing discretionary bonuses." Directors also admit that the prospect for future bonuses is bleak, given the low level of investment exposure to stock markets.

Policyholder action groups were left reeling at the deeply disquieting news. Action group co-ordinator Liz Kwantas called on the chief city watchdog the Financial Services Authority to step in and wind the company up.

She said: "This is shocking news. How can they have allowed the free assets to drop by more a third? What is the management doing? The company is just lurching from crisis to crisis and it has got to stop.

"These figures aren't even the real ones. The true position will be much worse by now. The best thing they can do is break it up and put an end to this misery for everyone."

Paul Braithwaite, of the Equitable Members Action Group, was equally outraged. He said: "This is a chilling turnabout in what was already a desperate situation.

"What does the Financial Services Authority think it is doing? There seems to be one set of rules for the financial industry and another for Equitable.

"The management seems entirely complacent about the numbers of policyholders who are abandoning the company, taking (pounds) 1 billion pounds with them and leaving only annuitants to bear the costs of running the fund. They now represent half the fund and there is nowhere for them to go."

Financial adviser Tom McPhail, of Hargreaves Lansdown, said his biggest concern was that the fund was currently being run in a very high-risk fashion, because 80% of it was invested in fixed-interest stocks.

He argued: "If we see an interest-rate rise or a stock recovery, or the government starts issuing gilts, all of which are on the cards, the price of fixed stocks will fall. What will that do to Equitable's solvency position?"

He also warned against taking the company's bad debt provisions at face value. "These are just guesstimates. They don't have a clue what any of these things, from compensation claims to the cost of the rectification scheme to employee pensions, are going to cost them. They are just figures plucked out of the air. With their free reserves as low as they are, they don't have any room for error."

Equitable Life's chief executive, Charles Thomson, acknowledged that with just (pounds) 383 million spare cash to back liabilities of (pounds) 16bn, the company's position was tight. However, he said, the Financial Services Authority would not necessarily take any action if the solvency position were to worsen "slightly" and fell below an acceptable level, although he refused to define "slightly".

Copyright 2002 SMG Sunday Newspapers Ltd.
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