Personal Finance: `Equitable Life's Management Should Never Have Sold Products with a Guarantee Tag'
Willcock, John, The Independent (London, England)
QUITE HOW one of the oldest and most respected mutual life assurance companies in the world turned into one of Britain's biggest financial scandals is bound to be argued over for many years - but that is precious little comfort to the one million-odd members of Equitable Life who are now facing losses.
The worst aspect of the case is how difficult it is to advise people what they should do. The court decision on Equitable's guaranteed annuities, followed by the collapse of the mutual's sales negotiations with the Prudential, has caught both regulators and analysts by surprise. On top of that, quite how the Equitable's beleaguered life fund will perform depends largely on how many customers head for the door compared to how many stay. My own suspicion is that most with-profits policyholders would probably be better off staying, despite Equitable's decision to opt for a more conservative investment strategy, which will mean lower payouts for investors.
This is because of the "double whammy" facing leavers: first the Equitable has slapped a 10 per cent charge on with-profits policyholders who opt to leave. Second, any company you take your pension business to will impose its own raft of start-up charges. So, even a slower growth in your Equitable fund may be preferable.
This mirrors the endowment mortgage scandal in a number of ways. The Equitable only got into trouble over its guaranteed annuities in the first place because of a change in the economic climate. High interest rates and high growth rates in the stock markets in the 1970s and 1980s gave way to a low interest rate, low growth environment in the late 1990s and today. The guaranteed rates that Equitable promised to its investors looked perfectly reasonable in the 1980s but have become prohibitive to honour today. This collapse in stock market growth rates had the same effect on endowment mortgages, which looked like a good deal in the 1980s but which may now face shortfalls in the new low-interest-rate environment.
In another parallel, many endowment policy holders may be better off holding onto their present policy, however poorly it is performing, since selling a policy towards the end of its life means you miss out on its best years of growth.
One bitter irony of the Equitable case is that …
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Publication information: Article title: Personal Finance: `Equitable Life's Management Should Never Have Sold Products with a Guarantee Tag'. Contributors: Willcock, John - Author. Newspaper title: The Independent (London, England). Publication date: December 16, 2000. Page number: 2. © 2009 The Independent - London. Provided by ProQuest LLC. All Rights Reserved.
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