Equitable future hinges on pounds 1.5bn test case

EQUITABLE LIFE, the country's largest mutual life insurer, could be forced to sell itself to the highest bidder, ending 237 years of independence, if a landmark court case goes against it.

A test case on the complex issue of guaranteed annuities brought by the society opens in the High Court today

If it loses the case, Equitable Life will face a liability of up to pounds 1.5bn, laying itself open to takeover overtures from its financial rivals.

The Equitable is bringing an action against Alan D Hyman, a representative of more than 100,000 pension savers who were guaranteed a minimum rate of income in retirement.

The guarantees typically promise an income worth over 12 per cent of the pension fund that has been built up. A saver with a fund of pounds 100,000 might therefore expect an income of pounds 12,000 a year.

The guarantees were made to attract customers in the Seventies and Eighties to prevent their retirement income being jeopardised by fluctuations in annuity rates. Annuity rates, and the incomes they provide, depend on long-term interest rates.

As long as interest rates remained high, the guarantees cost life offices nothing. But current long-term interest rates are lower than any life office expected, making the guarantees much more expensive to honour.

The guarantees are also more expensive than expected because of a dramatic increase in life expectancy, increasing the cost of paying the annuity income until death. Standard & Poor's puts the total industry liability at pounds 15bn.

Many Equitable policyholders have been incensed by its approach to the issue. Unlike other insurers, it has told them they can only have the guaranteed income if they accept a smaller pension fund than they would otherwise get.

More than 800 policyholders have joined an action group and two of them have brought court actions. Judges have set them aside in favour of this week's test case.

Equitable's free assets have already been hit by an order from the Government Actuary, who has given all life insurers strict guidelines on providing for the liabilities.

Documents filed with the Treasury show that Equitable has reserved pounds 1.5bn in respect of the guarantees.

Scottish Widows has reserved more than pounds 750m, subtracting from the amount it can give away in windfalls if it sells out to Lloyds TSB. Norwich Union has set aside pounds 750m.

Possible buyers include the high street banks Barclays and NatWest and insurance companies such as CGU, Royal & SunAlliance and the Prudential.

The Dutch insurer Aegon, Allianz of Germany and Axa of France have also been tipped.