More than 250,000 savers with scandal-hit pension firm Equitable Life are set to receive surprise payouts worth thousands of pounds as the firm is shut down and its pension book is taken over by another company, Reliance Life.
Here, Ruth Lythe explains who will benefit and by how much.
What is Equitable Life?
Equitable Life was one of Britain’s biggest and most trusted pension firms.
The company was founded 256 years ago and its former customers included the poet Samuel Taylor Coleridge and abolitionist William Wilberforce.
In 2000 it ran into difficulties after promising many of its then 1.5 million customers better payouts than could be delivered.
Most of its investors had what are known as ‘with-profits’ policies.
Equitable Life ran into difficulties after promising better payouts than could be delivered. To save itself from collapse, the firm then slashed savers’ pensions by as much as 40 per cent
These were meant to help their money grow in line with the stock market — but they aimed to smooth out wild swings in share prices by offering a steady rate of return.
They did this by holding on to some of the money earned in good times when markets rose, and paying this out when they fell.
But staff bungled their calculations and did not set aside enough money to pay what was promised to policyholders.
To save itself from collapse, the firm then slashed savers’ pensions by as much as 40 per cent.
This led to a court case that Equitable Life lost, leaving the business with a huge funding shortfall. It has been closed to new customers ever since.
The Government gave £1.5 billion of compensation to those affected, but this did not make up the shortfall.
Why are people getting a payout?
Last week the company announced it was selling its pensions business to another insurer, Reliance Life.
As part of the deal, the firm’s remaining 266,000 with-profits customers will share a £1.8 billion cash windfall.
Equitable Life was required by regulations to keep this money as a cash reserve so it could pay savers’ pensions in the event of a market downturn. Now these pensions have been sold, it can be released and paid to customers.
Equitable Life also has spare cash because market conditions have improved since its problems.
When it nearly went bust in 2000, it moved much of its money into bonds — a safe haven for savers as they provide a guaranteed return.
These bonds have soared in value thanks to low interest rates after the 2008 financial crisis.
The Government gave £1.5 billion of compensation to those affected by the Equitable Life scandal but this did not make up the shortfall
How much will people get?
This has not yet been confirmed but customers have been told to expect a top-up of between 60 per cent and 70 per cent to their pot, meaning a £10,000 investment would become up to £17,000.
If the £1.8 billion windfall was split equally, the average payment would be about £6,900.
This is, in many cases, still far lower than the returns promised when the policies were sold in the 1990s and earlier. But it is substantially better than many critics feared.
The final payments will be decided after a legal process that could take more than a year, and will depend on the size of each customer’s nest-egg.
Equitable Life has taken out insurance to protect against any stock market plunges, so customers should receive the 60 to 70 per cent boost even if investment conditions deterioate.
Will I miss out if I take my cash now?
If customers leave Equitable Life before the deal is done, they are likely to receive only a 35 per cent top-up to their fund — turning £10,000 into £13,500.
The firm has warned customers to ‘exercise great care’ when deciding to take their pensions before the deal is completed.
But remember that policyholders who are aged over 55 can make lump-sum withdrawals from their fund under the Government’s pension freedom rules, so savers can take a little cash, leave the rest in the fund and so benefit from the full top‑up on the remainder.
Will ex-customers receive a payout?
Customers have been told to expect a top-up of between 60% and 70% to their pot
The deal is only available to current customers, so hundreds of thousands of savers who abandoned Equitable Life after their pensions were hit will not benefit.
These members should have received some of the £1.5 billion pledged by the Government in 2010 to compensate existing and former Equitable Life members.
But campaigners on behalf of former members argue that the compensation payouts issued so far are too low and they are entitled to another £2.6 billion from the Government.
They say that for every Equitable Life member who benefits from this latest deal, there are five who have left it who are much worse off.
When will the money be paid?
Customers are unlikely to receive their money before the end of 2019, according to a spokesman for Equitable Life.
This is because policyholders must first vote through the move to Reliance Life and the vote isn’t expected to happen until the middle of next year.
The arrangement between the companies must also be signed off by a High Court judge.
In the unlikely event that policyholders vote against the deal, they will not receive the extra cash.
But provided the deal is agreed, savers should get their cash and have their pensions transferred to Reliance Life at the end of next year.
The money will be paid directly into customers’ pensions. They can then decide whether to cash out their policy and take the returns, move to Reliance Life or move to a different insurer.