Insurers told to up reserves

Life insurance companies offering pensions contracts containing a guaranteed annuity option will be forced to create reserves of hundreds of millions of pounds, which insiders say may ruin smaller players.

The Financial Services Authority wrote to all life companies last week, offering advice from the government actuary to insurers to raise their reserves to ‘prudent’ levels in order to meet policyholders’ long-term expectations.

Companies have been asked to check their 1997 returns and review their financial positions. They have been told to present their findings to the government by 15 February.

Paul Riddell, a spokesman for Sun Life of Canada, said: ‘We have been asked to make enough reserves to pay as if every policyholder wanted to invoke the clause. It is a long-term financial issue and the size of the reserve will have to increase over time.’

The news follows quickly on moves by Equitable Life to launch legal proceedings against more than 900 of its policyholders.

The company wants to put an end to policyholders’ allegations that they have been treated unfairly by Equitable’s decision to cut their bonus should they decide to take up the guaranteed option.

But the life company says its decision to change policies will benefit all policyholders, as it will protect Equitable from the potentially fatal damage of losing millions of pounds in guaranteed payouts.

SUN LIFE OF CANADA

Sun Life of Canada has made provisions totalling #114m to meet the reasonable expectations of its guaranteed annuity policyholders, even though most of these pensions will not mature for another 20 or 30 years.

The company realised it had a problem when the combination of falling interest rates and increasing longevity meant many policyholders, most of whom bought their pensions during the 1970s when growth was higher, could start exercising their rights to the guaranteed payment.

Company spokesman Paul Riddell said: ‘We have had to make extraordinary hedging investments to meet our obligation and our reserve figures will be continually reviewed.’