Equitable swiftly announced it would challenge the court’s ruling in the House of Lords.
The appeal springs from a High Court judgment last September declaring that the company, founded in 1762, was entitled to reduce final bonuses to holders of about 90,000 guaranteed annuity policies written during the 1960s to the 1980s when gilt yields were much higher.
The judge said the company was right to award lower bonuses to holders of guaranteed rate policies in a bid as far as possible to achieve parity between all classes of participating policy holders.
Equitable decided to reduce these final bonuses after gilt yields fell below the guaranteed rates, but some policyholders objected, saying they were being treated unfairly.
The earlier judgment concluded that any appeal on the case’s key aspects was likely to be ‘hopeless’.
But last Friday in the Appeal Court, Lord Woolf, Master of the Rolls, overturned that decision, saying: ‘The conclusion I have come to is that it was not permissible for the society to declare a differential bonus. To do so is inconsistent with the tenor of the policy.’
Equitable said it was disappointed at the latest ruling, but was pleased the court had granted permission to appeal to the Lords ‘and also that it agreed with all concerned the matter should be dealt with urgently’.
If Equitable does not succeed in its challenge, the society could be liable for extra payouts of up to £1bn.
Many of the guaranteed policies promised holders an annual return of 11% plus a terminal bonus that could be as high as 35% of the total pension fund.
Equitable had told those nearing retirement that they would have to forfeit terminal bonuses if they wished to keep the guaranteed rate.
A spokeswoman for insurer CGU Life said the company was ‘fully reserved’ in the event of the Appeal Court decision being maintained. ‘Payments to all policyholders who have guaranteed annuity rates will be honoured.’ She could not say at this stage how much this exposure could be and how many are affected.
Billy Burrows, marketing director of Prudential Annuities, said Prudential had very little exposure to guaranteed annuities, though its Scottish Amicable subsidiary had more.
But he added: ‘It’s a bit early to say what will happen, though it’s certainly a bit of a surprise. A lot can happen in the House of Lords.’
Early last year the Financial Services Authority wrote to all life companies advising them to raise their reserves to ‘prudent’ levels in order to meet policyholders’ long-term expectations.