Beleaguered insurance company Equitable Life has been forced to include a special reserve fund of £1.5bn in returns filed with the DTI ahead of the test case brought by policyholders who say they have been unfairly treated.
The case, which begins on Monday, stems from the life company’s decision to cut bonuses to those who decide to take their guaranteed annuity options on retirement, sold when interest rates were higher. Falling rates mean it is costly to fund guarantees.
Equitable has defended its position because its mutual status means policyholders using this option would receive a disproportionate amount of the investment pool.
But although the company has vowed to fight on, it had to respond to advice issued by the Financial Services Authority which asked life companies offering guaranteed options to make reserves that would enable them to pay as if every policyholder decided to invoke the clause.
An Equitable Life spokesman said: ‘We have estimated the cost of providing additional bonuses as £50m, but we have put in a prudent provision of £200m in the figures. Most people take the guaranteed bonus in the form of cash and make it up with a final bonus, so the total we expect to pay in benefits will not change.’
He said the £1.5bn figure was merely an alteration in presentation of the figures and demonstrated solvency.
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