Equitable Life affair (2000)
Britain's oldest mutual life office, closed to new business in December 2000 after the House of Lords required it to honor guaranteed annuity rates that had become very costly.
From 1956 to 1988, Equitable Life sold pension contracts carrying an option: at retirement, the policyholder could convert savings into an annuity at the rate guaranteed in the contract or at the market rate, whichever was better. While interest rates were high the guarantee was worthless; their decline in the 1990s put it in the money, because a fixed guaranteed annuity rate is worth more the lower market rates go. The society tried to neutralize the guarantee by cutting the final bonus of policyholders who exercised it, which the courts found contrary to the contract. The case became the reference point on options hidden in savings contracts: an option granted for free, never valued and never hedged, remains a dormant liability that wakes up precisely when the financial environment is at its worst.
On July 20, 2000, in Equitable Life Assurance Society v Hyman, the House of Lords held the differential bonus policy unlawful, leaving the society with about 1.5 billion pounds of additional liabilities. Unable to find a buyer, Equitable Life closed to new business on December 8, 2000.
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