A million Britons are coming to terms today with a steep cut in their retirement funds, in the latest horror story to hit the country's tainted pensions and insurance sector.
Troubled insurer Equitable Life, hit by a triple whammy of falling premiums, a weak capital base and tumbling stock markets, said it would have to slash the value of certain pension funds by a draconian 16%.
The 240-year-old mutual insurer said the savage cut was essential to ensure its financial solvency, which was dealt a hammer blow last year by a House of Lords ruling forcing Equitable to honour guaranteed high-interest pay-outs to policyholders.
That ruling immediately saddled Equitable with obligations of £1.5bn sterling, and it quickly fell prey to an emergency takeover by Halifax bank. But with falling stock markets eroding its asset base further, an increasing number of policyholders taking up their pensions and the company closed to new business, Equitable still found the numbers just did not add up.
'This was a hard decision but in our current situation we must not pay out policy values significantly above the level of underlying investments,' said Chief Executive Charles Thomson. Despite the insurance man's logic, the saga is the latest in a damning recent history of pensions fiascos which have raised questions over the adequacy of private retirement funds.
After a grim chapter in which thousands of workers were missold private pensions in the late 1980s, thousands more were deprived when tycoon Robert Maxwell plundered his workers' pension funds to prop up ailing areas of his business. Yet private pensions remain a virtual must in Britain, where the basic state pension of 72.50 pounds a week is often scarcely adequate.
Equitable's troubles began to multiply when the House of Lords ruled that it would have to honour final payments to 90,000 holders of guaranteed annuity rate policies. The policies promising guaranteed pension returns were written in the 1970s and 1980s during times of high interest rates but have recently become expensive to honour in a climate of low interest rates.
Policyholders then scrambled to encash their pensions, depleting Equitable's asset pool. The fact the FTSE 100 index has fallen more than 20% from last year's zenith has further depleted the value of Equitable's with-profits fund, which is linked to the stock market.
