Scottish Widows pays out £1.4bn on policies
SCOTTISH Widows is to pay out £1.4 billion in a surprise reversal of its controversial terminal bonus policy for people exercising guaranteed annuity rate options (GARs).
Since January 1999, Scottish Widows has paid different terminal bonuses to people depending on whether they choose to exercise GARs on pensions at retirement.
Scottish Widows' case differed in that it was paying enhanced terminal bonuses to people choosing not to exercise GARs. The society did this by adding a "market value equaliser adjustment" bonus to terminal bonuses for those waiving GAR rights or buying an annuity from another provider.
At the time of the House of Lords ruling, Mike Ross, chief executive of Scottish Widows, said in a statement: "Scottish Widows' approach to pensions with the option of a guaranteed annuity rate is fully in accordance with the contract terms of those policies."
Mr Ross's deputy at the time, Charles Thomson, is now chief executive of Equitable Life, having stepped in last January to help solve the Equitable's GAR problems.
Both companies have the same size with-profits fund - £20 billion. While Equitable had 90,000 GAR policyholders, however, Scottish Widows has nearly 200,000, including those who have retired in the past three years.
After carrying out a far-reaching legal review including consultations with the Financial Services Authority (FSA) and the Inland Revenue, however, Widows has decided it should have paid the same terminal bonuses to everybody.
In a statement, it said: "As a result of the change, terminal bonuses for most GAR policies will be increased. The change in practice follows the House of Lords judgment in the Equitable Life v Hyman case. As a consequence of this ruling, when interest rates are low
- as they are now - most holders of policies with GAR options should be able to receive significantly higher pensions."
From now on, people wishing to exercise GAR options must do so on the retirement date stipulated in their contracts.
Of the 23,000 GAR policyholders who have retired in the last three years, 11,000 have done this anyway. These people will have their cases reviewed immediately. The society could not say how many of them had chosen to exercise GARs.
People who chose to take the GAR, and receive a lower terminal bonus, will now be paid a lump sum to make up the difference. Those who chose the uplifted terminal bonus and bought an annuity with a lower rate elsewhere will be paid an additional income as determined in the review process.
At the time of its sale to Lloyds TSB in March 2000, Scottish Widows set £1.7 billion of the proceeds into an "additional account" to be used to enhance terminal bonuses across the company. This will now be used to make these payments instead.
Widows, which has reduced with-profits annual bonuses from 5.5pc last year to 4pc this year, said it did not expect its GAR liability to exceed £1.4 billion, however, including honouring GARs for 174,000 policyholders who have not yet reached retirement.
The life office, which has 1.8m policyholders, with £78 billion of assets under management, will write to all affected policyholders during the first half of this year. The review is expected to be completed by the year-end.
Mr Ross said: "Today's announcement is a positive response to the wider consequences of the House of Lords judgment, by increasing pensions for most policyholders who take their GAR options."