Bulletin No 2  4th April 2004 

From      Peter Butler

Email      pdbutler@ntlworld.com

Tel.         020 8466 6446

INSIGHT – A BRIEF GLIMPSE

The purpose of this second Bulletin is to provide some insight into the Review Method. Its not complete but is the best we have so far.

An offer has been made on a With Profits Annuity taken in October 98. with fund values amended from the New Bonus Resolution. The explanation given is:

“We have worked out the supplementary annuity by comparing

• The value at retirement of the GAR annuity that should have been available to you (with a fund where we used the higher differential final bonus) with

• he value at retirement of the with profits annuity that you bought with the same funds.

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Putting it another way as per the Questions and Answers leaflet

And we are offering the extra value a supplementary annuity using the annuity rate that was available at your retirement date.

 

We have received legal advice that this is the appropriate compensation for our failure to tell you the correct value for the GAR annuity.”

After seeking further clarification, the following comment was received. These are not the actual figures but the proportions are the same

“When you retired the GAR was more valuable than ELAS’s comparable current annuity rates and this makes the fund to which GAR’s were applied worth the equivalent of £137

 

We need to compensate you for the difference between the value of the annuity that you actually took at retirement of £100. and the value of the GAR annuity which we should have offered to you of £137

That is the differential bonus practice resulted in your getting benefits worth £37 too little.”

We are still seeking yet further clarification because the supplementary annuity being offered is at the rate of 10.9% (the annuity rate available at retirement date) of the missing fund, and so we are querying this and other rates that have been used in the calculations.

Acceptance of the offer is requested on a formal statement, which includes

My signature below acknowledges full and final settlement………..arising out of the Society’s differential final bonus practice including……….claims alleging breach of s.62 of the Financial Services Act 1986, misrepresentation under common law and/or under the Misrepresentation Act 1967, and breach of contract or warranty and/or any form of estoppel, whether any such claim is based on alleged negligence or fraud or otherwise and whether for damages, rescission and/or any other remedy whatsoever, whether known or unknown to me at the present date.

This clearly needs legal scrutiny, as the Rectification Scheme is an obligation on the Society to its members who should not necessarily be asked to surrender other legal rights in accepting the details of the offer.

If you find all this hideously complicated – don’t worry – you are not alone!

THE GUARANTEED RATE STRUCTURE

I understand the following table is the famous 6th Schedule in ELAS contracts sold in the 70s and 80s. Its possible that this may have been changed in policies sold in the 90s. If you have a different version please send it to me.  

A RECAP

ON HOW THE RECTIFICATION SCHEME BECAME NECESSARY

To complete the story so far it might be useful to read an extract from the HYMAN case in the Court of Appeal, which describes the differential bonus practice of Mr Hyman’s case. This gives more insight into the final bonus issues. Mr Hyman was apparently one of those who did not elect to take the GAR option.

EXTRACT FROM

THE HYMAN CASE IN THE COURT OF APPEAL

THE FINAL BONUS CALCULATION

The final bonus policy adopted by the Society means however that the final bonuses are of different amounts depending on whether or not one of the options is selected. The way the Society achieved this from 1993 to 1998 was by the form of the bonus declaration under Article 65. Final bonuses were to be at a rate of 13% of the contractual benefits ranking for bonus on 31 December 1992, together with an additional final bonus of 10% for the period from 31 December 1993 to the date of the payment of benefits. This was however subject to the proviso

“Where benefits are taken in annuity form and the contract guarantee minimum rates for annuity purchase, the amount of the final bonus payable is reduced by the amount, if any, necessary such that the annuity secured by applying the appropriate guaranteed annuity rate to the cash fund value of the benefits, after that reduction, is equal to the annuity secured by applying the equivalent annuity rate in force at the time benefits are taken to the cash fund value of the benefits before such reduction” (emphasis added)

EFFECT OF FINAL BONUS CALCULATIONS ON HYMAN

In December 1993 the Directors of the Society decided to amend the declaration of bonus for the calendar year 1994 so as to provide for the first time for a differential final bonus dependent on whether the grantee took the guaranteed annuity or exercised an option to take an alternative benefit from the Society or from another Life Office. The reason for the change was the decline in annuity rates to a level below the guaranteed rate. The effect of t he change was to allot to those who took the guaranteed annuity a lesser final bonus than that allotted to those who took some alternative benefit. The purpose of the change was to ensure that the annuity benefit available to those who decided to take alternative benefits was no less than that available to those who chose the guaranteed annuity.

Mr Hyman’s policy matured on 28th October 1998. The bonus declaration for that year declared final bonuses for a number of different types of policy at different rates. With regard to the category of recurrent single premium policies the final bonus was 13% of the annuity increased by previous reversionary or interim bonuses for the year to 31st December 1997 and 9% for the period from that date to maturity. The declaration provided that

“Where benefits are taken in annuity form and the contract guarantee minimum rates for annuity purchase, the amount of the final bonus payable is reduced by the amount, if any, necessary such that the annuity secured by applying the appropriate guaranteed annuity rate to the cash fund value of the benefits, after t hat reduction, is equal to the annuity secured by applying the equivalent annuity rate in force at the time benefits are taken to the cash fund value of the benefits before such reduction”

It is clear from the opening words that the provision applies only to those who take benefits in annuity form. The effect of the singularly opaque words is to reduce the final bonus allotted to those taking the guaranteed annuity by the ration of the current rate to the guaranteed rate. Thus if the current rate is 8% and guaranteed rate is 10% the final bonus to those taking the guaranteed rate I s 8/10ths of the final bonus as declared. The effect, so far as   Mr Hyman was concerned is demonstrated by the valuations provided to him by the Society.. The Policy Annuity Value of his policy attributable to the premiums paid and reversionary bonuses already declared was £20,867.67. To provide an annuity of £1099.92 per quarter at current rates required a final bonus of £26,867.67 but at the guaranteed rates the requisite final bonus was only £19,165.81.

As I have indicated Mr Hyman and those he represents object to such a differential final bonus. Those who took the guaranteed annuity claim that it should have been more and those like Mr Hyman who elected to take an alternative benefit, whilst recognising that they got a higher final bonus contend they were not given the choice they should have had between yet a higher guaranteed annuity and the alternative benefit. They contend that the declaration and payment of differential bonuses constituted a breach of contract or, if not a breach of contract, an improper exercise by the Society of its discretionary power to allocate bonuses

APPRAISAL OF THE HYMAN FIGURES

So what did Hyman get? It was reported that:

“ he and others were not given the choice they should have had between yet a higher guaranteed annuity and the alternative benefit”.

The higher guaranteed annuity would have been 10.9% of £ 47735.34 i.e £5203 -- 18% more than the alternative of £4400.!!?

AND FINALLY

A reminder for anyone who has not yet sent me his or her details. Please send me the following

ELTA Questionnaire

I hope this has not been too much of a bellyful. Next week I will be in the States for a couple of weeks and will resume communication thereafter.

Peter Butler.