Additional Voluntary Contributions and

The Equitable Life Assurance Society

This announcement is being sent to all members of the Fund who are currently paying Additional Voluntary Contributions ("AVCs") under the Fund’s arrangements with Equitable Life Assurance Society.

You will probably be aware of recent Press comment regarding Equitable Life. The purpose of this note is to give you further information about your investments with Equitable Life and to answer some questions you may have. The Trustee of the Fund has sought advice from its professional advisers in compiling this note.

Last year, Equitable Life decided to seek a ruling from the High Court in respect of its treatment of with-profits pension policies which included guaranteed minimum annuity rates. This allows a policyholder to convert the accumulated fund at retirement into a pension on guaranteed terms. These terms were not considered particularly valuable at the time its policies were issued, but as long term interest rates have declined, the value of the guarantees has increased considerably and the cost to Equitable Life of providing its guarantees has escalated. As a result, Equitable Life sought to reduce the amount of final bonus applied to a policy if the guaranteed annuity rate was accepted on retirement.

The Fund’s AVC policy with Equitable contained the above guarantees, although these only applied to members starting to pay AVCs before 1 November 1988. In practice, however, these guarantees were not utilised by the Fund as I) the rates applied within the Fund have been more favourable to members and ii) members who commenced paying AVCs prior to 8 April 1987 were able to elect, and generally did so, to take the value of AVCs as part of the cash option under the Fund at retirement.

In a recent ruling in the House of Lords, it was determined that Equitable Life will now have to give policyholders with the guaranteed annuity rate option the same level of final bonus as would apply to those without, together with the benefit of the guaranteed annuity rates. This will have significant cost implications for Equitable Life.

It will only affect those investing in Equitable Life’s with-profits fund. Investors in any of the other funds operated by Equitable Life should not be affected by these events..

For with-profits investors, Equitable Life has historically had a policy of distributing profits more fully to policyholders, in comparison to other with-profits providers. As a result, its level of ‘free assets’ is smaller and it cannot therefore absorb the additional costs. Equitable Life will, therefore, have to pass these costs on to the other with-profits policyholders through the application of lower bonuses in the future.

Faced with these issues, Equitable Life’s Board consider that the future interest of all policyholders will best be served by the sale of the business to an organisation which can bring the financial support required.

Equitable Life expects that a suitable purchaser will be identified around the end of the year, with the sale being completed, subject to the approval of policyholders (including, in the case, the Trustee of the Fund), by the summer of 2001.

Equitable Life has decided that no bonuses will be credited for the period from 1 January 2000 to 31 July 2000, but bonuses have started to be paid again from 1 August 2000. The level of the bonuses applied from August will be as originally declared for 2000, that is an interim overall rate of return of 9% per annum. Please note that under the terms secured for the Fund’s members, with-profits funds contain contractual 3.5% per annum increases to the guaranteed value of the policy. We understand that this guarantee still applies, but a corresponding reduction will be made to any non-guaranteed bonus granted, such that the overall rate of return with effect from 1 August 2000 will be 9% per annum.

One of the principal aims of the sale will be to replace this lost growth, but this cannot be guaranteed to happen, since it will be for the purchaser to decide what compensation or windfall should be paid.

At this stage, the extent of any resulting ‘windfall’ payment is impossible to predict, but will reflect Equitable Life’s financial position and the sale price negotiated by their Board. It should also be emphasised that the Fund’s AVC policy is held by the Trustee and not by individual AVC contributors direct and it will, therefore, be for the Trustee to decide how the distribution of a ‘windfall’ payment, if any, is allocated.

If you are currently contributing to the Equitable Life AVC arrangement, you do not need to make any specific changes at this time and you can continue paying your regular contributions in the normal way. Alternatively, you are free to suspend, or terminate your contributions as you choose, although you may wish to obtain independent financial advice before selecting either of these options.

The Trustee has taken advice from its professional advisers, Watson Wyatt Partners, and would suggest that you should not take any precipitate action as a result of the events detailed above. In particular, there are likely to be disadvantages in switching a with-profits fund into any of the alternative Equitable Life funds, and in moving away entirely from Equitable Life at this time, because either of these steps:

• Would probably result in the loss of any future entitlement to compensation payments as a result of the sale,
• May result in the lost growth (following the suspension of bonus additions from 1 January 2000 to 31 July 2000) not being replaced, and
• Equitable Life would be likely to apply an adjustment to the value of your accumulated fund equivalent to a reduction of 20% of the final bonus. It is not Equitable Life’s present intention to apply any such reduction to final bonuses of policies maturing in the normal course of events.

The Trustee will be obtaining further advice from its professional advisers in order to review the arrangements for members paying additional contributions. It is not expected that this review will be completed until Spring 2001, and the Trustee will circulate members with further information once decisions have been made about future arrangements.

If you have any queries concerning this letter or AVCs in general, please contact the Member Liaison Service on 01372 200200. Alternatively, you can write to MNPA at the address on this letter.

Read Note