Equitable Life Assurance Society v Hyman

JurisdictionEngland & Wales
CourtHouse of Lords
JudgeLORD SLYNN OF HADLEY,LORD STEYN,LORD HOFFMANN,LORD COOKE OF THORNDON,LORD HOBHOUSE OF WOODBOROUGH
Judgment Date20 Jul 2000
Judgment citation (vLex)[2000] UKHL J0720-2

[2000] UKHL J0720-2

HOUSE OF LORDS

Lord Slynn of Hadley

Lord Steyn

Lord Hoffmann

Lord Cooke of Thorndon

Lord Hobhouse of Woodborough

Equitable Life Assurance Society
(Appellants)
and
Hyman
(Respondent)
LORD SLYNN OF HADLEY

My Lords,

1

I have had the advantage of reading in draft the opinion of my noble and learned friends Lord Steyn and Lord Cooke of Thorndon. For the reasons they give I too would dismiss the appeal.

LORD STEYN

My Lords,

2

The need to plan for retirement is for many a high priority. One of the most attractive methods of personal saving in the United Kingdom has been life assurance policies with profits. The tax advantages associated with them have encouraged their use as a method of saving for retirement by the self-employed and those in non-pensionable employment. Provided that policyholders take their retirement benefits in the form of a taxable annuity, they are entitled to tax relief on premiums. It is, however, a fact of life that the level of such retirement benefits is dependent on variable investment returns and annuity rates. This was the contextual scene against which the Society, and other life offices, sold policies containing guaranteed minimum annuity rates. On the face of it this may have seemed to investors an attractive way of reducing uncertainties in retirement.

3

Against this background a dispute arose out of the decisions of the directors of the Society of calculating final bonuses so as to allocate to a with-profits policyholder, whose policy contains provision for guaranteed annuity rates ("GARs"), a different final bonus at the maturity of the policy, depending on whether the policyholder ("the GAR policyholder") elects:

(a) to take the annuity to which the guaranteed annuity rates apply under the policy; or

(b) to take an alternative benefit, whether an annuity with the society, calculated at current rates, or an annuity with some other pension provider, likewise calculated at current rates called "taking benefits in fund form."

4

The purpose and effect of this practice is to equalise, so far as possible, the total value irrespective of the election the policyholder makes. The ground upon which the society seeks to justify this differential policy is article 65 of the articles of association of the Society which provides that the directors "shall apportion the amount of [the] declared surplus by way of bonus among the holders of participating policies on such principles, and by such methods, as they may from time to time determine." By mid-December 1998 a number of GAR policyholders had complained to the Personal Investment Authority Ombudsman. At the request of the Society he relinquished jurisdiction of the complaints to the High Court. By an originating summons dated 15 January 1999 the Society sought declarations affirming the validity of the decisions of the directors to apply differential bonuses to GAR policyholders for the stated purpose. On 5-7 July 1999 the action came on for trial before Sir Richard Scott V.-C. On 9 September he gave judgment granting declarations affirming the validity of the decisions of the directors. Mr. Hyman, a representative policyholder, appealed to the Court of Appeal. On 21 January 2000 the Court of Appeal allowed the appeal by a 2:1 majority: Equitable Life Assurance Society v. Hyman [2000] 2 W.L.R. 798.

5

The final resolution of the dispute will affect many policyholders. As at the beginning of 1999 there were about 90,000 policyholders holding with-profits policies of the Society that contained guaranteed annuity rates. Some 27,000 GAR policies had matured since October 1993. By contrast, there were about 290,000 non-GAR policyholders. Some 20,000 of these policies had matured since October 1993. These figures demonstrate the direct importance of the case. It may, however, be that the question before the House is also of wide commercial importance.

6

The genesis of the dispute

7

The Society is the oldest mutual life assurance society in the world. Its constitution is contained in its memorandum and articles of association. The principal activity of the Society is the transaction of life assurance, annuity and pension business. The Society conducts its business on a mutual basis for the benefit of "members," who are persons who hold "participating policies," i.e. "any policy which for the time being confers a present entitlement to participate in the profits of the Society." As at March 1999 the Society had some 425,000 members. It is the surplus arising on its with-profits fund which is potentially available for distribution to its with-profits policyholders. The value of the with-profits fund as at 31 December 1998 was £21 billion.

8

The applicable category of policies is UK pensions business, and only policies issued before 1988 in the following four sub-categories are relevant: (i) retirement annuity policies; (ii) individual pension plan policies, (iii) group pension plan policies, and (iv) transfer plan policies. These policies contain GARs.

9

The business of the Society is managed by its directors. The entitlement of with-profits policyholders to participate in the profits of the Society is given effect to by the declaration and payment of bonuses. Bonuses are determined by directors in the exercise of a discretion conferred upon them by article 65 of the articles of association. It provides as follows:

"(1) The directors shall, at such intervals as they may deem expedient, but at least once in every three years, cause an investigation to be made into the financial condition of the Society, including a valuation of its assets and liabilities, by the actuary. Provided that in the valuation of the assets the values thereof be not estimated beyond the market prices (if any) of the same, unless for reasons to be set out in the directors' report to the members upon the results of the valuation. After making such provision as they may think sufficient for such liabilities, and any special or other reserve they may think fit, the directors shall, at a special board meeting, declare what amount of the surplus (if any) shown by such valuation may, in their opinion, be divided by way of bonus, and they shall apportion the amount of such declared surplus by way of bonus among the holders of the participating policies on such principles, and by such methods, as they may from time to time determine. The directors may pay or apply the bonus so apportioned to each participating policy holder, either by way of reversionary bonus (that is to say, by way of addition to the sum assured when it shall become a claim), cash payment, reduction of premium for the whole of life or any less period, or in any other way they and any participating policy holder may agree.

"(2) The directors (after obtaining such report or reports from the actuary as they may in their discretion consider to be necessary or desirable in the circumstances) may, in cases where participating policies become claims in the interval between two valuations, pay such interim or additional or special bonuses as they shall think fit. "(3) The amount of any bonus which may be declared or paid pursuant to paragraph (1) or paragraph (2) of this regulation and the amount (if any) to which any participating policyholder may become entitled under any mode of payment or application of any such bonus, shall be matters within the absolute discretion of the directors, whose decision thereon shall be final and conclusive."

10

[My emphasis]

11

While it was necessary to set out the whole of article 65 the discretion of the directors invoked by the Society to justify the differential policy adopted by the directors is set out in the italicised words of paragraph (1). The provisions of paragraph (2) are not directly relevant. Paragraph (3) deals with the amount of any bonus, and gives the directors an "absolute discretion" in that particular respect.

12

It is necessary to describe the current bonus system of the Society. Although article 65 only requires consideration to be given to the declaration of bonuses every three years, the practice adopted by the directors since 1986 is to declare bonuses annually. There is agreement on the following facts. Two types of bonus are involved. First, there are annual or declared bonuses (sometimes called reversionary bonuses). These bonuses have been part of the Society's bonus system for many years. They are allotted irrevocably to policies when declared, whereupon they constitute a vested legal entitlement of the policyholder. Such bonuses are reversionary in the sense that the benefit of them is enjoyed at a future date when the policy matures. Secondly, there are final bonuses. These bonuses are sometimes called terminal bonuses. They are not allotted when announced, but only vest on a policy's maturity. The directors pass resolutions setting final bonuses for each year. If a policy matures during the year (and prior to any adjustment being made), a final bonus is automatically allotted to the policy pursuant to the terms of the resolution. Prior to maturity of a with-profits policy, final bonuses are provisional only and do not represent a legal entitlement of the policyholder. Upon maturity of a with-profits policy, the final bonus at such level as is then prevailing pursuant to the director's then current final bonus resolution (if any) becomes irrevocable, and thereupon such final bonus constitutes a vested legal entitlement of the policyholder.

13

The Society's bonus philosophy is summarised in the statement of facts and issues. It is to deliver, as far as possible, to each with-profits policyholder his asset share. "Asset share" is an actuarial concept widely used amongst life offices. It is the share of the with-profits fund notionally attributable to a particular policy and represents the premiums...

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