Select Committee on Treasury Minutes of Evidence

Annex 2



  This morning, Halifax Group plc ("Halifax") announced that it has agreed to acquire The Equitable's operating assets, salesforce and non-profit and unit-linked business for a payment of up to £1 billion into the with profits fund.

  The Equitable is also announcing the outline of a proposed scheme to achieve a compromise between policyholders with guaranteed annuity rate policies and those with non-guaranteed annuity rate policies.


  Set out below is an extract from the announcement released by Halifax:

    "Halifax has agreed to buy The Equitable Life Assurance Society's non-profit and unit-linked business and its operating assets and salesforce, subject only to regulatory approval.

    Stage 1: Halifax will pay £500 million to acquire The Equitable's:

      —  economic interest in its non-profit and unit-linked business, which has an embedded value of approximately £300 million;

      —  operating assets, including its highly efficient IT and administration platform which will be managed by Clerical Medical; and

      —  salesforce, which will be rebranded The Halifax Equitable.

    Clerical Medical will also provide fund management and administration services to The Equitable's closed fund.

    Stage 2: Following the successful outcome of a scheme to achieve a settlement between The Equitable's guaranteed and non-guaranteed annuity rate policyholders, Halifax will pay:

      —  £250 million unconditionally; and

      —  a further £250 million contingent on the achievement of agreed new business sales and profitability targets in 2003 and 2004 by The Halifax Equitable salesforce.

    Halifax will have no exposure to The Equitable's with profits fund, which is closed to new business and remains mutually owned by its policyholders.

    The transaction has been welcomed by the Financial Services Authority."

Chris Headdon, Chief Executive of the Society, said:

    "This is a good result for policyholders after a long period of uncertainty. If the GAR compromise is achieved—and we all have a strong incentive to ensure that it is—then this, combined with the sale, will provide certainty for policyholders and the prospect of higher investment returns."


  In July 2000, the Board of The Equitable announced that, as a result of the House of Lords' ruling on guaranteed annuity rates ("GAR"), it believed it was in the best interests of members to find a purchaser for the Society. By December 2000, no firm proposals had been received and the Board decided the Society should close to new business. Since the Society closed to new business, the Board and its advisers have been exploring whether a sale of the Society's operations could offer greater value to policyholders than the alternative of a run-off of the closed with profits fund. On 22 December 2000, the Board of The Equitable announced the sale of Permanent Insurance Company for £150 million.

  The transaction with Halifax offers the following key benefits to policyholders:

    —  A payment of up to £1 billion for the operations of the Society and its non-profit and unit-linked business, significantly strengthening the with profits fund.

    —  This payment, coupled with the proposed compromise scheme between GAR and non-GAR policyholders referred to below, should restore the investment freedom of the with profits fund leading to a potential improvement in long-term investment returns (Note 1).

    —  The provision of IT and administration services at cost. The use of The Equitable's administration platform for The Equitable's and Halifax's life and pension business will maintain the low cost, high quality service for policyholders and promises further economies of scale. In addition, policyholders will continue to be able to receive advice from their representatives and Equitable Direct.

    —  Strengthened investment management capabilities through the combination of The Equitable's investment management operations with Clerical Medical, which has a very strong investment performance record.

  If there had been no sale, the Board believes that policyholders would have been disadvantaged through the risk of staff departures and increasing costs per policy inherent in administering only a closed fund as well as the continuing constraints on investment freedom.



  The House of Lords' ruling in July 2000 meant that value within the with profits fund had to be transferred from policyholders without GARs to policyholders with GAR.

  The value of this transfer was estimated at £1.5 billion, including the £0.2 billion cost of a Rectification Scheme for policies which matured between January 1994 and 20 July 2000.

  This estimate was made using assumptions as to future interest rate, longevity of pensioners, maintenance or premiums on GAR policies and the take-up rate of the GAR option.

  The Equitable believes that it would be in the interests of policyholders as a whole if this cost could be capped and the damaging division of policyholders into two camps with opposing interests could be resolved. To that end, the Society has been working on a proposal which will be put to policyholders. Halifax strongly supports this proposal and believes that the Equitable franchise will be more valuable if the GAR issue can be resolved. Halifax's deferred payments of up to £0.5 billion are conditional on a GAR compromise scheme being approved.

The proposal

  The Equitable intends to put policyholders in a scheme under section 425 of the Companies Act 1985 ("the GAR Scheme") which will give a one-off increase in all GAR policyholders' policy values in exchange for giving up their GAR option. As an illustration of the possible increase, the estimated GAR cost of £1.5 billion would be sufficient to increase the policy values of GAR policyholders by around 20 per cent in aggregate. The Society intends to consult widely before the details of the GAR Scheme are finalised to ensure that the scheme is as fair as possible to each class of policyholder.

  The Board believes that such a proposal offers significant benefits for each class of policyholder:

    —  GAR policyholders would get a definite value for their guarantee which would otherwise fluctuate as interest rates change in future. In addition, flexibility in the choice of annuity option (eg investment backed annuities and income drawdown) would become available on their increased policy value and this would also be available on early retirement and death.

    —  Non-GAR policyholders would see their liability to pay for the cost of GARs fixed.

    —  For all policyholders, the proposal would create greater certainty as to future benefits and allow an overall improvement in the investment freedom of the with profits fund (Note 1).

    —  If the GAR Scheme is approved, there would be an additional payment (by Halifax) of up to £0.5 billion into the fund for the benefit of all members.


  Details of the GAR Scheme when finalised will be set out in a proposal document to be sent to policyholders in the summer, which will include an independent report on the fairness of the proposals. Implementation of the GAR Scheme would require approval by a 75 per cent majority by value and 50 per cent majority by number of each class of policyholder voting at EGM and subsequent approval by the High Court. The GAR Scheme is unlikely to become effective until the autumn.

  The Equitable has consulted the FSA on the proposed GAR Scheme. More work remains to be done but the FSA have stated that, in their view, there is now a promising basis for a fair deal for policyholders.


  Where policyholders require assistance, they should contact their usual Equitable representative at their local branch or telephone 0870 9010052. For general information, policyholders should telephone 0870 6002272. This announcement will be posted on the Society's website ( All policyholders will receive a letter as soon as possible detailing this announcement and containing further information.

Press briefings

  Briefings for the press will be held at 12 noon (City Correspondents) and 1.30 p.m. (Personal Finance Journalists) at Halifax's offices at 33 Old Broad Street, London EC2N 1HZ.

Note to editors:

  1.  When Equitable closed to new business on 8 December, it announced that this would require a switch in the with profits fund's investment from equities to fixed interest securities. Expectations were that some 15 to 20 per cent of the with profits fund would be switched, leading to a lower expected overall return of 0.5 to 1 per cent per annum.

  A GAR Scheme would bring much greater certainty to the Society's pensions business. This would allow a correspondingly substantial reduction in the technical reserves which Equitable is required to hold in its statutory solvency returns to Financial Services Authority. The payments from Halifax will also strengthen the solvency of the with profits fund. Together, these factors are expected to enable the restoration over time of Equitable's former equity backing ratio and investment freedom.

2.  Timetable

  In accordance with the agreements between Halifax and The Equitable, the initial £500 million payment in respect of the first stage of the transaction will be paid on 1 March 2001, subject to necessary regulatory clearances.

  The proposed legally binding settlement between The Equitable's guaranteed and non-guaranteed policyholders, which will be recommended to policyholders by The Equitable's Board, will be sought by means of a Court sanctioned Scheme of Arrangement expected to become effective in the autumn.

3.  Information on Halifax

  Halifax is one of the UK's leading financial services organisations. In 1999, the most recent financial year for which information is available, Halifax derived 35 per cent of its profits from diversified earnings in Consumer credit, Personal Lines Insurance, Long Term Savings and Protection, and its Treasury operations. This is targeted to grow to 50 per cent by 2002 in order to complement its UK market leading positions in Mortgages and Savings.

  In the Long Term Savings market, Halifax operates under its own brand in the bancassurance sector and, in the IFA sector, through Clerical Medical, a wholly owned-subsidiary of Halifax. In June 2000, Halifax added to its capabilities in this area through the acquisition of a 60 per cent interest in St James's Place Capital, a major UK provider of life insurance and investment products whose principal operation is the J Rothschild Assurance Group which sells exclusively through over 1,000 dedicated advisers who sell exclusively to higher net worth individuals. In addition to providing an extensive range of life assurance and pensions products, J Rothschild Assurance Group sells a St James's Place branded range of unit trusts.

  In an extension of Halifax's own branded distribution, Halifax Direct and Halifax Online now have one million direct banking customers and around 400,000 online customers for a full range of personal financial products including sharedealing services. In addition, Intelligent Finance, a stand alone telenet banking operation was launched during 2000 and markets a full range of banking products: current accounts, savings, mortgages, personal loans and credit cards. Intelligent Finance systems automatically allow customers the chance to offset debit and credit balances to maximise the interest on savings and minimise the cost of borrowing.

  A motor and household insurance business with the generic brand esure is being established and will be operational over the telephone and internet in 2001.

  1999 saw record Group profits of £1.78 billion before tax, exceptional items and pensions review. Earnings per share rose by 12 per cent and dividends increased by 19 per cent. This performance reflected sales growth in every retail diversified business in excess of 20 per cent and record profits in each business.

  In the first half of 2000, Halifax achieved profits of £909 million before tax and exceptional items. Underlying earnings per share rose by 8 per cent and dividends per share rose by 13 per cent.

  4.  Lazard is advising Halifax on this transaction. Jonathan Dawson, a non executive director of Equitable, is a managing director of Lazard. Whilst Jonathan Dawson supports the transaction, he did not take part in the Board's decision to approve the sale of the Society's operations to Halifax.

  Salomon Brothers International Limited, trading as Schroder Salomon Smith Barney ("Schroder Salomon Smith Barney"), which is regulated in the United Kingdom by The Securities and Futures Authority Limited, is acting for The Equitable Life Assurance Society and no one else, and will not be responsible to anyone other than The Equitable Life Assurance Society for providing the protections afforded to customers of Schroder Salomon Smith Barney or for providing advice to any other person. Salomon Smith Barney is a service mark of Salomon Smith Barney Inc. Schroder is a trademark of Schroders Holdings plc and is used under licence.

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Prepared 30 March 2001