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Equitable Life v Hyman CA (2)

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69. If, in accordance with that procedure, the grantee exercises any of the rights of election provided for in Schedule 4 then the consequence is "to renounce all or part of the Annuity increased by Related Bonuses (if any)". In the case of a substituted contract with another life office (Schedule 4 para. 1.1) then "in lieu thereof to have the Policy Annuity Value in respect thereof at the Selected Pension Age applied as a premium under a Substituted Contract". In the case of an annuity with the Society at current rates (Schedule 4 para. 2.0) then there is "to be paid in lieu thereof an annuity calculated by reference to the Policy Annuity Value of the benefit so renounced...". Accordingly, in each case, it is necessary to ascertain the Policy Annuity Value of "the Annuity as increased by Related Bonuses" or of "the benefit so renounced".

70. By Schedule 1 the expression Policy Annuity Value is defined as meaning

"in relation to all or part of the Annuity increased by related Bonuses (if any)....the Policy Annuity Value attributable thereto calculated in the manner specified in the Sixth Schedule."

71. The provision for ascertaining such Policy Annuity Value is contained in Schedule 6.5(ii) which is in the following terms

"The Policy Annuity Value at the Selected Pension Date of the Annuity increased by Related Bonuses (if any)...shall be the amount of Accumulation Value attributable thereto which shall be ascertained by reference to Table B."

72. It is evident that in that context the expression "Accumulation Value" is related to "the Annuity increased by Related Bonuses (if any)" and not to "any premium" which is the context in relation to which it is defined in Schedule 1. The common element is the application of Table B. But whereas Table B is to be applied to ascertain the capital equivalent of the Related Bonuses as well as of the Annuity, there is no provision requiring the application of Table B for ascertaining the Related Bonus.

73. 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 either 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 the 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.

74. 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 guarantees minimum rates for annuity purchase, the amount of 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."

75. 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 ratio of the current rate to the guaranteed rate. Thus if the current rate is 8% and the guaranteed rate 10% the final bonus to those taking the guaranteed rate is 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 1,099.92 per quarter at current rates required a final bonus of 26,635 but at the guaranteed rates the requisite final bonus was only 19,165.81.

The proceedings

76. 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 that they were not given the choice they should have had between a yet 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.

77. Sir Richard Scott V-C rejected both submissions. With regard to the breach of contract claim he analysed the argument as "wholly dependent on the proposition that it is not contractually open to the Society to allot a conditional final bonus". He rejected that proposition on the ground that there was nothing in the contract to prevent it. With regard to the submission that the Directors' declaration and payment of a differential final bonus was an improper exercise of their discretionary power it was his view that the decision was not irrational and that the Directors had taken account of all relevant factors and no others. Mr Hyman and those he represents contend that the Vice-Chancellor was wrong on both points. Thus the issues for our determination are whether the declaration and payment of differential final bonuses are (1) inconsistent with, and so in breach of, the contract between the Society and its policy-holders; or (2) an improper exercise of the discretion conferred on the Directors of the Society by Article 65 of its Articles of Association.

Related Bonuses

78. Before considering the arguments advanced in support of Mr Hyman's appeal on those two grounds it is convenient to deal with a subsidiary point raised by the Society's respondent's notice, namely whether the amount of final bonus allotted to those taking an alternative benefit in so far as it exceeds the amount of the final bonus payable to those taking the guaranteed annuity is a Related Bonus within the terms of the policy. Before the Vice-Chancellor the Society submitted that it was not. The argument and his reason for rejecting it are clearly set out in paragraph 93 of the Vice-Chancellor's judgment. He said

"[Counsel for the Society] argued, also, that the final bonus taken by a GAR policy holder who elected to take benefits in fund form was not a Related Bonus, as defined. The GAR policy holder only became entitled to it if he renounced the GAR based annuity. So it could not be described as an addition to or bonus on the GAR based annuity. This is made explicitly clear in the new wording incorporated into the 1999 bonus declaration. However, in the 1994 to 1998 bonus declarations the final bonus was expressed as "the amount required to increase the annuity or other benefit ranking for bonus ... "etc. This language, in my view, brought the final bonus within the definition of "Related Bonuses". But the qualifying sentence, included for the first time in the 1994 declaration, made the amount of the final bonus conditional on the form in which the policy holder took his benefits. The amount of final bonus receivable by a policy holder who elected to take his benefits in fund form was never receivable by a policy holder who elected to take a GAR based annuity. The amount of the "Related Bonuses" varied, therefore, depending on what the policy holder decided to do. I do not agree with [Counsel] that, in the 1994 to 1998 bonus declarations, the final bonus to which GAR policy holders became entitled was not a Related Bonus. I think it was. But I do not think that makes any difference. The amount was conditional."

79. Similar arguments were advanced on behalf of the Society in this court. The final bonus insofar as it exceeded the amount allotted to the guaranteed annuity was not "allotted by way of addition to or bonus on [the Annuity]" for the purposes of the definition of Related Bonus contained in Schedule 1. The Vice-Chancellor rejected the argument because of the form of declaration. I agree that he was right to do so. But there is a danger that to confine the reason for rejecting the argument to such form may perpetuate the dispute. In my view there is another ground for reaching the same conclusion derived from the context of Schedule 6 para. 1.5(ii). The term Related Bonus is defined in Schedule 1 "in relation to the Annuity". By virtue of Clause 1 of the Policy that definition does not apply if the subject or context is inconsistent with it. The purpose of Schedule 6 para. 1.5(ii) is to provide the basis on which to ascertain the Policy Annuity Value of the Annuity increased by the Related Bonuses. There is no doubt that the bonus is declared in respect of the Annuity for there is no other justification for the policy holder's participation in the profits. Accordingly account must be taken of it for the purpose of ascertaining the Policy Annuity Value. In that respect it is plainly related. It appears to me, in that context, to be placing an altogether too restricted interpretation of the part of the definition of Related Bonus which stipulates that it is "allotted by way of addition to or bonus on [the Annuity]" to require that it is not only declared in respect of the Annuity but will be payable as an increase of the Annuity. In my view a bonus is related for the purpose of ascertaining the Policy Annuity Value if it is declared in respect of the Annuity, and in that sense allotted by way of addition to or bonus on the Annuity, even though that annuity is never paid because the policy-holder elects to take an alternative benefit in connection with which the need to determine the Policy Annuity Value arises.

Contract

80. The argument of Mr Hyman on this appeal is founded on the objection to the Society's policy of declaring differential final bonuses that

"it is designed to render the contractual annuity rates in Table B irrelevant to the calculation of benefits wherever possible. This is (a) contrary to the purpose for which those rates were included, namely to protect policy-holders against a fall in interest rates, and (b) impossible to achieve without calculating bonuses in a manner different from that required by the express terms of the policy, which make the guaranteed rates an integral part of the calculation of benefits."

I will return to this fundamental point in due course but it is convenient first to consider the three specific but related points on which Mr Hyman relies.

81. The first point is that the Society's practice involves calculating the policy-holder's contractual entitlement to "the Annuity increased by Related Bonuses" by the application to the relevant capital fund of current annuity rates rather than the contractual rates set out in Table B. It is submitted that the contractual rates are used only for the purpose of calculating the differential bonus. The contractual term to which this submission is attached is the requirement in Schedule 3 para. 1.1 and the definition of Annuity contained in Schedule 1 that the Annuity should be calculated in accordance with Schedule 6. Reliance is also placed on the proposition that the calculation requires two elements namely an underlying capital fund, whatever it may be called, and the application of the contractual annuity rates.

82. I do not accept these submissions. Plainly it is necessary to use current interest rates as an integral part of the calculation of the differential bonus rates. But the requirement that the Annuity is to be calculated in accordance with Schedule 6 does not impose any restriction on the method of calculation of the Related Bonuses whether reversionary or final. It is also true that Schedule 6 requires the calculation of the Accumulation Value of a premium by reference to the rate set out in Table A but that relates to the premium not the bonus and it applies Table A. Table B applies to the Accumulation Value so determined but not to Related Bonuses.

83. The submission for Mr Hyman seeks to impose an obligation on the Society to declare a final bonus equal to the net investment return on his asset share, being the notional fund generated by the investment of the premiums he has paid. But not only is there no such requirement in the policy its imposition would be contrary to the express words of Article 65 of the Society's Articles of Association. That Article is a term of the contract between the Society and the policy-holder first because the policy-holder is or becomes a member of the Society by virtue of effecting the policy and second because it is imported by the definition of Related Bonus.

84. The second specific point is that the practice of declaring differential final bonuses is inconsistent with the provisions requiring the calculation of the fund in cases where the policy-holder has renounced the guaranteed annuity in favour of one of the alternatives. It is submitted that the policy requires the fund to be the capital equivalent of the guaranteed annuity inclusive of final bonuses. I agree with that submission for it is implicit in the provisions contained in Schedule 4 paras 1 and 2 and the calculation of the Policy Annuity Value contained in Schedule 6 para. 1.5(ii). But it is then submitted that it is implicit that the same rates will be used to derive the annuity from the capital fund and to derive the capital fund from the annuity. I do not (unless it is limited to the Annuity as defined) accept that submission. The Table B rates are applicable to the Accumulation Value of the premiums paid so as to derive the amount of the Annuity. But, as I have already pointed out, there is nothing in the policy to require the application of the Table B rates to the calculation of the Related Bonuses. Thus though the Annuity is derived from the Table B rates the Annuity as increased by the Related Bonuses is not. This is to be contrasted with the application of Table B so as to derive the Policy Annuity Value from the Annuity as increased by the Related Bonuses as prescribed by Schedule 6 para. 1.5(ii). In this event Table B is applicable not only to the Annuity but also to the Related Bonuses including, in the view I have taken on that issue, the final bonus. Accordingly the implication contended for cannot be made.

85. In connection with this point it is suggested that it is anomalous to calculate the annuity from the capital at the current rates but to calculate back to the capital from the annuity at the higher guaranteed rate. It is suggested that in consequence the asset share of two policy-holders whose contributions to the underlying fund are the same end up with different shares. I do not accept that there is the anomaly alleged. The guaranteed rates set out in Table B are applied for all purposes except the amount of the Related Bonuses to be declared; there is no contractual requirement that they be used for that purpose. But I do not accept the suggested consequence either. Let it be assumed that two policy-holders have made identical contributions by way of premium under identical policies. In capital terms their asset share will be the same. But the annuity value of their contributions will differ if each receives the same final bonus. The purpose of the differential final bonus is to equalise the benefits available in annuity terms, being the only form in which the policy-holders are permitted to take the benefits even if a proportion of the annuity may be commuted and taken as capital.

86. The third specific point is somewhat different. It is pointed out that the amount of the final bonus depends on the form in which the policy-holder chooses to take his benefits. It is also pointed out that the scheme of the policy is that the allotment of the final bonus precedes the time when the policy-holder must make his election. The form of election involves the renunciation of "the Annuity increased by Related Bonuses". Thus far I agree with the observations of Counsel for Mr Hyman.

87. It is then submitted that a right may only be renounced if it has already accrued. Reliance in this connection is placed on the speech of Lord Goff of Chieveley in The Kanchenjunga [1990] 1 Ll.L.R. 391, 398. He said

"In the context of a contract, the principle of election applies when the state of affairs comes into existence in which one party becomes entitled to exercise a right and has to choose whether to exercise the right or not. His election generally has to be an informed choice made with knowledge of the facts giving rise to the right".

88. I confess to being puzzled by this submission. There is no suggestion that at the time the policy-holder is required to make his election he is unaware of the amount of the differential bonuses. The case relied on concerned election not renunciation. It is submitted that an accrued right is one which could notionally be sued on and that it is not possible to sue on a right to x or y. Let it be assumed that a right may only be renounced once it has accrued. We were not referred to any authority or principle justifying a conclusion that to be renounceable a right must be accrued in the sense of being both presently enforceable and indefeasible in amount. I see no reason why a right to either x or y dependent on the subsequent action of the person entitled to the right should be incapable of renunciation within the terms of the policy. Such a right is inherently capable of assignment. I see no reason why it cannot be renounced "in lieu of" some other right.

89. For all these reasons I would reject each of the specific but related points on the detailed terms of the policy advanced by counsel on behalf of Mr Hyman. But I agree with him that in addressing those points it is all too easy to lose sight of the wood for the trees. In that connection it is appropriate to refer back to the basic objection I have quoted in paragraph 81 above and to the repetition of it contained in counsel's criticism of the Vice-Chancellor's judgment in rejecting his submissions. It is suggested that his conclusion did not confront the essential difficulty of the Society's case that it

"(i) desires to calculate bonuses in a manner which gives no effect to provisions for the use of contractual annuity rates that are an integral part of the contract,

(ii) arrives at a result which is designed to deprive pre-1988 policies of part of their purpose, namely to protect policy-holders against a fall in current annuity rates."

90. For reasons to which I have referred already I would reject each of those criticisms. With regard to the first there is no provision integral or otherwise for the use of contractual or guaranteed interest rates in the calculation of any bonuses reversionary or final. With regard to the second, notwithstanding the introduction of differential final bonuses, policy-holders have not been deprived of what was guaranteed, namely payment of an annuity of an amount not less than that derived from the application of the rates contained in Table B to the Accumulation Value of their premiums. There was no guarantee that a final bonus would be paid at all or at any particular rate. The purpose of the differential final bonus was to equalise the value of the benefits in annuity form, being the only form to which the policy-holder was ultimately entitled. For all these reasons I would reject the claim that the Society has committed any breach of the terms, whether express or implied, of the contract contained in the policy issued to Mr Hyman.

Discretion

91. The second issue is whether the Directors of the Society have exercised the discretion vested in them by Article 65 of the Society's Articles of Association in an improper manner. Article 65 provides, so far as material

"..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..."

92. The requirement that the decision is taken at a Special Board Meeting precludes delegation to any committee of the Board. (Article 58(1)).

93. The evidence before the Vice-Chancellor included affidavit evidence from Mr Nash, the Managing Director and Actuary of the Society, Mr Brindley, the Finance Director and Actuary of National Provident Institution, Mr Headdon, the Appointed Actuary and General Manager of the Society, and Mr Shelley, an independent actuarial expert. I do not find it necessary to consider the terms of the evidence in any detail for the material parts are summarised in the judgment of the Vice-Chancellor.

94. In paragraphs 40 to 57 he dealt with the Society's Practice regarding bonuses. Their purpose (para. 41)

"was and is to bring the value of the benefits being taken by the policy holder on maturity up to a level that equates to the policy holder's notional "asset share" in the Society's with-profits fund. The "asset share" as explained by Mr Nash, the Society's Managing Director and Actuary, in his first affidavit is:-

"... the share of the fund ... generated by the investment of the premiums/contributions actually paid ..."

95. With regard to final bonuses he said (para. 46)

"without a final bonus the value of the benefits payable to a with-profits policy holder may be significantly less than the "asset share" of that policy holder. A final bonus may be necessary in order to ensure that the policy holder obtains a proper share of the investment returns earned by the with-profits fund, i.e. obtains benefits which equate to the asset share attributable to his policy."

96. In paragraphs 58 to 76 the Vice-Chancellor considered the relationship between final bonuses and guaranteed annuity rates. In paragraphs 77 to 87 he described the concept of the policy-holders' reasonable expectations or PRE, a concept derived from ss. 12 and 21 Insurance Companies Amendment Act 1973. In this connection he referred (para. 81) to the Report of a Working Party chaired by Mr Brindley that

"the primary expectation of policy holders was that their guaranteed benefits would be met in full and that the company's affairs would be managed ethically and competently. The Report concluded that:-

"The holders [of policies with a discretionary element] may reasonably expect that life offices will behave fairly and responsibly in exercising the discretion which is available to them. They may also expect a reasonable degree of continuity in an office's approach to determining variable charges or benefits".

and that:-

"in the normal day-to-day actuarial management of a life policy, PRE is synonymous with equity and the almost universal method for measuring it is asset share calculation".

97. The Vice-Chancellor found the concept of PRE to be elusive and difficult but accepted the conclusions of the Working Party to which he had referred. He considered in some detail the communications from the Society to its policy-holders in the form of Bonus Illustrations, the With Profits Guide, Bonus Notices and Bonus Leaflets. He concluded this section of his judgment by noting that (para. 84)

"It is common ground that none of these documents creates any contractual obligation on the Society to award final bonuses on any particular, identifiable basis or at any particular rate or of any particular amount. The question, which I will consider in a moment, is whether or to what extent they place constraints on the manner in what the Society can, with propriety, exercise its discretion as to the allotting of final bonuses to GAR policy holders."

98. The Vice-Chancellor dealt with that question on the footing, with which I agree, that there was no contractual impediment to the declaration and payment of differential bonuses. He considered that (para. 95) in deciding what bonus policy to adopt the Directors of the Society should take PRE into account. As to the PRE of the Society's relevant policy holders he concluded that (para. 96)

"the communications received by GAR policy holders from the Society over the period up to 1994 and, perhaps, for a while thereafter, and the Society's practice regarding final bonuses up to 1994, did produce in GAR policy holders a reasonable expectation that the final bonus declared for all policy holders would be added to the previously guaranteed fund in order to produce the fund to which GARs would be applied or, at the election of the policy holder, taken in fund form. I do not, on the other hand, think that the communications and previous practice provided the basis for any reasonable expectation that a GAR policy holder who elected to take his benefits in fund form would be entitled to take a fund equal to the value at current rates of the GAR based annuity that he could have elected to take. Nor, in my view, did policyholders have a reasonable expectation that the same rate of final bonus would be applied to all policy holders. As I have noted, a variable final bonus had for some time been used in order to cater for variations in guaranteed investments returns."

99. After reviewing the history of declining interest rates in the mid 1990s, the problems to which that gave rise and the change in practice by the introduction of differential final bonuses in 1994 the Vice-Chancellor stated (para. 99)

"I am not satisfied that the Society failed, when exercising its discretion regarding final bonus over the period since 1994, to take into account PRE."

100. He rejected (para. 100) the submission that the Society's policy involved depriving policy-holders of part of their asset share on the ground that

"A policy holder's asset share is, and remains, a notional sum. It is not a sum of capital that the policy holder is entitled to be paid. It is a yardstick by which to measure the value of the benefits the policy holder receives from the Society."

101. His conclusion on the issue of discretion (para. 103) was

"It would have been open to the Directors, if they had wanted to do so, to have adopted a quite different final bonus policy. They could have ignored the value of the benefits receivable by the GAR policy holder and, instead, have concentrated on the policy holder's guaranteed fund. They could have awarded as a final bonus a sum sufficient to bring the guaranteed fund up to the level of the policy holder's notional asset share. If they had done so, the policy holder would have become entitled to a GAR based annuity of the amount attributable under Table B to a capital sum equal to the notional asset share. The value of the annuity taken by the policy holder would, if GARs exceeded current rates, necessarily exceed the notional asset share. It would, in my opinion, have been open to the Directors, exercising their Article 65 discretion, to have allotted final bonus on that basis. But they were not contractually obliged to do so and their decision to allot final bonus on a different basis, a basis that used asset share as a yardstick for the value of benefits taken rather than as a yardstick for the capital sum by reference to which the amount of the annuity taken was calculated, was, in my judgment, a decision well within their discretion."

102. For Mr Hyman and those he represents it is submitted that the Vice-Chancellor was wrong. It is submitted that the purpose of declaring differential bonuses was and is collateral to the purpose for which the power contained in Article 65 was conferred. In addition it is submitted that the policy is irrational because it reduces the asset share of those who take the guaranteed annuity and introduces an arbitrary distinction between the basis on which reversionary or interim bonuses and final bonuses are declared.

103. It is not disputed that the purpose for which a fiduciary power, such as that contained in Article 65, is exercised must fall within the purpose for which it was conferred or its scope. The scope or purpose of a power is limited both by the terms in which it is conferred and by the requirement that it is to be exercised in good faith. cf O'Neill v Phillips [1999] 1 WLR 1092, 1100/1. For Mr Hyman it is submitted that the purpose of Article 65 does not include either the nullification of a contractual advantage to which a class of policy-holder is entitled or discrimination between policy-holders by the attribution of different capital values to the same underlying share based on a criterion irrelevant to their value.

104. It is convenient to take the second point first. It is true that if it be assumed that A and B are of the same age and paid the same premiums on the same date for the same annuity contract then their asset shares, as understood by actuaries, will be the same in both income and capital terms. If on maturity they take the same benefits then there will be no reason or justification for discriminating between them. But if they take different benefits then there may be.

105. If it be assumed that A takes the guaranteed annuity but B opts for one of the alternatives then benefits in annuity form to be derived from their respective asset shares will differ because the guaranteed rate is more than the current rate. For the same reason the cost to the Society in providing the latter, either directly or by transfer to another life office, will exceed the cost of providing the former. In addition, as the expert witness, Mr Shelley, pointed out in paragraph 4.6.1 of his report dated 28th June 1999 the reduction in interest rates, which was primarily responsible for the fall in annuity rates, had also given rise to capital appreciation for fixed interest securities and equities and a corresponding rise in asset shares. If the final bonus for those taking the guaranteed annuity was the same as the final bonus for those electing for an alternative then the former would obtain a double benefit. Mr Shelley gave it as his opinion that so to do would be unfair. And, as Mr Brindley accepted in paragraphs 29 and 32 of his affidavit, the concept of asset share is but one element in the concept of fairness.

106. In these circumstances there were grounds on which the Board of Directors might consider it appropriate to declare differential final bonuses. They were not limited to considering the capital value of the asset shares but were entitled, and indeed bound, to consider the relative values and costs of the benefits in annuity form obtainable depending on the chosen form of benefit.

107. The first point, namely, the nullification of a contractual advantage to which a class of policy-holder is entitled is no more than the expression, in pejorative terms, of the submission that the Directors had no power to declare differential bonuses. But that submission is unsustainable in the light of the terms of Article 65 and my conclusion that there is no contractual impediment to their payment. As the Vice-Chancellor held the asset share is a notional sum and a yardstick by which to measure the value of the benefits the policy-holder receives; it is not a contractual entitlement.

108. It was suggested that the Vice-Chancellor was wrong to have concluded that there was no PRE that the rate of final bonus would be the same for all irrespective of the benefit chosen because of the differential final bonuses declared in respect of policy-holders enjoying the benefit of a guaranteed investment return. It was not disputed that such differential final bonuses had been declared. It was contended that guaranteed investment returns were different and justified differential final bonuses to avoid double counting. I accept that they are different. But I do not think that the differences are relevant. The point is that it was not the invariable practice of the Society to avoid differential bonuses. In any event, as Mr Shelley pointed out, the use of differential final bonuses in the case of guaranteed annuity rates was also justifiable as a means of avoiding duplication of the benefit derived from the fall in interest rates.

109. The irrationality relied on is twofold. The first is the reduction in the asset share of the policy-holder who takes the guaranteed annuity when compared with the asset share of the policy-holder who opts for an alternative benefit. The second is the change in basis for the declaration of the final bonus when compared with the reversionary bonus. But both presuppose that the only proper purpose or consideration of a final bonus is the return of the capital value of the asset share of the policy-holder. For the reasons I have already given such a limited purpose or consideration is inconsistent with both the terms of the power and the economic justifications for a differential bonus.

110. In this connection it is not irrelevant to observe that the policy adopted by the Directors of the Society has been approved or emulated by others. Thus the relevant official in HM Treasury, the regulatory authority for insurance companies, in writing on 18th December 1998 to the managing directors of insurance companies, envisaged that depending on the terms of the contract it might be possible to award a lower final bonus in respect of contracts containing a guaranteed annuity rate when compared with contacts which did not. Similarly the Faculty and Institute of Actuaries in a Position Statement issued in March 1999 recognised that the declaration of differential final bonuses was one of a number of acceptable approaches. The expert witness, Mr Shelley pointed out that three other significant with-profits companies had adopted principles effectively identical in their financial effects to the differential final bonuses declared by the Society.

111. For my part I can see no ground on which the exercise of the discretion given to the Directors of the Society by Article 65 so as to declare differential bonuses can be successfully challenged. The terms of Article 65 are wide enough to permit such declarations and they do not constitute the breach of any term, express or implied, of the contract between the Society and the policy-holder. The power thereby conferred to make such declarations was exercised by the Directors of the Society in good faith. There was proper justification for the course the Directors took. That course was not the only one available to them but the decision which to adopt was a matter for the Directors.

112. For all these reasons I would dismiss this appeal.

Lord Justice Waller:

113. I gratefully adopt the facts and the background from the judgments of the Master of the Rolls and Morritt LJ.

114. My view is that the critical question that arises in this case is whether the argument of Mr Sumption QC on the proper construction of the policy is right. I am fully persuaded that if the Board of the Society had a discretion unlimited by the terms of any contract, as to whether to allot by way of final bonus a different bonus, depending on whether the beneficiary was to take the benefit of the policy as an annuity, or whether he was to take it by way of a capital sum to be used for the purchase of an annuity other than from the Society, the exercise of that discretion could not be attacked. In that context the Board must, as I see it, have a broad discretion as to how it brings about a situation in which as between policy holders, those with guaranteed annuity rates and those without such terms, each get their asset share and no more than their asset share.

115. But what is much more difficult is whether the contract allows for the allotting of different bonuses on the Guaranteed Annuity Rate policies depending on whether the beneficiary takes the annuity or a capital sum with which to purchase an annuity elsewhere. That difficulty flows in my view from the fact that the starting point for the calculation of the capital sum or the Policy Annuity Value is 'the Annuity' that the beneficiary would otherwise receive but surrenders. It is, at least at first sight, difficult to contemplate that the annuity, i.e. the actual figure, which the policy holder would receive if he took the annuity, might be different from the annuity that forms the basis of the calculation for the Policy Annuity Value. I should say straight away that even if Mr Sumption is right in saying that the two figures must be the same, it does not in my view lead to the conclusion that the annuity figure must be that which was in fact used in the calculation of the Policy Annuity Value. The conclusion (as I understood Mr Sumption to accept) would simply be that the Board should start again and reconsider what bonus should be allotted having regard to the fact that the two figures must be the same.

116. The important terms are the following:-

Clause 2

"The Society hereby covenants with the Grantee that if the Policy shall continue to be approved as aforesaid then:

(a) if the Grantee shall survive to the Selected Pension Date the society will pay to the Grantee the Annuity increased by Related Bonuses (if any): . . . ."

Clause 4

"The Grantee shall be entitled to exercise the options to take alternative benefits which are contained in the Fourth Schedule upon and subject to the terms and conditions therein set out"

Third Schedule

"1.1 The Annuity shall be calculated in the manner specified in the Sixth Schedule

1.2 The Annuity increased by Related Bonuses (if any) shall be payable from the Selected Pension Date during the remainder of the lifetime of the Grantee by equal quarterly instalments in advance the first instalment being payable at the commencement of each subsequent period of three months during the lifetime of the Grantee "

Fourth Schedule

"1.1 At the time of choosing the Selected Pension Age the Grantee may elect upon the terms and conditions hereinafter appearing to renounce all or part of the Annuity increased by Related Bonuses (if any) and in lieu thereof to have the Policy Annuity Value in respect thereof at the Selected Pension Age applied as a premium under a Substituted Contract"

Fifth Schedule

"4.0 This Policy shall confer right to participation in the profits of the Society up to the Selected Pension Date and no longer "

117. The Sixth Schedule is the key and is brought into play by virtue of the definitions of the following :

"the Annuity"

"means the Annuity purchased by the premium specified in Endorsement 1 and calculated in the manner specified in the Sixth Schedule "

"Accumulation Value"

"means in relation to any premium the Accumulation Value thereof calculated in the manner specified in the Sixth Schedule "

"Policy Annuity Value"

"means in relation to all or part of the Annuity increased by Related Bonuses (if any) or (as the case may be) all or part of any Further Annuity increased by Related Bonuses (if any) the Policy Annuity Value attributable thereto calculated in the manner specified in the Sixth Schedule "

118. There is also a definition of "Related Bonuses" in the following terms:-

"means in relation to the Annuity or (as the case may be) any Further Annuity such amounts (if any) as shall under the rules and regulations of the Society have been allotted by way of addition to or bonus thereon."

119. The Sixth Schedule provides

"1.1 The Annuity and any Further Annuity payable at the Selected Pension Date shall be calculated in the following manner

1.2 The Accumulation Value at the Selected Pension Date of the premium paid in respect of the Annuity and (as the case may be) the Further Annuity shall first be ascertained in accordance with paragraph 1.3 or (as the case may be) paragraph 1.4 of this Schedule "

There is no need to quote the whole of 1.3 or 1.4 since there is no dispute as to the calculation of the "Accumulation Value".

120. Paragraph 1.5 is in three parts which although not numbered in the policy I shall number

1.5

"(i) Having ascertained the Accumulation Value at the Selected Pension Date of the premium paid in respect of the Annuity and (as the case may be) the Further Annuity in accordance with the preceding paragraphs of this Schedule the amount of Annuity and (as the case may be) the Further Annuity shall be the amount of annuity attributable to such Accumulation Value at the Selected Pension Age by reference to Table B

(ii) The Policy Annuity Value at the Selected Pension Date of the Annuity increased by Related Bonuses (if any) and the Policy Annuity Value at the Selected Pension Date of any Further Annuity increased by Related Bonuses (if any) shall be the amount of Accumulation Value attributable thereto which shall be ascertained by reference to Table B

(iii) And the Policy Annuity Value at the Selected Pension Date of a part of the Annuity increased by Related Bonuses (if any) and (as the case may be) a part of any Further Annuity increased by Related Bonuses (if any) shall be calculated proportionately"

Common ground

121. There is much which is common ground to be noted. First, the annuity to which a beneficiary is entitled is the amount of annuity attributable to the accumulation value by reference to "Table B", increased by related bonuses (if any) i.e. such amounts (if any) as shall under the rules and regulations of the Society have been allotted by way of addition to or bonus thereon. It is Table B which provides the guaranteed annuity rate. It is to be noted that related bonuses are not taken into account when calculating the basic "accumulation value".

122. Second, if the policy holder is to exercise the right to take alternative benefits, he renounces "all or part of the Annuity increased by related bonuses (if any) and in lieu thereof [takes] the Policy Annuity Value in respect thereof ...", the Policy Annuity Value being calculated under paragraph 1.5(ii). What paragraph 1.5(ii) is thus calculating is the capital value of the annuity increased by the related bonuses. It is accepted that where the phrase "accumulation value" is used by reference to both the annuity and related bonuses in that paragraph it has a different meaning from "accumulation value" as defined in the policy. [Clause 1 of the policy recognises that the definitions bow to an inconsistent context, and the context clearly is inconsistent]. The calculation under paragraph 1.5(ii) is designed to produce the capital equivalent of the annuity increased by bonuses allotted thereto by application of the Table B rates.

What is not common ground

123. Putting it broadly for the moment, it is disputed by the policy holders that the contract allowed the Society to allot final bonuses to be added to the annuity depending on whether the beneficiary was going to take the benefit of the policy by way of annuity, or whether the annuity plus bonuses were going to be used as the basis for the calculation of the Policy Annuity Value.

124. When the Guaranteed Annuity Rates in the relevant policies exceeded the annuity rates available in the market, the Society in 1994 began to declare final bonuses, so far as the GAR policies were concerned, in the following form:-

"Where benefits are taken in annuity form and the contract guarantees minimum rates for annuity purchase, the amount of final bonus payable is reduced by the amount, if any, necessary such that the annuity secured by applying the appropriate guaranteed 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."

125. This form was used between 1994 and 1998.

126. In 1999 the form changed a little, and was as follows:-

"If the contract guarantees minimum rates for annuity purchase the aggregate final bonus otherwise applicable is reduced when benefits are taken by the amount, if any, necessary such that the annuity secured by applying the appropriate guaranteed annuity rate after such reduction, is equal to the annuity which would be secured by applying the Society's annuity rate for an equivalent annuity in force at the time benefits are taken to the cash fund value of the benefits before that reduction, subject to a minimum value for the final bonus after such reduction of zero.

If the contract guarantees minimum rates for annuity purchase and a reduction has been made under the immediately preceding paragraph, then where benefits are not taken in a form to which those minimum rates apply an additional amount of final bonus will be made available to the policy holder at the time benefits are taken equal to the reduction if any made under the immediately preceding paragraph. Such additional amount of non guaranteed final bonus will not constitute a "related bonus" or bonus allotted under the contract."

127. By the first form the Society purported to declare a bonus but reduce it if the policyholder took it in annuity form, meaning, as I understand it, that if the Policy Annuity Value was taken, then in that calculation the annuity plus related bonuses would continue to include the bonus without any reduction.

128. By the second form the same result was sought to be achieved, but the Society described any difference between the bonus if the annuity was taken, and the bonus if the Policy Annuity Value was taken as not a "related bonus" or a bonus allotted under the contract.

129. The Vice-Chancellor was of the view that, however the Society described that part of the bonus, which in the Policy Annuity Value calculation was additional to that in the situation in which an annuity was taken, the bonuses declared were related bonuses, and it is that aspect which is the subject of a respondent's notice.

130. The Vice-Chancellor took the view that the short point on which the contractual issue depended was whether under the policy the Society was entitled to allot a final bonus that was conditional. I agree that that is the issue. His view was that by virtue of Article 65 which gave the Board a very wide discretion it was permissible to allot a conditional bonus and it was his view that there was nothing in the contractual terms which precluded the allotment of a conditional final bonus. So his conclusion was that the Society were entitled to allot a final bonus in the form that the beneficiary gets x as a bonus to be added to his annuity if he takes the annuity, but x plus y added to the annuity if he takes the capital value of the annuity plus bonuses.

131. I am unable to reach the same conclusion as the Vice-Chancellor. I accept that Article 65 gives a very wide discretion, and that if that Article applied alone a conditional bonus would be possible. But the question seems to me to be whether the Society are free under the policy to do what they did, and that could only be so if they were free to do one of two things. First, are the Society free to make the annuity plus related bonuses if taken as an annuity one figure say z, but make it a different figure say z plus x, when calculating the capital value of that figure? Then, second, if not, are the Society free to allot a sum which is not a related bonus to the beneficiary in order, as Lord Grabiner put it, to top up that which is required to provide a capital fund equivalent to a beneficiary's notional asset share ?

132. As to the first of the two alternatives, it seems to me that the contract contemplates that it is the annuity plus related bonuses, including any final bonus, which will be the starting point for the capitalisation of that very figure. By clause 1.1 of the Fourth Schedule the Grantee is entitled to elect to renounce "the annuity increased by related bonuses" and "in lieu thereof to have the Policy Annuity Value in respect thereof". I cannot at present see how the "annuity increased by the related bonuses" can be different depending on whether it is being taken as an annuity or used as a basis for calculating the Policy Annuity Value.

133. It thus seems to me that differential "related bonuses" are not permissible. Can the same result be achieved by allotting a sum not a "related bonus" as a top up to the Policy Annuity Value? I do not think so. Paragraph 1.5(ii) of Schedule 6 states how the Policy Annuity Value is to be calculated, and it does not allow for a top up sum. I accept that "related bonuses" are only those amounts added to an annuity as calculated under the first part of the Sixth Schedule but it is only that annuity increased by related bonuses that can form the basis for calculating the Policy Annuity Value.

134. In my view thus the terms of the policy required the Society to calculate the annuity plus related bonuses that would be payable by it if an annuity was taken, and then calculate back from that resulting annuity its capital equivalent. The Society's argument asserts that if the Society carries out the exercise in this way the result may be that in cash terms the policy holder will be entitled to x a year if he takes the annuity, but will only be able to purchase an annuity which will provide x-y in cash terms, and, so it is said, he does not get the equivalent value of his notional asset share depending on whether he takes an annuity or a capital sum. The premises on which that contention is based seem to me to be unsound. First, with guaranteed rates it should not be surprising if the guaranteed annuity comes out higher than an annuity purchased when current rates are lower. Second, the calculation of value of "notional asset share" and the attempt to equalise whether the value is taken as an annuity or as a capital sum, is done simply by reference to current rates. But it is the guaranteed rates when applied to calculating an annuity which must be the starting point.

135. As indicated at the commencement of this judgment, in my view it does not follow that beneficiaries are entitled simply to take an annuity increased by the bonuses used for the calculation of the capital sum in place of the bonuses previously offered. The Board have in my view conducted an exercise that the policy does not allow them to do. The exercise that the Society must carry out accordingly is a different one. What Mr Sumption seeks is an order that will enable the Society to carry out the exercise again. In the carrying out of that exercise the Board will of course have to take into account the cost of providing the annuities at the guaranteed rate if no differential bonus is declared. It is possible that because there is no contractual entitlement to a final bonus, and because as between different types of policy it is certainly, in my view, legitimate for the Board to have regard to the value of the notional asset share of the different policy-holders, the Guaranteed Annuity Rate policy holders will not in actual cash terms do very much better than they have done under the differential bonus scheme. I see no reason why different bonuses may not be awarded to different types of policy holder and thus I do not understand why, for example, the Board cannot in deciding what final bonus to award to GAR policy holders, keep that bonus at a level which does not deprive different with profits policy holders of their equivalent asset share. What the correct final bonus is in relation to GAR policies could only be worked out by the Board on the advice of the actuary.

136. I would however be in favour of allowing the appeal.

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