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Equitable Life v Hyman ChD (2)
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94. There is no dispute as to the legal principles applicable to the question whether the Society's Directors, in taking decisions as to the final bonus, if any, to be paid to GAR policy holders, have been exercising their discretion in a legally permissible manner. It is accepted that, under Article 65, the Directors had a very wide discretion. It is accepted that in order to attack the exercise of the discretion it must be shown that they took into account irrelevant, improper or irrational factors or failed to take into account factors that they should have taken into account or reached a decision that reasonable directors properly directing themselves could not have reached (Edge -v- Pensions Ombudsman  Ch. 512).
95. In Scott -v- National Trust  2 All ER 705, Robert Walker J. had to consider the role of legitimate expectation in an attack on the National Trust's decision not to renew licences permitting stag hunting over its land in Devon and Somerset. He said that he was "inclined to think that legitimate expectation may have some part to play in trust law as well as in judicial review cases" (p. 718g). In cases such as the present I, too, am inclined to think that PRE has some part to play. PRE, is, in my opinion, something that directors should take into account in deciding what bonus policy to adopt. But this conclusion, of itself, solves nothing. It simply gives rise to another question. What is the PRE that the directors should take into account? It cannot be the reasonable expectations of any individual policy holder. It can only be the collective reasonable expectations of the policy holders as a class. What must be looked for, in my opinion, is an objectively ascertained, reasonable expectation of the policy holders.
96. It is, in my view, fair to conclude that 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.
97. However, a reasonable expectation does not become a contractual right. PRE was no more than one of the factors to be taken into account by the Directors. Its effective weight in the balance would depend upon all the other relevant factors taken into account. And the balance was, and is, one for the Directors, not the court, to strike.
98. It is clear, in my judgment, that the downward movement of current annuity rates from 1993, briefly checked in 1994, was a factor that the Directors, advised by the Actuary, were entitled to take into account in deciding on the manner in which the total declared bonus should be apportioned among policy holders. The Directors' intention was always an intention to use final bonus so as to enable each policy holder to receive benefits with a value that equated to the policy holder's notional asset share. Once a situation had been reached in which GARs exceeded current annuity rates and, therefore, in which a GAR based annuity would have a value, and a cost to the Society, in excess of the amount of the policy holder's asset share, the Directors were, in the exercise of their discretion, entitled to apply a solution which involved reducing the final bonus taken by those who took GAR based annuities. And it cannot, in my judgment, realistically be suggested that in taking the decision the Directors did not take account of what their previous practice had been. They knew what their previous practice had been. 1994 did represent a change. It is true that the Directors did not do much, until 1996, or perhaps even 1998, to communicate to GAR policy holders that the change was being made and the reasons for the change. But it cannot, in my judgment, reasonably be inferred that the Directors did not take into account that they were making a change. Paragraphs 70 and 71 of Mr Nash's first affidavit and paragraphs 9 to 11 of his second affidavit show that the Directors did take into account the aspects of PRE to which I have referred.
99. In a very recent case, Piglowska -v- Piglowski reported in The Times of 25 June 1999, and now in  1 WLR 1360, Lord Hoffmann commented that:-
"an appellate court should resist the temptation to subvert the principle that they should not substitute their own discretion for that of the judge by a narrow textual analysis which enables them to claim that he misdirected himself".
The same warning is, to my mind, relevant to a submission that the Directors failed to take into account that the introduction in the 1994 Bonus Declaration of the qualifying sentence regarding final bonuses would fail to give effect to PRE built up by the Society's previous practice. 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. Mr Sumption submitted, and I would accept, that policy holders are entitled to expect that, when exercising their discretion as to final bonus, the Directors will take into account, and act consistently with, the contractual rights of the policy holders. I have already given my reasons for concluding that the Society's decisions regarding final bonus were not in breach of any contractual rights of the policy holders. There were, however, some specific points made by Mr Sumption in support of his argument that the directors, in exercising their discretion, failed to take into account GAR policy holders' contractual rights. He said that policy holders had a contractual right to share in the profits of the Society and that the final bonus was a tool for giving effect to that right. I agree. He said that a policy holder's asset share represented the policy holder's notional share in the profits of the Society. I agree. He said that the final bonus was calculated so as to provide each policy holder with the policy holder's asset share. I agree. He submitted that the Society's decision to reduce the final bonus of a policy holder who took his benefits in GAR based annuity form was a decision which deprived the policy holder of some part of his asset share and was, therefore, irrational and inconsistent with the object the Society purported to be trying to achieve. This final step in the argument is, in my opinion, a non sequitur. 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. A policy holder who receives an annuity of £500 per annum receives a benefit worth, say £X. Another policy holder who receives an annuity of £600 per annum receives a benefit worth £X plus £Y, £Y being the value of an annuity of £100 p.a. If both policy holders have the same asset share, the amount of the final bonus necessary to bring each policy holder up to the asset share yardstick will be £Y more in the case of the first policy holder than in the case of the second. The second policy holder is not being deprived of any part of his asset share. He is being allotted a lesser final bonus because a lesser final bonus is all that is needed to bring the value of the benefits he receives up to his asset share. I reject the argument that the Society's policy involves depriving policy holders of part of their asset share.
101. Mr Sumption pointed out, correctly, that the Society's contractual obligation to provide GAR policy holders with GAR based annuities was the reason for reducing the final bonus of those who elected to take GAR based annuities. This, he submitted was not fair. The Society ought to have asked "What is the notional share in the with-profits fund that the policy holder is entitled to?". Instead they had asked "What is the share that should be attributed to the policy holder in order to avoid the cost of the contractual GAR commitment?".
102. I do not accept that there is any necessary inconsistency between these two questions. The "cost of the contractual GAR commitment" is the same as the current value of the GAR based annuity. The current value of the GAR based annuity is a measure of the benefits funded by the Society's assets that the policy holder receives. The amount, if any, of the top-up can be calculated accordingly. Mr Sumption pointed out, again correctly, that the Society's final bonus policy did not aim to bring policy holders' guaranteed funds up to notional asset share. What it did aim to do was to bring the value of the benefits they received up to notional asset share.
103. 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.
104. I can see no basis on which the manner in which the Directors exercised their Article 65 discretion can be categorised as irrational. I can see no irrelevant factors that they took into account or any relevant factors that they should have taken but failed to take into account.
105. I would give an affirmative answer to the question expressed in the first paragraph of this judgment and, in these circumstances, I propose to make the declarations set out in paragraphs 1 and 2 of the Originating Summons.
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