Scott Redpath on the allocation of policyholders' final bonuses.

Scott Redpath is a barrister at Hammond Suddards.

Several interesting points emerged in the recent case of The Equitable Life Assurance Society v Alan David Hyman, heard by vice-chancellor Richard Scott in the High Court.The originating summons sought declarations on questions arising from the allocation of final bonuses by Equitable Life (the Society) to its with-profits policy-holders. The Society asked whether it could allocate bonuses to policyholders with guaranteed annuity rates (GAR) provision, at a lower rate than it did to other policyholders.

Between 1957-1988, the Society issued with-profits GAR policies. Since 1993 current annuity rates had fallen below GARs. The Society's normal practice was to use the final bonus, over which its directors had absolute discretion under its governing articles, to increase the policyholders' contractual benefit – that is premiums paid, guaranteed investment returns and previously declared annual bonuses – to a level comparable to the policyholders' notional "asset share" in the Society. However, after annuity rates fell behind GARs, the Society reduced the final bonus of GAR policyholders (if necessary to zero) to no more than their notional asset share.

The GAR policyholders contended this was in breach of contract and an improper exercise of the directors' powers.

The contractual argument was opaque, since it turned on the proposition that since a GAR policyholder had an option to renounce his GAR-based annuity on retirement, there was a contractual right to know the amount of the final bonus not later than the date when he must decide whether to renounce. In other words, as the vice-chancellor noted, it was based on the proposition that it was not contractually open to the Society to allot a final bonus conditional on GAR policyholders renouncing their GAR-based annuity.

The vice-chancellor held there was nothing contractually improper in the allotment of final bonuses on a conditional basis and that the directors acted within their discretion. He considered the role that policyholders' "reasonable expectations" might play with respect to the Society's decision on which bonus policy to adopt.

The vice-chancellor granted leave to appeal the contractual point. How it will be framed is yet to be seen.