Before October 1993 Equitable Life’s current annuity rates were always above the guaranteed rates and so on maturity of the guaranteed annuity policies policyholders would elect to take their benefits under the current rate annuities. By September 1998 the guaranteed annuities exceeded the current annuity rates by 25%. This naturally made the guaranteed policies expensive to honour but more attractive to policyholders. The directors’ response was to discriminate between policyholders when allotting levels of final bonus to the effect that those electing to take the guaranteed annuity would receive a lower final bonus. Equitable Life maintained that this achieved fairness as between those holding guaranteed annuities and those who did not, asserting that Art. 65 of the insurer’s Articles of Association provided that the amount of any final bonus was to be within the absolute discretion of the directors. A challenge was made to this discretion in a representative action.

The issues before the House of Lords were: (1) whether Equitable Life were precluded from allotting different final bonus amounts according to the policyholders’ election whether to take a guaranteed annuity; and (2) whether the discretion given to the directors under Art. 65 had been exercised in a proper manner.

Held (H.L.): The terms of the guaranteed annuity policies required calculation of the contractual annuity by rates set out within the policy. It was not permissible to calculate rates by the current market rate unless the policyholder renounced the contractual rate. However, the policyholders were participating members of Equitable Life and their policies were to be read subject to the powers of the directors. Article 65 purported to give the directors absolute discretion to decide the policyholders’ entitlements. The self-

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