Equitable Life Assurance Society v Hyman [2000] EWCA Civ 5 (21 January 2000)

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Case No: 1999/1025/3

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM CHANCERY DIVISION
(SIR RICHARD SCOTT V.C.)
Royal Courts of Justice
Strand, London, WC2A 2LL
Date: 21 January 2000

The Background to the Appeal
1. This is an appeal from the judgment of the Vice Chancellor, Sir Richard Scott, given on 9 September 1999. The appellant, Mr Hyman, is a representative of the interests of approximately 90,000 policy-holders who hold about 116,000 pre-1988 policies with the respondent, the Equitable Life Assurance Society ("The Society"). The critical feature of all the policies which were entered into pre-1988 is that they provide the policy-holder with the option on the maturity of the policy of taking an annuity at a guaranteed annuity rate ("GAR"). The issue on which this appeal turns arises because in October 1993 current annuity rates began to fall below the GAR and they have remained below ever since. The response of the Society has been to adopt the policy of declaring two different rates ("differential rates") for the final bonuses. It is this policy which is under attack in these proceedings. Accordingly, it is possible to encapsulate the dispute between the parties as being :
"Whether the Society is entitled to declare, as a final bonus in relation to its retirement with profit policies which contain a GAR, a differential rate of final bonus, the rate of final bonus depending on whether the policy-holder chooses to take an annuity at the GAR or chooses to take an annuity at the Society's current annuity rate or an annuity from another provider?"
2. The dispute is not as to what is the GAR. The guaranteed rate is not in dispute. It is as to the size of the fund to which the GAR is to be applied. That fund is made up of three elements representing the investment return which the policy-holder receives on the premiums which he has paid. The elements are :
(i) The minimum level of benefits specified in the policy.
(ii) The reversionary bonuses which were declared from time to time under the policy, which once declared are allotted to all unmatured policies and become guaranteed. Guaranteed in the sense that the policy-holder has an accrued contractual right to the reversionary bonus even though it is not payable until maturity, and
(iii) final bonuses declared annually for each calendar year and allotted at maturity to policies maturing during that year. Until the policy matures, the final bonus is not guaranteed and the policy-holder has no accrued contractual right to that bonus.
The Rival Contentions of the Parties

3. It is not in dispute, therefore, that the policy-holder is entitled to have his GAR calculated on the combined value of the minimum level of benefits specified in the policy plus the reversionary bonuses and whatever is the appropriate final bonus, if any. The Society contends that as the final bonus was not guaranteed, it is appropriate, if the GAR is higher than the current annual rate, for the Society, in order to achieve equality between its policy-holders, to pay a smaller final bonus to those GAR policy-holders who elect to take the GAR annuity than it pays to those who take the other options under the policy. This the Society considers is desirable because otherwise under the terms of the Policy the proportion of the assets of the Society which will be attributed to the policy-holders selecting to take a GAR annuity will be greater than those selecting other options. This is due to the greater cost of providing the higher annuity than a current annuity. In fact, if the final bonus was not reduced, in practice it would mean that the policy-holder would always select to be paid a GAR annuity since the other options would be less attractive because of the fall in the annuity rates. The Society also points out that, if they are not entitled to take the course of adopting differential final bonus rates, those policy holders who are entitled to a GAR will benefit twice over as a result of having a GAR. They will benefit from the higher rate of annuity and in addition from the improvement in the capital value of the funds of the Society, which is the result of the Society's investments appreciating in value in consequence of the fall in interest rates, which is in turn reflected in the lower current annuity rates. The Society accepts that the GAR was meant to be of benefit to the policy-holder but contends that the policy-holder, under the terms of the policy, is only entitled to the GAR on a minimum level of benefits plus the guaranteed reversionary bonuses and whatever sum is paid as a discretionary final bonus. If no final bonus or a reduced final bonus is paid he has no grounds of complaint.

4. Mr Sumption QC on behalf of the appellant and his fellow policy-holders submits the situation is very different. He submits that it is contrary to the terms of the policy and an improper exercise of discretion by the Board of the Society to adopt the policy of declaring a differential final bonus. Until the current annuity rates fell below the GAR the practice of the Society was to have a single final bonus, and what the Society is doing is depriving the policy-holders of at least part of the benefit of the GAR and in doing so discriminating against the policy-holders who were wise or fortunate enough to have a GAR included in their policy.
5. In the course of argument criticisms were made both of the policy-holders for seeking more than their fair share of the investment profits of the Society and the Society for seeking to deprive the policy-holders of that fair share. In my judgment no criticism of the policy-holders or the Society is justified. If the Society is entitled to adopt the course which it has then, having regard to their responsibility to all the policy-holders, it seems to me that what it is seeking to achieve is perfectly reasonable. On the other hand I can well understand the policy-holders' feelings viewing the issue from their perspective. What appears to them to have happened is that the Society has adopted a wholly new policy to deprive them of at least part of the benefits of having the GAR provision contained in their policy. I certainly do not regard it as correct to characterise their conduct as "greedy", a description to which they justifiably took exception. All they are seeking is what they believe is their just entitlement.
6. My understanding is that the Society, confronted with an unprecedented situation, felt it right for both the Society and the policy-holders to obtain the legal ruling of the courts. The Society is therefore funding these proceedings, so that the legal position can be tested notwithstanding the costs involved. It appears to me that both parties are to be commended and not criticised for trying to resolve the issues between them in this way. It is fortunate that declaratory proceedings are sufficiently flexible to enable the issue to be determined in a single action.
7. It is recognised by the Society that even if it is entitled to adopt the bonus policy which it has, this may not be the end of the story in the case of all policy-holders. It is accepted that there could be circumstances personal to any particular policy-holder which induced that policy-holder to enter into the policy or to pay a premium thereunder which give that policy-holder rights independent of those which are being considered on this appeal. The position as to those circumstances is not covered by these proceedings.
8. The policies entered into by Mr Hyman are accepted as being representative of this class of policy. They are all "Retirement Annuity Policies" approved by the Inland Revenue under section 226 of the Income and Corporation Taxes Act 1970. Those policies are issued to self-employed persons or those in non-pensionable employment. These policies are attractive because of the income tax relief which the policy-holder receives in relation to the premiums which he pays. However, in view of this tax advantage, subject to exceptions which are not relevant to these proceedings, it is the intention of the legislation that the value of the policies must, under the relevant Inland Revenue Rules, be used on maturity to buy an annuity. It was part of that policy, that on maturity of the policy the policy-holder should not be confined to taking an annuity from the Society. A policy-holder on a policy maturing is to be able, if this is preferred, to choose an annuity policy provided by another life office. This is in the interests of policy-holders generally because it encourages competition and extends the choices which are available to policy-holders. It was because of the alternatives which are open to a policy-holder that the size of the fund that could be used to obtain an annuity other than that which is based on the GAR is important.
The Significance of the Appeal
9. The effect of the approach of the Society in providing differential final bonuses can be demonstrated very clearly in practical terms under one of the policies of the appellant. If the appellant selected the GAR annuity the fund on which it would be paid would be £40,033.48. While if he chose one of the other options, the fund would be £46,503.39. The difference in the final bonus was therefore the sum of £6,469.89. For the appellant, assuming he would be aged 68 and 3 months at the relevant time, the difference between the GAR annuity on the smaller and larger fund was the difference between £4,399.68 per annum and £5,110.74 per annum. A difference which is not insignificant when it is borne in mind that the annuity is paid annually. The differential bonus on the other hand meant that the annuity he would receive from the other provider or from the Society on a funded basis would be equal in value in current terms to that payable at the GAR.
10. It would be wrong to conclude from this that if the appeal is successful, the appellant and his fellow policy-holders will in fact benefit to the extent of the figures first quoted. Mr Sumption acknowledges that, if his arguments are accepted, the result will be that at best from his clients point of view the Board would have to reconsider what final bonus should be payable. He accepts it is possible, if not probable, that, if the Board cannot declare a differential rate of bonus, they will declare a unified rate which is lower than the higher rate of bonus the Society has decided to pay to those policy-holders who do not select the GAR option but instead select what was described in argument as the funded option. Nonetheless the significance of the case is very great. Quite apart from the scale of the Society's activities, which result in its assets at 31 December 1998 exceeding £28 billion pounds, there are a great many other insurance companies who were offering policies with a GAR and the decision in these proceedings will be relevant to their policies as well. In addition I regard the case as being important because it demonstrates the extent to which the courts can review the manner in which a fiduciary discretion is exercised. There could also be an important issue if the appeal succeeds as to what action the Society should be required to take to rectify the situation bearing in mind that since the first differential bonuses were declared many policy holders have exercised their powers of election. Whether it would be desirable to require the Society to attempt to put the clock back to zero (if this is possible) is not an issue on which we have heard argument.
The Decision of the Vice Chancellor
11. The Vice Chancellor came to the conclusion that the policy adopted by the Society was in accord with both the Articles of Association of the Society and the terms of the policy. He therefore made the declarations which the Society was seeking. Lord Grabiner QC, on behalf of the Society, adopts the Vice Chancellor's reasoning with one exception. What I have described as the differential rate final bonus was described by the Vice Chancellor as a conditional bonus. Whether the bonus is described as a differential bonus or a conditional bonus is not significant. What could be of significance is whether that bonus is a "Related Bonus" under the terms of the policy. The Vice Chancellor considered it was a Related Bonus. Lord Grabiner disagrees and for this reason the Society has filed a respondent's notice. In due course it will be necessary to consider this point.
The Articles of Association of the Society
12. Policy Number RO119487 of the Appellant ("the Policy") is accepted by the parties as containing terms on which it is possible to resolve the issues between the parties. As the recitals to the Policy make clear, the appellant by virtue of the Policy is entitled to be a member of the Society. The Articles of Association of the Society govern the relationship between the Society and its members. Article 2 defines a "Participating Policy" as "any policy which for the time being confers a present entitlement to participate in the profits of the Society". The Policy is a participating policy. Article 3 accords with the recitals to the Policy by providing that every person who has effected a participating policy is a member of the Society.
13. It is the Articles of the Society which set out the powers of the directors of the Society to declare a bonus or make a cash payment. The relevant Article is Article 65 and it is in very wide terms.
"65(1) The Directors shall, at such intervals as they may deem expedient, but at least once in every three years, cause an investigation to be made into the financial condition of the Society, including a valuation of its assets and liabilities, by the Actuary. Provided that in the valuation of the assets the values thereof be not estimated beyond the market prices (if any) of the same, unless for reasons to be set out in the Directors' report to the Members upon the results of the valuation. After making such provision as they may think sufficient for such liabilities, and any special or other reserve they may think fit, 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. The Directors may pay or apply the bonus so apportioned to each participating policy holder, either by way of reversionary bonus (that is to say, by way of addition to the sum assured when it shall become a claim), cash payment, reduction of premium for the whole of life or any less period, or in any other way they and any participating policy holder may agree.
(2) The Directors (after obtaining such report or reports from the Actuary as they may in their discretion consider to be necessary or desirable in the circumstances) may, in cases where participating policies become claims in the interval between two valuations, pay such interim or additional or special bonuses as they shall think fit.
(3) The amount of any bonus which may be declared or paid pursuant to paragraph (1) or paragraph (2) of this Regulation and the amount (if any) to which any participating policyholder may become entitled under any mode of payment or application of any such bonus, shall be matters within the absolute discretion of the Directors, whose decision thereon shall be final and conclusive".

14. In his judgment the Vice Chancellor draws attention to the three stages by which bonuses become allocated to individual members (paragraph 10) :

"First, the Directors must decide upon the amount of surplus to be divided by way of bonus. I will call the amount "the total declared bonus" in order to distinguish it from the bonus allocated to individual policy holders or classes of policy holders. Second, the Directors must decide how to apportion the total declared bonus among the members. As to this, they may apportion "on such principles, and by such methods, as they may from time to time determine". Third, the Directors must decide upon the manner in which the bonus allocated to each member will be provided to him or her."

15. The process of declaring bonuses only need take place once in every three years and in practice the process occurs annually. Subject to this the directors' powers are expressed in the widest of terms. They have an "absolute discretion" and their decision is to be "final and conclusive".
16. However, even a discretion expressed in these wide terms is not unlimited. The directors cannot use their powers under Article 65 to take a decision which would constitute a breach of contract. The limits on the exercise of this broad discretion are not however confined to excluding conduct which is contrary to the terms of a contract. It is not disputed that the relationship between the directors and the members of the Society means that the directors have to exercise their powers in a fiduciary manner. The powers have to be used to further purposes for which they are conferred. They have to be exercised justly and fairly.
17. In his speech in O'Neill v Phillips [1999] 1 WLR 1092, Lord Hoffman provides an illuminating analysis of the nature of the restriction which is imposed by equity on the literal construction of a provision in a context involving s.459 of the Companies Act 1985. (See in particular p.969) From what Lord Hoffman has to say as to legitimate expectation, I recognise that a lawyer more familiar with the review of the exercise of discretionary public law powers than the exercise of discretionary fiduciary powers must be cautious and not draw false analogies. Nonetheless, while recognising the need for caution, it can be safely said that there are marked similarities between the two discretionary situations. This is made clear by the judgment of Chadwick LJ in Edge v Pensions Ombudsman [1999] PLR 215. As Professor Dawn Oliver of University College, London has recently convincingly pointed out in a paper for the Sweet & Maxwell 1999 Judicial Review Conference there are "a range of fiduciary relationships in which equity imposes (and the fact of imposition is important) duties of considerate decision making" on bodies who are not public for the purposes of judicial review. By contrast, there is a well established tradition, especially in relation to local authorities, of regarding public bodies as being under a fiduciary duty similar to that owed by trustees (see Roberts v Hopwood [1925] AC 578, Prescott v Birmingham Corporation [1955] CL 210, Vaisey J (p.226 and Jenkins LJ (pp 235 to 237)) and Bromley LBC v GLC [1983] 1 AC 768, Lord Denning MR (pp 776/7) and Lord Wilberforce (p 815)).
18. Parliament confers wide discretionary powers on the Government of the day, so that they can be used in the nation's and the public's interests. Local authorities have wide discretionary powers conferred upon them so that they can be used in the interest of the locality and those who reside there. (I would not accept that today any group such as the ratepayers can be singled out as the beneficiary of local government powers.) The recipients of the powers, whether national or local, are in very much the same position as they would be if they had fiduciary powers conferred upon them. The powers are entrusted to them so that they can exercise them on behalf of the public or a section of the public. The public places its trust in the public bodies to exercise their powers for the purposes for which they are conferred. The importance of the House of Lords' decision in Padfield v Minister of Agriculture [1968] AC 997 is that it made this clear.
19. With-profits policies which involve the allocation of bonuses based upon the profits earned by the insurer would not be possible if the discretions, such as those conferred on the Board of the Society in such wide terms, were not also recognised by the courts to be subject to similar responsibilities. The powers are entrusted to the Board to be used equitably for the benefit of existing and future policy holders, having regard to the terms of their respective policies and the interests and needs of the Society as a whole. If decisions are taken which are inconsistent with or disregard those terms the courts can intervene and require the decisions to be taken again in very much the same way as they intervene on judicial review. As with judicial review the exercise is not confined to a black letter exercise of construing the width of the power. Although the power allows the decision maker a wide latitude to use the discretion in the manner he regards as most appropriate, the discretion is not unlimited.
20. That there is this similarity between the role of the courts on judicial review and in relation to a fiduciary duty should cause no surprise when it is remembered that Lord Greene, who encapsulated the essence of the court's role in judicial review in Wednesbury [1948] 1 KB 223, was a distinguished Chancery lawyer, as is Lord Wilberforce, one of the patriarchs of English administrative law. Indeed it was only the need to protect the procedural safeguards which are part of the process of judicial review which explains the decision in O'Reilly v Mackman [1993] 2 AC 237, in so far as it decides public law issues could no longer be regularly determined on an application made by originating summons in the Chancery Division.
21. The good sense of the courts' requirement of similar standards from those who exercise fiduciary discretionary powers to those who exercise public law discretionary powers is emphasised by the facts of this case. A substantial body of members of the public are dependent on the Society for pensions to meet their needs after they have ceased to earn their living as a result of their employment. The pension industry is therefore regulated and there is a pensions ombudsman because of the functions the industry performs. The supervision which is thus provided is in addition to and not in substitution of that provided by the courts. It is important that courts are prepared to supervise the manner in which fiduciary powers are exercised. The position does, however, remain that, in considering whether the directors have acted inequitably or otherwise gone outside their powers in declaring a differential final bonus in relation to pension policies of the class with which we are concerned, the terms of the Policy are of critical importance. The fact that policy holders are also members of the Society is no more than background. My views on the issues would be the same even if the Society was no longer owned by its members. I therefore turn to the terms of the policy.

Terms of the Policy
22. After the recitals, the Policy contains only five short clauses followed by six relatively short schedules. Despite this the proper interpretation of the Policy has been subject to extensive argument, both orally and in writing, between the parties. The position as I see it, however, is relatively straightforward as long as you focus on the issue which divides the parties, namely whether the Society is entitled to declare a differential final bonus because the current annuity rates have fallen below the GAR. The Policy gives the policy-holder an option to pay further premiums but this option does not affect the issue and so, in my reference to the terms of the Policy, to minimise the complexity of the provisions, I will not refer to passages of the Policy which refer to the payment of further premiums or further annuities. The starting point of the Policy is Clause 2 of the Policy which provides that if the policy-holder "shall survive to the Selected Pension Date the Society will pay to the [the policy-holder] the Annuity increased by Related Bonuses (if any) ... upon and subject to the terms and conditions set out in this Policy". The important point to note here is that there is a right to have Related Bonuses, if any, added to the Annuity (the GAR Annuity) given expressly by the Policy. If there is no bonus there is nothing to add but if there is the policy-holder is to benefit. This is an important feature of the contract.
23. The First Schedule contains definitions and included among those definitions are definitions of "the Annuity", "Selected Pension Age", "Selected Pension Date" and "Related Bonuses". The Annuity means :
"the Annuity purchased by the premium specified in Endorsement 1 and calculated in the manner specified in the Sixth Schedule."
"Related Bonuses" means :
"in relation to the 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".
24. The only relevant rules and regulations of the Society are those contained in Article 65 which I have already quoted. So already the Policy has identified what the policy is to provide, namely an Annuity plus Related Bonuses, if any, and how the Annuity is to be calculated and the basis for allotting bonuses. "The Selected Pension Date" means "the date upon which the [policy holder] attains the " Selected Pension Age"".
25. "The Selected Pension Age" ("SPA") is said to have
"the meaning ascribed thereto by the provisions of the Third Schedule".
26. The Third Schedule states that the SPA shall be either the age chosen by the policy-holder or within one calendar month of attaining that age or the age deemed to be the SPA pursuant to paragraphs 4 or 5 of the Third Schedule.
27. Paragraph 4 of the Third Schedule provides :
"Unless and until the (policy-holder) shall have chosen an age as the SPA the SPA for all the purposes of this Policy (including the calculation of the Annuity ... and the policy annuity value (s) of the Annuity) ... shall be deemed to be the age of 70 years".
28. Paragraph 5 provides that if the policy-holder has not chosen an age before the age of 70 then the policy-holder is deemed for all purposes of the policy to have chosen the age of 70 as the SPA. This is subject to the provision which allows the policy-holder in specified circumstances to select a different SPA not exceeding 75.
29. Clause 4 of the policy provides that the policy-holder :
"shall be entitled to exercise the options to take the alternative benefits which are contained in the Fourth Schedule upon and subject to the terms and conditions therein set out ". (emphasis added)
30. This is another important provision because it makes clear the options are an entitlement. Before turning to the Fourth Schedule to see what that schedule says about options, it is desirable to refer back to the Third Schedule, which is described as the "Benefit Schedule", to note that it provides :
"1.1 The Annuity is to 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 [policy-holder] ..."
31. Turning now to the Fourth Schedule it is headed "Options to Take Alternative Benefits". It provides two relevant options. The first is the option to take an Annuity from a provider other than the Society. This is described as an "Option to effect a Substituted Contract". The provision reads :
"1.1 At the time of choosing the Selected Pension Age the [policy-holder] may elect upon the terms and conditions hereafter appearing to renounce all or any 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 premium under a Substituted Contract." (emphasis added)
32. The second option dealt with in Schedule 4 is the option to take an Annuity at the Society's current rate. This option is described in these terms :
"2. At the time of choosing the Selected Pension Age the [policy-holder] may elect by giving written notice to the Society ... to renounce all or part of the Annuity increased by Related Bonuses (if any) ... and to be paid in lieu thereof an Annuity calculated by reference to the Policy Annuity Value of the benefit so renounced and the table of rates in use by the Society at the Selected Pension Date for a contract providing an immediate annuity approved under section 226 of the Act having regard to the sex of the [policy holder] and the age of the [policy-holder] at the Selected Pension Date." (emphasis added)

33. Here it will be noted that in the case of both options (a) it is the Annuity increased by Related Bonuses which is the starting point, (b) it is necessary to ascertain the Policy Annuity Value [PAV] and (c) it is on the PAV that the alternative annuities will be calculated. The PAV is defined in the First Schedule as meaning :
"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".
34. The Sixth Schedule is headed "Calculation of Annuities and Policy Annuity Values". This is important since it deals with the calculation of the Annuity which will be obtained applying the GAR and where a policy-holder selects one of the two options, to which I have referred already under Schedule Four, the calculation of the PAV.
35. Central to the calculation of the GAR Annuity is the Accumulation Value and Table A to the Sixth Schedule. Table A consists of a Schedule setting different sums of money against each year during which the premium is invested up to 59 years for a premium of £100. Thus in year zero the Accumulation Value is £95.50 and in year 59 the Accumulation Value is £726.92.
36. Turning to the main body of the Sixth Schedule it initially deals with the GAR Annuity. Paragraph 1 states :
"1.1 The 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 ... shall first be ascertained in accordance with paragraph 1.3 or (as the case may be) paragraph 1.4 of this Schedule.
1.3 The Accumulation Value at the Selected Pension Date of any premium paid on the date falling on or within 30 days after any Premium Day shall be calculated as follows :
1.3.1 The number of completed years between the Premium Day in question and the Selected Pension Date shall be ascertained .
1.3.2 The amount of Accumulation Value attributable to such complete numbers of years and to the amount of the premium in question shall then be ascertained by reference to Table A.
[1.3.3. This sub-paragraph contains a provision providing for a percentage increase where the Selected Pension Date is not a Premium Day.]
and the Accumulation Value so determined ... shall be the Accumulation Value of the premium in question at the Selected Pension Date."
37. Paragraph 1.4 deals with the position where the premium is paid after thirty days and can be ignored for the present purposes.
38. Paragraph 1.5 is divided into 3 sub-paragraphs. The first sub-paragraph sets out how the amount of the GAR Annuity is to be ascertained. It states :
"Having ascertained the Accumulation Value at the Selected Pension Date of the premium paid in respect of the Annuity ... in accordance with the preceding paragraphs of this Schedule the amount of Annuity ... shall be the amount of Annuity attributable to such Accumulation Value at the Selected Pension Age by reference to Table B."
39. Table B sets out the Selected Pension Ages between 60 and 70 and against each gives an amount of Annuity equivalent to £100 Accumulation Value. Thus for £100 of Accumulation Value at the age of 65 a male is to receive an Annuity of £11.72 and a female £10.36.
40. It will be observed that the process is two-fold. First of all you ascertain by reference to Table A the Accumulation Value and then you find the amount of the Annuity at the GAR by applying Table B to the Accumulation Value.
41. Then returning to Clause 2(a) the policy-holder is to receive "the Annuity increased by Related Bonuses". There is no problem in calculating the Related Bonuses in the case of a GAR because they are declared in the terms of an annuity. However in the case of the exercise of one of the options the position is more complicated because of the need to ascertain the PAV.
42. The second subparagraph of paragraph 1.5 provides for the calculation of the PAV. It states :
"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".
43. The second subparagraph of 1.5 therefore provides that Table B is to be used to obtain an Accumulation Value if one or other of the options contained in Schedule 4 is selected instead of taking the GAR Annuity. In both calculations the Related Bonuses are to be taken into account. Those Related Bonuses, if the Vice Chancellor is correct, include the final bonus.
44. The final bonus policy adopted by the Society means however that the final bonuses are of different amounts depending on whether or not one of the options is selected. The way the Society achieved this from 1993 to 1998 was by the form of the bonus declaration under Article 65. Final bonuses were to be at a rate of 13 per cent of the contractual benefits ranking for bonus on 31 December 1992, together with an additional final bonus of 10 per cent for the period from 31 December 1993 to the date of payment of benefits. This was however subject to the proviso :
"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". (emphasis added)
45. The declaration in 1999, as a response to the arguments and contentions of policy-holders, used a different formulation. The new formulation was :
"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". (emphasis added)
46. The language of both declarations is complex. For the purposes of the present appeal I do not consider that it is helpful to attach any significance to the different language used. The second form of declaration was no doubt thought to improve the position of the Society. I do not consider that it does so. If however it does, then it would be a pyrrhic victory for the policy-holders to succeed on the first form of declaration, if they could not succeed on the second form of declaration. This is because, on the evidence of the Society, if it was required to retake its decisions in relation to the earlier years, it would merely adopt the formula used for the declaration in 1999. The later formulation also indicates that the "additional amount" is not to be a "Related Bonus". I consider that the Vice Chancellor was correct to regard the reduced final bonus referred to in the earlier declaration and the additional amount referred to in the later declaration as being Related Bonuses. It is not in my judgment open to the Society to seek by adopting a particular form of words in the later declaration to avoid the clear intention of the Policy that a final bonus should be a Related Bonus. I would therefore reject the arguments of the Society set out in its respondent's notice.
47. I should also make clear that I do not consider that the outcome of this appeal turns on whether the declarations are creating what I prefer to call a differential bonus or what the Vice Chancellor describes as a conditional bonus. The critical issue as I have already indicated is whether it is permissible to declare two levels of final bonus. One payable in the case of the GAR annuity and the other when the options are exercised. Whether "conditional" or "differential" the final bonus is to be used to establish the PAV and so must be a Related Bonus for the purposes of the policy.
The Contract Argument
48. Basing himself on the language of the Policy, Mr Sumption advances three main arguments for submitting that the bonuses declared over the relevant period contravene the terms of the contract. The first principal argument is that in calculating the policy-holders' contractual entitlement the Society has applied the current annuity rates rather than the contractual rates set out in Table B. The second principal argument is a variation of the first argument and involves the contention that the conditions of the policy require the PAV to be the capital equivalent of the GAR annuity including the final bonuses. The third principal argument depends on the scheme of the policy. It is submitted that the allotment of the final bonus is intended to precede the time when the policy-holder makes his decision whether to select one or other of the options instead of the GAR. Here it is said it depends on the choice made by the policy-holder. It is submitted relying on a statement of Lord Goff of Chievely in The Kanchenjunga [1990] 1 Lloyd's Law Rep. 391 at p.398, that "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".
49. None of these arguments establishes that to declare a differential bonus is contrary to any express term of the contract. If there was such a term the answer would be obvious. The first two arguments at one level amount to no more than an objection as to the manner in which the equivalent capital value of the fund on which the annuity would be based, depending on which option was selected, would be calculated. The Society no doubt had to make a reverse calculation in order to determine the differential final bonuses. However, having ascertained the differential bonuses in this way, the express terms of the Policy can be applied to produce the result that the Society sought to achieve once it is accepted that there can be two different rates of final bonus. The arguments do not go to the question of whether a differential rate of bonus is permitted. As already indicated, "Related Bonuses" are linked by the Policy to the power of the Society under Article 65 and the language of Article 65 is certainly wide enough to permit the declaration of differential bonuses if this is a permissible manner in which to exercise the discretion under Article 65. The most one can say is it is surprising if the "Related Bonuses" which are referred to in the GAR and the two options can differ in amount. This is not what you would expect.
50. As to the third argument, I have no difficulty in applying Lord Goff's statement as to election to a situation where two different rates of bonus are announced before the policy-holder makes the choice. This was the position here. It cannot be said that the policy-holder was lacking in information which was required to make a proper selection.
51. I therefore reject Mr Sumption's arguments in so far as they are based on a contravention of any single term of the policy. In his submissions, Lord Grabiner on behalf of the Society drew attention to the fact that in opening this appeal Mr Sumption had not expressly stated that the Society had breached any term of the contract. This was no doubt no more than a forensic point but did suggest, what I believe to be the case, that if Mr Sumption's client is to succeed, it must be on the basis that, while to declare a differential bonus may not be contrary to the letter of the Policy, it involves an impermissible exercise of discretion. This is because it amounts to exercising the Board's discretion in a manner which is contrary to what the Policy by implication requires; the implication being drawn from the structure and terms of the Policy as a whole. This is the argument which I regard as going to the heart of the appeal. It can be considered as part of Mr Sumption's first head of argument "Inconsistency with the contract" or it can be considered under the more general head of an improper exercise of discretion. I prefer to deal with it under the broader head of discretion to which I will now turn. However, in the end I would come to the same conclusion under either head after taking into account the matrix of the contract.
Improper Exercise of Discretion
52. Here, the matrix of the Policy is important. Included in the matrix is the Society's general approach as to the declaration of bonuses which I believe is correctly set out in Mr Sumption's revised skeleton argument in these terms :
"1. The main features of the Society's practice at all relevant times have been as follows:
(1) Final bonuses are declared annually by the Board, for the succeeding calendar year. Upon a policy maturing during that calendar year, the Board's decision is mechanically applied by the Society's staff.
(2) The Board of the Society declares final bonuses for each calendar year, as a percentage uplift applied to the value of the benefits that would have been available to a given policy-holder at the beginning of the previous calendar year. Subject to any express reservation included in the declaration, the uplift applies across the board regardless of the form in which benefits are taken.
(3) The fundamental concept used by Equitable Life and other life offices is `asset share'. This is a notional capital fund attributed to a particular policy. It reflects a retroactive assessment of the amount of the policy-holder's premiums, the period of time for which they have been invested with the Society and the investment return which the Society has achieved.
(4) The object of final bonus declarations is to increase the notional fund attributable to each policy, so that on maturity it will correspond to that policy's asset share.
(5) It was a common feature of all Retirement Annuity Policies (but not all pension policies with GARs) that the bonuses were expressed in the declarations and allotments as an increase of the Annuity, and not as an increase of the Accumulation Value from which the Annuity was calculated. This, however, was essentially a matter of procedure. The bonus, like the minimum contractual annuity, can in practice be calculated only by reference to the notional capital fund attributed to the policy-holder. As Mr Nash (the Managing Director and Actuary of Equitable Life) points out in his affidavit, the Board of Equitable Life has always calculated final bonuses as additions to the Accumulation Value, and then expressed them in annuity terms by applying the GARs to the addition:
The effect of the allotment of bonus to any given policy is the same irrespective of whether a given bonus is expressed in annuity terms or as a capital value equivalent to that produced by applying GARs.
Since this exercise involves determining the distribution of the increase in the value of the Society's net assets over the relevant period, there is no other way that it can be done.
(6) It is implicit in this practice, and is expressly accepted by Equitable Life, that GARs must be applied not just to the Accumulation Value shown in Table A to the policy, but to additions to that value made in the course of declaring bonuses, including final bonuses. Mr Nash says:
On maturity, if a final bonus is made available to a policy-holder taking his benefits in guaranteed annuity form, the GAR applies to that final bonus just as it applies to other guaranteed benefits under the policy."
53. Against this background the conclusion I have come to is that it was not a permissible exercise of discretion for the Society to declare a differential bonus. To do so is inconsistent with the tenor of the Policy for the following reasons :
(a) The differential bonus significantly detracts from or undermines the benefit of GAR given by the Policy. The assumption on which the Policy was based was that when current annuity rates fall below the GAR the annuity which the policy-holder should receive would be higher than if there was no GAR.
(b) Although a policy-holder has no right to a terminal bonus, if the Society declares a terminal bonus, the bonus is a Related Bonus, which has to be taken into account in determining the sum available whether an option is exercised or not. This is inconsistent with the declaration of differential bonuses.
(c) Whatever formulation is adopted by the Society to achieve its policy, that policy has the effect of providing the policy-holder with a final bonus which differs in amount depending on which of his contractual rights the policy-holder exercises. The power to declare bonuses is not to enable the Society to increase or reduce the attractiveness of those rights. For example, it would be impermissible for the Society because it did not wish to offer annuities itself to use its discretion as to bonuses to make it more attractive for the policy holder to use another provider.
(d) The options under the Fourth Schedule 1.1 involve renouncing the Annuity increased by the Related Bonuses and "in lieu thereof" the policy holder receiving "the Policy Annuity Value in respect thereof". As the Related Bonuses are part of the PAV this is not consistent with there being different Related Bonuses. In addition, the PAV is based on the "Annuity" increased by "Related Bonuses", which produces the Accumulation Value by reference to Table B. Table B is in fact central to the GAR so whether an option is exercised or not Table B plays a part in the calculation. This does not suggest that the effect of the GAR should be neutralised by the declaration of differential bonuses.
(e) It is argued by the Society that its policy is merely to maintain equality between the choices the Policy gives a policy holder. However the GAR meant there would always be inequality. Either the current annuity would be lower or higher than the GAR. It is said that if the Society had not adopted a differential bonus, the options under the Fourth Schedule to the policy would be of no value when the GAR is above current rates. However this will be the case if current annuity rates drop so low that even if the Society attributed the entire sum available for final bonuses to those policy holders who did not select the GAR, the selection of the GAR would still be financially beneficial. It was therefore always contemplated there could be inequality in the value of the choices the policy provided.
(f) The other justification of the Society for its policy, namely that it prevents the policy-holder receiving a double benefit, namely the benefit of the appreciation of the assets of the Society and a high annuity rate, is not as strong an argument as it first appears. The policy-holder is in any event entitled to the benefit of a policy with a GAR and should be not treated differently if he seeks to take the benefit the GAR provides because the assets of the Society appreciate. The final bonus is payable because of the profitability of the Society, the GAR is payable because this is what the Policy requires.
(g) The absence of any documentation suggesting at the time that the policies were entered into that differential final bonuses could be declared in these circumstances.
(h) While the expert evidence called by the Society and the policy-holders in this case is useful in getting the background to the issues involved, the issues cannot be resolved by the opinions of experts, no matter how eminent, or the views of other bodies. It is a question for the court.
(i) The policy-holder was entitled to be told if there were to be differential final bonuses depending on which Policy option was chosen since the neutralisation of the benefit of the GAR was not a course which could be reasonably foreseen.
54. The declarations of final bonus which are in issue in this case therefore involved an impermissible exercise of discretion. It was an exercise of discretion reducing the policy-holder's reasonable expectation that he would receive his asset share irrespective of how he exercised his rights under the policy. The purposes for which the powers contained in Article 65 are conferred on the Society do not include treating a policy-holder differently depending on the manner in which he seeks to exercise his rights under the policy which he has been granted by the Society in return for his premium. This is precisely the result of the policy adopted by the Society and it is a collateral purpose designed to negative a benefit to which the policy-holder would otherwise be entitled. The fact that the Society was not under an obligation to pay a final bonus does not mean that if the Society decided to pay a final bonus it should do so in a manner which deprives the policy-holder of a share of the investment return of the Society which the Society would confer upon him if he selected one or other of the other options available under the policy.
55. I do not as part of my reasoning go so far as to say that the action of the Society deprives the GAR of any value. It does provide a floor below which the annuity rate could not fall. However, as Mr Sumption submitted, such protection is extremely limited.
56. In my judgment the appeal should be allowed. The Society will have to decide on what course it should now adopt. We will be prepared to hear argument as to the order which is appropriate if there is any dispute as to this.
Lord Justice Morritt :
Introduction
57. The Equitable Life Assurance Society ("the Society") was formed in 1762. In 1892 it was incorporated under the Companies Act 1890. Its members are those with whom it has entered into participating, or with profits, policies of assurance. By Article 65 of its Articles of Association its directors are required periodically to determine how much of any surplus of its assets over its liabilities and reserves should be paid to its members by way of bonus and to apportion such surplus "on such principles, and by such methods, as they may from time to time determine".
58. Since 1974 the Society has declared two types of bonus, reversionary or interim and final. The reversionary or interim bonus has been declared annually from the inception of the policy to its maturity; it becomes a contractual entitlement at the time of the declaration but is not payable until maturity. By contrast the final bonus is also declared annually but is payable only on the maturity of a policy in that year; there is no prior contractual entitlement to a final bonus of any or any particular amount. The bonus is calculated so as to distribute to the policy-holder net investment returns attributable to the premiums he has paid. To retain maximum flexibility the Society has retained a large proportion of such returns until the declaration of the final bonus.
59. From 1957 to 1988 the Society sold with profits annuity policies on terms which, in one form or another, guaranteed the rate of annuity payable in respect of the premium or premiums paid for a specific form of annuity. Such policies also gave the holder options to acquire annuities on terms different to those to which the guaranteed rate applied. If the holder chose to acquire any of those alternative annuities then the notional fund required for the provision of the guaranteed annuity was treated as applied in the purchase of the alternative.
60. Since the mid 1990s the market rate for the purchase of annuities has been below the guaranteed rate. Accordingly the notional fund required to provide an annuity at the guaranteed rate has been less than that required to fund an annuity of the same amount at the current rate. In December 1993 the directors of the Society resolved to allot to those policy-holders who elected to take an annuity to which the guaranteed annuity rate did not apply a larger final bonus than that allotted to those who took the annuity to which the guaranteed rate did apply.
61. A number of policy-holders, through a representative policy-holder Mr Hyman, contended that the Society was not entitled so to do. Sir Richard Scott, Vice-Chancellor, disagreed with them and made declarations upholding the validity of the Society's practice. This is the appeal of Mr Hyman from those declarations. Both before the Vice-Chancellor and this court the parties were agreed that the points of principle could be fully and properly argued and determined on the basis of the terms of one of the policies taken out by Mr Hyman. Accordingly I propose to consider the arguments and reach my conclusions in the light of the terms of that policy.
The Policy
62. The policy, R90427, was effected by Mr Hyman in June 1979 by payment of a premium of £1,000. It was a retirement annuity contract in a form approved by the Inland Revenue pursuant to s.226 Income and Corporation Taxes Act 1970. Consequently, subject to commutation of part, the benefits might only be taken in annuity form, s.226(2)(a) Income and Corporation Taxes Act 1970 and, by virtue of subsequent endorsements, the value of Mr Hyman's accrued rights under it might be applied as a premium or other consideration for alternative annuity benefits, s.622 Income & Corporation Taxes Act 1988. Schedule 5 para. 4.0 conferred on Mr Hyman the right to participation in the profits of the Society up to the selected pension date but no longer. Mr Hyman thereby became, if he was not one already, a member of the Society. By clause 2(a) Mr Hyman was entitled to the guaranteed annuity. Clause 4 and the Fourth Schedule gave him various options to take the alternative benefits therein described. Clause 1 and the First Schedule contained definitions applicable to the policy as a whole but only if the context so permitted. It is necessary to consider all these provisions in some detail.
63. The starting point is clause 2(a). This provides
"2. The Society hereby covenants with the Grantee that...:
(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): or
(b)...
upon and subject to the terms and conditions set out in this Policy."
64. The terms "Selected Pension Date", "the Annuity" and "Related Bonuses" are defined in Schedule 1. For the moment it is only necessary to refer to the latter two definitions. They are
""the Annuity" means the Annuity purchased by the premium specified in Endorsement 1 and calculated in the manner specified in the Sixth Schedule"
""Related Bonuses" means in relation to the Annuity...such amounts (if any) as shall under the rules and regulations of the Society have been allotted by way of addition to or bonuses thereon"
65. The Sixth Schedule provides by para.1.1 that "the Annuity...payable at the Selected Pension Date shall be calculated in the following manner". Paragraphs 1.2 to 1.4 provide for the calculation of "the Accumulation Value", a term defined in Schedule 1 "in relation to any premium" by reference to this calculation which is to be carried out by the application of an attached Table A. Table A contains the value after any given number of years up to 59 of each £100 of premium paid. Para. 1.5 contains three sub-paragraphs which for ease of reference I have numbered (i),(ii) and (iii). Sub-paragraph (i) provides
"Having ascertained the Accumulation Value at the Selected Pension Date of the premium paid in respect of the Annuity...in accordance with the preceding paragraphs of this Schedule the amount of Annuity...shall be the amount of annuity attributable to such Accumulation Value at the Selected Pension Age by reference to Table B."
66. Table B provides for the amounts of annuity per £100 of Accumulation Value dependent on age and sex ranging from £9.32 to £13.80. There is no provision for the valuation of Related Bonuses for the purpose of the guaranteed annuity because there is no need. The bonuses are declared as a percentage of the annuity derived from the Accumulation Value or the annuity so derived as increased by earlier reversionary or interim bonuses. Schedule 3 para.1.2 provides that the Annuity so calculated and increased by Related Bonuses should be paid from the Selected Pension Date during the remainder of the lifetime of the grantee by equal quarterly instalments in advance.
67. Schedule 4 confers options on the grantee to take alternative benefits. One option (Schedule 4 para.2.0) is to have an annuity from the Society calculated by reference not to the guaranteed annuity rate but by reference to the rates used by the Society at the Selected Pension Date. The other (Schedule 4 para. 1) is to have the value of the guaranteed annuity as increased by Related Bonuses transferred to another life office in payment for the acquisition of an annuity from that life office. There are two points relevant to the exercise of either option. The first is the time when the option must be exercised. The second is the method of ascertaining the value of the guaranteed annuity to be applied in paying for the alternatives arising on the exercise of either option.
68. The election is, in each case, to be made "at the time of choosing the Selected Pension Age". The term "Selected Pension Age" is defined by reference to Schedule 1 and Schedule 3 para. 3.1.1 as the age chosen by the grantee as provided in Schedule 3.2 at which the Annuity is to commence. By Schedule 3 para. 3.2 the grantee is required to chose that age "on or within one calendar month of attaining" it. Unless and until such age is chosen the Selected Pension Age is deemed to be 70. Schedule 3 para. 5.0 provides that "if the grantee shall have attained the age of 70 years plus one calendar month" without having chosen an age then he is deemed to have chosen the age of 70 as the Selected Pension Age. There is provision in Schedule 3 para. 6.0 for selecting an age greater than 70 but not more than 75. It must be exercised on or within one calendar month of attaining the age of 70 and requires a new table of guaranteed annuity rates "calculated on the same basis as Table B but applicable after the age of 70".
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.

	THE EQUITABLE LIFE ASSURANCE SOCIETY	Claimant/Respondent
	And
	ALAN DAVID HYMAN	Defendant/Appellant

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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Equitable Life Assurance Society v Hyman [2000] EWCA Civ 5 (21 January 2000) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2000/5.html Cite as: [2000] EWCA Civ 5

England and Wales Court of Appeal (Civil Division) Decisions