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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Equitable Life Assurance Society v Hyman [1999] EWHC 847 (Ch) (- 9 September 1999) URL: http://www.bailii.org/ew/cases/EWHC/Ch/1999/847.html Cite as: [1999] OPLR 213, [1999] EWHC 847 (Ch), [1999] Pens LR 297

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		- 9th September 1999

The Vice-Chancellor:-

1. The purpose of the proceedings before me is to settle the question whether the Equitable Life Assurance Society (`the Society') is entitled, when allocating final bonuses amongst its with profits policy holders, to allocate bonuses to one class of policy holders at a lower rate than the rate at which it awards bonuses to other policy holders. More specifically, the question is whether the Society can award reduced bonuses - or no bonuses at all - to policy holders whose polices contain guaranteed annuity provisions.
2. The Society, not surprisingly, contends that it can do so. Mr Jonathan Sumption Q.C., who appears for a policy holder, Mr Hyman, joined in a representative capacity to represent all policy holders entitled to guaranteed annuity rates, contends that it cannot. He contends, first, that to award lower bonuses to these policyholders than are awarded to others is in breach of contract. He contends, secondly, that to do so is an improper exercise by the Society of its discretionary power to allocate bonuses.
3. Stated in that way, the issues for decision can be made to appear reasonably tight and concise. And so they are. But before the point can be reached at which the issues can be confronted and, I hope, resolved, a great deal of background needs to be examined.

The Society

4. The Society was founded in 1762. It is, I am told, the world's oldest mutual life assurance society. Its principal activity is the transaction of life assurance, annuity and pension business. It issues with-profits policies, without-profits policies and unit linked policies. It is an unlimited liability company, and has no shareholders. Its members are the with-profits policy holders. It is these policy holders who, potentially, share any profits made or losses incurred by the Society in carrying on its businesses.
5. An individual who wants to take out a with-profits policy with the Society must first sign a policy proposal form. The form records the individual's agreement that, once the policy is effected, he will become a member of the Society (unless he is a member already) subject to the terms and provisions of the Society's Articles of Association for the time being.
6. The Society's assets at 31 December 1998 exceeded £28 billion. Of that sum, over £21 billion represented the fund built up over the years from the premiums and contributions paid in respect of with-profits policies. The Society regards this sum as belonging to its with-profits policy holders.

The Society's Articles of Association

7. Article 2 defines the expression "participating policy" as "any policy which for the time being confers a present entitlement to participate in the profits of the Society" i.e., with-profits policies.
8. Article 3 declares that "every person who ... has effected or shall hereafter effect any policy which at the said time is a participating policy" is a member of the Society.
9. Article 65 plays a critical part in this case. I should set it out in full.

"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".

10. I draw attention to the three stages by which bonuses become allocated to individual members. 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.
11. It is important, also, to note the terms in which sub-paragraph (3) describes the width of the Directors' discretionary powers under sub-paragraphs (1) and (2). The Directors are given an "absolute discretion" and their decision "shall be final and conclusive".

The Policies with Guaranteed Annuity Rates

12. Between 1957 and July 1988, the Society issued with-profits policies containing provision for guaranteed annuity rates (GARs). This was a time when current annuity rates in the market were high. The GARs were fixed at a level well below current annuity rates. The policies were marketed on the footing that the guaranteed rates would provide a minimum level below which the annuity obtained by the policy holder from his investment in the Society could not fall. No special charge was made for the inclusion in policies of GAR provisions. GARs were one of the contractual benefits obtained by the payment of the premium by which the policy was effected.
13. The Society has at present in issue some 116,000 with-profits policies containing GARs. About 90,000 persons are interested under the policies. There are, in addition, about 27,000 GAR policies which have matured since October 1993. The significance of October 1993 is that that was the time when the Society's current annuity rates began to fall below the guaranteed rates. It was then that the problems which have given rise to this litigation became apparent and that the Society's policy, under attack in this litigation, was instituted.
14. By contrast, the Society has at present in issue about 300,000 with-profits pension policies that do not contain GAR provisions. About 290,000 persons are interested under these policies. About 20,000 such policies have matured since October 1993.
15. Mr Hyman, the representative defendant, held five with-profits policies with the Society. Each contained GAR provisions. The policies were taken out between 1972 and 1983. The policies have all matured. In describing the contents of the Society's GAR policies, I will take as the model Mr Hyman's third policy, effected on 11 June 1979.
16. The proposal form signed by Mr Hyman on that date gave his relevant personal details, indicated that he wanted to effect a with-profits policy with a first premium of £1,000 paid at once and with subsequent premiums payable at his option. The form contained a declaration that "this declaration shall be the basis of the contract between me and the ... Society" and that on the policy being effected Mr Hyman would "become a member of the Society in respect thereof".
17. The policy itself consisted of a single page containing recitals and operative clauses followed by a number of Schedules.
18. The first recital referred to the proposal form as being "the basis of the contract" and to the payment of the first premium. The third recital said that the policy had been approved by the Inland Revenue.
19. Clause 1 of the operative clauses incorporated the definitions set out in the First Schedule. I will come to those in a moment.
20. Clause 2 consisted of a covenant by the Society in the following terms:-

"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); or

(b) if the Grantee shall die before the Selected Pension Date the Society will pay to the Executors or Administrators of the Grantee the Death Benefit

upon and subject to the terms and conditions set out in this policy".

21. Clause 3 gave the Grantee the option to pay further premiums in order to secure further annuities.
22. Clause 4 said that:-

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

And Clause 5 said that the policy was subject to the terms and conditions contained in the Schedules.

23. Several of the definitions set out in the First Schedule are important.

"The Annuity" is defined as "the Annuity purchased by the [first] premium ... and calculated in the manner specified in the Sixth Schedule".

24. "Related Bonuses" is defined as meaning "in relation to the Annuity ... such amounts (if any) as shall under the rules and regulations for the Society have been allotted by way of addition to or bonus thereon". One of the main issues of argument has been as to the point at which a final bonus allotted to a policy holder when the policy matures becomes, or indeed as to whether it ever does become, a "Related Bonus" as defined.
25. "The Selected Pension Age" is defined as having "the meaning ascribed thereto by the provisions of the "Third Schedule". Paragraph 3.2 of the Third Schedule provides that: "The Grantee shall choose the Selected Pension Age on or within one calendar month of attaining that age by completing and signing an application in such form as the Society shall stipulate and producing the same to the Society ... for registration ...". Broadly speaking, if the policy holder has failed to choose his Selected Pension Age within one month of becoming 70, he is deemed to have chosen the age of 70. There are certain circumstances in which an age between 70 and 75 years can be chosen.
26. "The Selected Pension Date" is defined as "the date upon which the Grantee attains the Selected Pension Age". Paragraph 1.2 of the Third Schedule provides that the Annuity, calculated in the manner specified in the Sixth Schedule, and the Related Bonuses "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 on the Selected Pension Date".
27. It seems to me apparent that this provision cannot be strictly complied with according to its terms. The Society will not know the Selected Pension Date until, at the earliest, the very same day or, at latest, one month thereafter. It cannot put in train the arrangements for paying the first quarterly instalment until it has received and registered the application form nominating the Selected Pension Age. By the time this has happened, the Selected Pension Date, when the first payment is supposed to have been made, will have passed. None of this matters very much. But it does suggest that the literal terms of the policy may need some small adjustments in the interests of practicality.
28. Two expressions, both defined in the First Schedule, are particularly important for the purpose of understanding the Society's approach to bonuses and the arguments about that approach that have been addressed to me. One is "Accumulation Value"; the other is "Policy Annuity Value".
29. "Accumulation Value" is defined as meaning "in relation to any premium, the Accumulation Value thereof calculated in the manner specified in the Sixth Schedule". In the Sixth Schedule the Accumulation Value of a premium is calculated, first, by ascertaining the number of years between the date on which the premium was paid and the Selected Pension Date i.e., the period during which the Society will have had the sum available for investment, and, secondly, by reference to a table, Table A, which specifies the capital value of a premium of £100 left with the Society for the number of years in question. The Table incorporates guaranteed investment returns. These should not be confused with GARs. Guaranteed investment returns are used for the purpose of calculating the Accumulation Value of each premium paid by the policy holder to the Society. For example, according to Table A a premium of £100 left with the Society for 25 years will have an Accumulation Value of £225.69. GARs, in contrast, are used for the purpose of ascertaining the amount of the annuity from the Society that a particular Accumulation Value e.g., the £225.69, will obtain.
30. "Policy Annuity Value" means the value, calculated in the manner specified in paragraph 1.5 of the Sixth Schedule, of "the Annuity increased by the Related Bonuses". I will defer for the moment an exposition of that paragraph.
31. I need not refer to any other definitions. Nor need I refer in any detail to the Second Schedule. It contains provisions regarding the payment of further premiums, additional to the first premium.
32. The Third Schedule contains provisions dealing with payment of the Annuity, and the Related Bonuses, (paragraphs 1.1 and 1.2), and with the ascertainment of the Selected Pension Age (paragraph 3.2)
33. The Fourth Schedule contains provisions giving the Grantee an option to take other benefits in the place of the Annuity and the Related Bonuses, or part of them. The alternative benefits may be of two types. First, the Grantee may elect to take a sum of cash, up to a limit imposed by the Revenue. Second, the Grantee may renounce the Annuity, and Related Bonuses, or part of them, and require the Society to apply the Policy Annuity Value of what has been renounced in providing the Grantee with a substituted annuity at current annuity rates. The substituted annuity may be obtained either from the Society or from some other assurance company. The option enabling the policy holder to obtain an annuity from some other assurance company resulted from statutory provisions enacted in 1978. Mr Hyman's 1979 policy, which I am taking as a model, held open, therefore, this option. The option had not been provided for in the earlier policies. But, following the coming into force of the 1978 statutory provisions, the Society extended the option to the holders of existing with-profits policies. Mr Hyman has exercised this option in respect of his matured policies. A GAR policy holder who elects to renounce the GAR based annuity and take his benefits in one or other of the alternative forms, is described as taking his benefits "in fund form". I will, for convenience, use that expression in this judgment.
34. Under paragraph 1.1 of the Fourth Schedule the Grantee is required to exercise his option to take his benefits in fund form by written notice given at the same time as he chooses the Selected Pension Age. He may, of course, choose not to exercise the option. In that case he will simply become entitled to the Annuity , increased by any Related Bonuses.
35. The Fifth Schedule sets out a number of conditions. One of these forbids the surrender or commutation of any annuity except to the extent permitted by the Fourth Schedule. Another, paragraph 4, provides that:-

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

36. This provision confirms, therefore, that although the Selected Pension Date may not be known until up to a month after the date has passed, the policy benefits to which the Grantee will become entitled are to be calculated by reference to that date. This is made clear, too, by the provisions of the Sixth Schedule.
37. Paragraphs 1.3 and 1.4 of the Sixth Schedule deal with the calculation of the Accumulation Value of each premium paid by the policy holder. Paragraph 1.5 says that:-

"Having ascertained the Accumulation Value at the Selected Pension Date of the premium paid in respect of the Annuity ... the amount of the Annuity ... shall be the amount of annuity attributable to such Accumulation Value at the Selected Pension Age by reference to Table B".

Table B incorporates the GARs. The amount of the Annuity acquired by the payment of each premium is, therefore, ascertained by applying GARs to the Accumulation Value of the premium.

38. Paragraph 1.5 continues:-

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

Table B attributes a specified amount of annuity to each £100 of Accumulation Value. The Policy Annuity Value identifies the sum that, at the option of the policyholder, can be taken to some other assurance company and applied in obtaining an annuity from that assurance company.

39. The result of these provisions is that in order to ascertain the Policy Annuity Value, the amount of the Annuity and of any Related Bonuses must be known. The Related Bonuses will be known from the declarations of bonus from time to time made by the Society as additions to the Annuity. The amount of the Annuity will be ascertained from the Accumulation Value and Table B. The Accumulation Value will be ascertained from the amount of the premium, the period between payment of the premium and the Selected Pension Date and Table A.

The Society's Practice Regarding Bonuses

40. The Society has always used the declaration of bonuses as a means of trying to ensure that each with-profits policy holder receives a due share of the investment returns achieved by the Society in investing its with-profits fund. The ability of the Society to declare bonuses depends, of course, on the existence and extent of a surplus. Some part of the Society's assets has to be set aside for the purpose of meeting administrative and other expenses and in making provision for the Society's contractual liabilities under its with-profits policies. Profits and losses made by the Society on its other business, i.e., its business other than the issuing of with-profits policies, are added to or subtracted from the with-profits fund in order to identify the surplus available to be applied as bonuses.
41. Article 65, in its present form, requires the declaration of bonuses to be considered at least every three years. And from 1962 to 1986, the Society declared triennial bonuses. Since 1986, however, it has declared bonuses annually. The annual bonuses are reversionary bonuses. No payment is made to the policy holder until the policy matures. But, once declared, the annual bonuses are irrevocable and constitute a contractual entitlement of the policy holder. In addition, in 1973 the Society introduced "terminal" or "final" bonuses. These are bonuses declared on the maturity of policies. Their purpose 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 ..."

42. Some part of a with-profits policy holder's "asset share" will have become a contractual entitlement of the policy holder under the policy. This will be the policy's so-called "guaranteed value". This "guaranteed value" will be the combined value of :-

(i) the premiums paid (less initial charges);

(ii) the guaranteed investment return calculated by applying the guaranteed investment rates to the premiums and;

(iii) the annual bonuses previously allotted to the policy.

43. However, the policy's guaranteed value may be considerably less than the policy holder's asset share. There are several reasons for this. First, the guaranteed investment return applicable to the policy may be less than the actual rate of investment earned by the Society's with-profits fund. Second, unless the policy matures on the very day an annual bonus is declared, there will be a period after the declaration of the bonus and before the maturity date during which the with-profits fund will have continued to earn an investment return. This return, too, may exceed the guaranteed investment return. Third, the policy of the Society, in recent years at least, has tended to depress annual bonuses relatively to final bonuses. The reason for this policy is that once annual bonuses have been declared and allotted to individual policies, they become reversionary contractual liabilities of the Society and appropriate provision must be made for them in the Society's accounts. They need to be funded from reserves represented by fixed interest securities. Fourth, there will in any event be some part of the surplus that will not be allocated as bonus but will be carried forward as a reserve. The total declared bonus in any year will always be less than the surplus.
44. Final bonuses (sometimes called `terminal' bonuses), in contrast to annual bonuses, remain provisional until the maturity of the policy. Each year the Society, as well as declaring irrevocable annual bonuses, "declares" final bonuses which the Society retains the right to adjust. A final bonus does not become irrevocably allotted to an individual policy until the policy has reached its maturity date. Until that date the final bonus does not represent a liability of the Society and provision does not need to be made for it in the Society's accounts.
45. The fact that annual bonuses represent reversionary liabilities of the Society as soon as they are declared and that final bonuses do not has the result that a reduction in the level of annual bonuses, and a corresponding increase of final bonuses, allows the Society greater freedom in investing its assets.
46. It follows that 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. The Actuary's report to the Society's Board on 28 January 1987 gave the following summary of "The Society's approach to Bonuses".

"The current bonus system has two components. Declared Bonuses are allocated annually and serve to increase the guaranteed policy benefits. When policy benefits become payable a final bonus is added to the proceeds otherwise payable. That represents a final "topping up" of the benefits to ensure that each policy holder leaving the fund receives "full value" having regard to the history of his contract and the performance of the fund during his membership of it. Final bonus rates are not guaranteed and can be varied at any time at the board's discretion.".

In "With-Profits Without Mystery", a paper written by Mr Ranson and Mr Headdon, and presented to the Institute of Actuaries on 20 March 1989, the function of a final bonus is described as follows:-

"For final, or terminal, bonus rates the starting point is the rates needed to lift the guaranteed benefits and declared bonuses to the appropriate asset share" (para. 3.2.15).

47. It may be helpful to demonstrate the Society's practice regarding declarations of bonus by reference to the bonus declarations for 1989 made at a meeting of the Society's Board of Directors on 14 February 1990. The Directors had before them the recommendations of the Society's Actuary and resolved to adopt the recommendations.
48. Paragraph 8 of the recommendations identified the surplus as at 31 December 1989 as being £237.5 million. The figures were as follows:-

Value of assets £4,704.8m

Value of liabilities £4,467.3m

Surplus £ 237.5m

49. The figure for liabilities would have included the reserves necessary to fund the "guaranteed values" of policies in issue. The guaranteed values would have included previously declared annual bonuses in respect of policies not yet matured.
50. In paragraph 15, the Actuary recommended that bonuses costing £235.9 million be declared. This left a balance of £1.6 million to be carried forward. I draw attention to the relatively small amount, the £1.6 million, excluded from the total declared bonus. This is typical of the Society's consistent policy of distributing by way of bonus as much as prudently possible of the available surplus.
51. A Statement of Bonuses was annexed to the recommendation. This Statement set out the rates of bonus recommended for various types of business. It stated that:-

"Declared bonus is a guaranteed addition to the sum assured, maturity value, annuity or other benefit on death or retirement. The bonuses now declared will vest in contracts which are still in force on 1 April 1990".

52. Under the heading "General Annuity Fund" and the sub-heading "With Profits Class", the "Actuary recommended" a bonus of £75.00 per annum for each £1,000 of annuity and £75.00 for each £1,000 of existing bonus additions" i.e., £7.5 per cent.
53. Under the sub-heading "Final Bonus", the Actuary said that:-

"Final bonus is payable under an assurance which becomes a claim by death or maturity between 1 April 1990 and 31 March 1991 ..."

54. Sub-paragraph (iv) dealt with retirement annuities and personal pensions and recommended a final bonus which would increase the value of the benefits by 20 per cent for the year 1989 and by 15 per cent, on a proportionate daily basis, for the period between 31 December 1989 and the maturity of the policy. The Statement ended with the warning that:-

"The directors reserve the right to reconsider the rates of final bonus at any time".

55. The Statement of Bonuses was accompanied by a six page document entitled "Some Further Thoughts on the Forthcoming Declaration". A few passages from this document are worth mentioning. Paragraph 2 cited from a document that had been sent to all the Society's new with-profits policy holders. It summarised the Society's policy on bonuses as follows:-

"Earnings on the assets by way of interest, dividends and rent, as well as appreciation in market values of the assets, in excess of those required to meet the guarantees are passed on to the policy holders by way of bonuses".

56. Paragraph 3 referred to "... a clear implication that there will be an attempt at fair treatment between policy holders", and paragraph 4 said this:-

"The Society has two bonus systems. The declared bonus passes on part of the investment return to be allotted and does so in a form which adds to the guaranteed benefit under a contract. The balance of the return is passed on by way of the final bonus payable when a policy "matures". Final bonuses are not guaranteed and can be changed by the directors at anytime".

57. A similar picture is shown by the papers relating to the Board meeting on 10 February 1993 at which the bonus declaration for 1992 was made. The surplus was £303.4m. The total declared bonus was £298.7m. A bonus of £4.5 per cent per annum was declared on basic benefits and the same amount on previously declared bonuses. A final bonus rate was recommended of £10 per cent on benefits secured up to and including 31 December 1991 and 12 per cent on benefits secured within 1992. As in the previous year there was a warning that the directors "reserve the right to reconsider the rates of final bonus at any time".

Final Bonuses and GARs

58. The Society regards the declaration of final bonuses as the mechanism for ensuring that policy holders under maturing contracts receive their due share of the profits earned by the Society. There was no particular problem in achieving this object so long as current annuity rates exceeded GARs. From 1967 (when the Society's records of its annuities rates begin) to 1993 that was the position. But for the period between October 1993 and May 1994 GARs exceeded current annuity rates. And since May 1995 they have consistently done so. Moreover, the excess has been increasing and by September 1998 GARs in the policies issued between 1975 and 1988 were approximately 25 per cent higher than current annuity rates.
59. The calculation of the annuity to be paid under a GAR policy requires, first, the Accumulation Value of the premiums paid to be ascertained. Table B (in the Sixth Schedule to the 1979 policy) identifies the amount of the annuity, payable from the Selected Pension Age, that is produced by the Accumulation Value. The Table B annuity will, since May 1995, be greater in amount than the annuity, payable from the same age, that could be acquired at current annuity rates by the outlay of a sum equal to the Accumulation Value. It follows that the sum to be reserved in the Society's accounts in order to fund the GAR based annuity will be greater than the Accumulation Value.
60. The notional "asset share" of a policy holder in the Society's with-profits fund is dependent on the amount of premiums paid by the policy holder and the length of time since they were paid. So, too, is the Accumulation Value. The difference is that the Accumulation Value is calculated by reference to guaranteed investment returns. The asset share is calculated by reference to actual investment returns. But neither is dependant on whether or not the policy in question entitles the policy holder to GARs. Policy holder A, without GARs, who paid £1,000 on 1 January 1990 will have the same asset share as policy holder B, with GARs, who paid the same sum on the same date. But if GARs exceed current annuity rates, the contractual benefits to which policy holder B is entitled will cost the Society more and be greater in value than those to which policy holder A is entitled.
61. The Society's approach, as I have said, is to try and ensure that each policy holder receives, on maturity of his policy, benefits not less than his asset share. Let me try and illustrate the problem.
62. Let it be supposed that the asset share in the with-profits fund earned by the payment of a premium of £1,000 on 1 January 1990 is, on 1 January 1999, £2,500. Assume that £1,000, increased by the application of a guaranteed investment rate common to A's policy and to B's policy, will by 1 January 1999 produce an Accumulation Value of £2,000. And let it be supposed that both A's policy and B's policy reach maturity on 1 January 1999. The value of the annuity to which A, with no GARs, will be contractually entitled, i.e., an annuity at current annuity rates, will presumably be £2,000. So it will need a final bonus of £500, or an extra annuity that can be acquired at current rates for £500, in order to bring the value of his benefits up to £2,500, his notional asset share.
63. B, on the other hand, is entitled to have an annuity of the amount that the GARs in Table B attribute to an Accumulation Value of £2,000. The value of this, since GARs are higher than current annuity rates, will be, say, £2,400. So B will need a final bonus of only £100 in order to bring the value of his benefits up to £2,500, his notional asset share. If the difference between GARs and current annuity rates is wide enough, the value of B's benefits may, without any final bonus at all, equal or exceed his notional asset share. In that case, on the Society's approach, B will receive no final bonus at all.
64. The figures I have used in this illustration may well be far removed from reality. I am no actuary. But I think the principle is clear enough.
65. The illustration has assumed that B, with a GAR policy, had opted to take a GAR based annuity. The problem would not arise if B had opted to renounce the annuity and, instead, to have its Policy Annuity Value applied as a premium under another policy (see para. 1.1 of the Fourth Schedule to the 1979 policy). Under the substitute policy, taken up with the Society or with some other assurance company, B would obtain an annuity at current rates. His position would be no different from that of A. The value of their benefits would be the same. Both would need the same final bonus to bring them up to asset share level. The problem only arises if the GAR policy holder decides to take a GAR based annuity.
66. The problem, not surprisingly, appears very differently to the GAR policy holders, of whom Mr Hyman is representative, than it appears to the Society. The Society wants every policy holder to receive benefits with a value of, at least, his asset share. The GAR policy holders, however, regard a practice that awards them less by way of final bonus than is awarded to other policy holders as being unfair. They are contractually entitled to take a GAR based annuity. Their exercise of a contractual right ought not, they submit, prejudice the amount of final bonus allotted to them.
67. Mr Hyman's complaint is not quite the same as that which I have described. When his five policies reached maturity he did not elect to take GAR based annuities. He elected, instead, to take his benefits in fund form and obtain an annuity at current rates with another assurance company. So he received, and took to the other assurance company, a final bonus at the same rate as that allotted to non GAR policy holders. Mr Hyman's complaint is that the qualifying sentence in the declarations of final bonus purported to deprive him of the right to choose to take a GAR based annuity plus the final bonus increasing that annuity. He complains that he was deprived of an option which he ought to have had.
68. Mr Hyman's particular complaint, which is probably shared by a number of other GAR policy holders who elected to take their benefits in fund form, does not raise any different question to that which is raised by the general complaint of GAR policy holders. The question is whether the Board is entitled to deprive GAR policy holders who elect to take GAR based annuities of all or part of the final bonuses to which they would become entitled if they did not so elect. Another way of putting the same question is to ask whether the Board can make the entitlement to a final bonus conditional, in whole or in part, on the GAR policy holder renouncing his GAR based annuity. As Mr Grabiner Q.C., counsel for the Society, put it, "£Y if you take a guaranteed annuity; £X if you take in fund form".
69. The Society's 1992 and 1993 bonus declarations did not make any distinction between final bonuses awarded to policy holders without GARs and those awarded to policy holders with GARs. The 1994 bonus declaration was the first to do so.
70. The general form of the 1994 declaration was the same as that of its predecessors. A surplus of £323.3m was identified. The total declared bonus was £317.5m, leaving a surplus of £5.8 million to be carried forward. Annual bonuses were declared at a rate of £4 per cent per annum.
71. Under paragraph B7 final bonuses 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, were declared. But paragraph B7 ended with the following sentence:-

"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".

72. Whether this mechanism works in order to reduce the final bonus rate to be taken by GAR policy holders who opt to take GAR based annuities is a question which has been debated by counsel. Mr Sumption argues it does not. The intention, however, is clear enough. The intention is to reduce the final bonus taken by the GAR policy holder so that the value of the GAR based annuity he takes is no greater than the value of the annuity he would have taken if his policy had not had GAR provisions. It may be, of course, that the value of the annuity taken by a GAR policy holder is, without any final bonus, greater than the value of the annuity he would have taken if his policy had not had GAR provisions. In that case the policy holder will retain his guaranteed benefits but will receive no final bonus at all. The premise of all this is that the benefits, including final bonus, the policy holder receives should be benefits with a value equal to his notional asset share.
73. The final bonus declarations in 1995, 1996, 1997 and 1998 were qualified by the inclusion of a sentence in the same terms as that which qualified the 1994 final bonus declaration.
74. The 1999 bonus declaration, however, made by the Board on 24 February 1999, used a different form of words in dealing with final bonuses. The difference was attributable, apparently, to the arguments and contentions being advanced by a number of GAR policy holders in protest at the Board's policy. The new form of words 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".

75. The intention of this new form of words, like that of its predecessor in the 1994 to 1998 declarations, was to make clear that the final bonus to be received by a GAR policy holder would be the amount, if any, necessary to bring the value of the benefits taken by the policy holder (excluding any final bonus) up to the value of the benefits (including the final bonus) that the policy holder would have taken if the policy had not been a GAR policy. I am unable to discern any difference between the result produced by the previous wording and the result produced by the new wording. Counsel have not submitted that there is any difference in result. I think - tentatively - that the new wording was intended to make more difficult the contention that the final bonus taken by a GAR policy holder who took his benefits in fund form was a Related Bonus as defined.
76. The Society's solution to the problem posed by GARs higher than current annuity rates was a solution applied also, although with less attendant controversy, to cases of guaranteed investment returns. Different generations of with-profits policies issued between 1957 and 1988 incorporated different guaranteed investment returns. The variation was from 2.5 per cent per annum to 3.5 per cent per annum. The Directors set final bonus rates so as to take into account variations in guaranteed investment returns and so as, where appropriate, to grant policy holders with higher guaranteed investment returns to correspondingly lower final bonuses. The Directors' policy became controversial when applied to the problem presented by GARs in excess of current annuity rates. It was not, however, conceptually speaking, a new policy.

PRE and Representations made by the Society to GAR policy holders regarding the final bonus

77. The relevance of these representations is two fold. First, they are relevant to "policy holders' reasonable expectations" (PRE). Second, they lie at the root of the sense of grievance felt by many individual policy holders about the Society's final bonus policy. PRE figured much less prominently in the submissions put before me by Mr Sumption than it had seemed from the contents of the evidence filed on behalf of Mr Hyman would be the case. It is nonetheless a matter which I must take into account in considering the manner in which the Directors exercised their discretionary powers in respect of final bonuses.
78. PRE has been the subject of debate in the actuarial profession but has no statutory definition. The expression was first used in a statutory context in the Insurance Companies Amendment Act 1973 which gave powers to the Secretary of State to intervene in the affairs of an assurance company on various grounds. One ground was that the company might be unable to meet its liabilities or "the reasonable expectations of policy holders ..." (see sections 12 and 21 of the 1973 Act).
79. The statutory successors to these provisions are section 37 and 45 of the Insurance Companies Act 1982.
80. These provisions recognise that policy holders may have a reasonable expectation of benefits over and above their contractually guaranteed benefits. One of the functions of Actuaries appointed to advise assurance companies is, according to the practice standards issued by the Faculty and Institute of Actuaries, to ensure, so far as possible, that the long term business of assurance companies is conducted with regard to PRE.
81. A Working Party chaired by Mr Brindley, who gave expert evidence on behalf of Mr Hyman, examined the concept and implications of PRE and reported to the Institute in June 1993. The Report pointed out 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".

82. I have great sympathy for those commentators who have found PRE to be an elusive and difficult concept. I am not in the least surprised that the Institute of Actuaries set up a Working Party to examine and report on PRE. I would, for my part, be prepared to accept the Working Party's conclusions set out above.
83. The expert witnesses were in agreement that factors that might shape PRE would include:-

(a) the terms of the contract between policy holders and the Society;

(b) statements made to the policy holders by the Society;

(c) past practice of the Society; and

(d) practice in the industry.

84. Mr Hyman, supported by Mr Brindley, has contended that the Society's GAR policy holders had a reasonable expectation that they would receive the same proportionate final bonus irrespective of the form in which they took their pension benefits. Mr Shelley, (the Society's expert actuary), Mr Headdon (the Society's Appointed Actuary) and Mr Nash disagreed. So let me examine some of the documents and statements placed by the Society before its GAR policy holders.

1. Bonus Illustrations

From time to time the Society provided its policy holders with illustrations of the benefits they would, on maturity, become entitled to if annual bonuses and final bonuses continued to be declared at the current rates.

For example:-

(1) An illustration sent, I think (the date is obscured on my copy) in 1980, showed:-

(i) "Basic benefits plus declared bonuses - £682.39".

(ii) "Benefits if current bonus rates continue up to the pension date but excluding any terminal bonus - £2178.45".

(iii) "Benefits if in addition terminal bonus at the current rate applies at the pension date - £2396.28.

The illustration then said that:-

"The policy annuity value equivalent to the total annuity of £2396.28 p.a. is £23,612.83 ...".

and showed, first, the annuity at GAR that the £23,612.83 would provide and, second, the annuity at current rates that the £23,612.83 would provide. The latter annuity was, since current annuity rates were much higher than the GARs, much larger than the former. The Notes to the illustration warned that current annuity rates might fluctuate over the years.

The importance of the illustration is that it shows annuity figures, both at GARs and at current rates, based on a fund that included the terminal bonus.

(2) An illustration sent in December 1983 showed:-

(i) a "total projected fund" based on the stated assumption that "current bonus rates continue up to the pension date" and that "terminal bonus [i.e final bonus] at the current rate applies at the pension date";

(ii) a "projected annuity" based, first, on the application of GARs and, second, on the application of current annuity rates to the total projected fund.

The notes to the illustration include a warning that "future bonuses depend on future profits and cannot be guaranteed", and that "the current annuity rates used in the illustration may not apply on the pension date".

(3) Another example is a 1986 illustration. The structure is much the same as the 1983 illustration. It identifies a "projected fund" based on guaranteed benefits increased by future bonuses and indicates the amount of annuity that the projected fund would produce (a) if GARs were applied and (b) if annuity rates consistent with a return of 10 per cent p.a. were applied. The same warnings were given as had been given in the 1982 illustration. . It was expressly stated that "The projected figures ... are given for illustration only and no guarantee is implied".

It may be noted that no express reference at all was made in the 1986 illustration to final, or terminal, bonus. But all these illustrations have the feature that the annuity figures shown are based on a fund that includes all bonuses.

By way of contrast, illustrations sent in October 1998 are based, not on the policy holder's fund, but on the annuity which the policy holder will receive. The amount of the annuity is £1099.92. A "guaranteed rates illustration" shows that a fund of "£40,033.48 (consisting of £20,867.67 guaranteed fund and £19,165.81 non-guaranteed final bonus)" would produce that annuity.

A "current rates illustration" shows that a fund of "£46,503.59 (consisting of £20,867.67 guaranteed fund and £25,635.92 non-guaranteed final bonus)" would produce that annuity. So the Society's intention to provide a final bonus of £25,635.92 if the policy holder took his benefits in fund form but a final bonus of only £19,165.81 if he took his GAR based annuity is made explicit.

2. The With-Profits Guide

In 1990 the Society introduced a With-Profits Guide which was sent, on request only, to policy holders. Section C of the Guide was headed "factors influencing bonus rates". The text said this about final bonuses:-

"A final share of profits is also allotted at the point the benefits become contractually payable. The rates of bonus used to allocate a final share of profits are determined by the Directors from time to time acting on the advice of the Actuary".

and that:-

"The Society's approach means that each policy holder's benefits should reflect the earnings on the assets during his or her membership of the fund ...".

In Section F, headed "Recent bonus policy " the text said this:-

"The Society's bonus system aims to pass on ... the full investment return on the fund, together with any other profits (or losses) made in the running of the business. The intention is that earnings should not be held back from current policy holders to benefit future policy holders.

A part of the return is passed on in the form of declared reversionary bonus which, once allocated, becomes part of the guaranteed benefits under the policy. In recent years, all income and a proportion of capital appreciation have been passed on as declared reversionary bonus.

The remainder of the return is passed on in the form of final bonus to those policy holders leaving the fund ...".

3. Bonus Notices

Each year the Society sent a Bonus Notice to its policy holders. The document set out the bonuses declared for that year. Until the March 1996 Bonus Notice none of these Notices made any reference to final bonuses or drew attention to the Society's practice of reducing the final bonus payable to GAR policy holders who took GAR based annuities. The first Bonus Notice to do so was the March 1996 Notice. Note (2) to the Notice said this:-

"The total fund values include amounts of final bonus which are not guaranteed and may vary. In addition, where the policy provides a guarantee of terms on which annuity benefits can be secured, the final bonus then payable will take account of the cost of providing that guarantee. The fund available at retirement may therefore be less than the total shown, but would not be less than the guaranteed value".

4. Bonus Leaflets

The Society sent out to its policy holders, on request only, leaflets describing its bonus policy. The leaflet for 1980 said, under the heading "Terminal Bonus", that "A terminal bonus may also be payable under with profits policies". The 1986 leaflet contained the same statement. The 1987 leaflet adopted the expression "final bonus", and said that "A [final] bonus may also be payable under with-profits polices when benefits under the policy become payable". The leaflet gave examples of how the benefits obtained under a policy might increase over the years, but warned that "The projected figures are for illustrative purposes and there is no element of guarantee implied". The 1989 leaflet referred to final bonuses in these terms:-

"Final bonuses are also determined and applied retrospectively. The final bonus is calculated so as to top up the growth arising from the policy guarantees and the declared bonus rate for the year to the full overall rate of return announced for the year. Final bonuses do not add a guaranteed element to the contract, and the final bonus element of a policy can be varied up or down in future".

In October 1998, after the present dispute had arisen, the Society issued a leaflet drafted specifically with GAR policy holders in mind. It said this about final bonuses:-

"Generally a final bonus is payable to lift the guaranteed benefits and declared bonuses to the appropriate `asset share' but there will be circumstances where the `asset share' has already been given or exceeded through the addition of annual declared bonuses or the operation of guarantees. In those circumstances no final bonus would be payable and there would be no question of reducing policies' values to the lower `asset share'".

The documents I have referred to are, I think, fairly representative of the documents sent from time to time by the Society to GAR policy holders.

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.

Claims

85. Paragraph 3.2 of the Third Schedule to the 1979 policy required the policy holder to choose the Selected Pension Age by completing and signing an application in a form prescribed by the Society. Paragraph 1.1 of the Fourth Schedule required the policy holder at the same time to elect by written notice in a form prescribed by the Society whether to take a GAR based annuity or to take benefits in fund form. The Society's Claim Form serves both purposes as well as putting the Society on notice that the payment of benefits under the policy is due to commence.
86. An example of the Society's Claim Form, which I understand to be typical, is among the documents in evidence. Section B enables the policy holder to indicate the mix of available benefits that he wants to take and to specify the Selected Pension Date. Section D headed "Declaration" must be signed by the policy holder. It contains a number of paragraphs. Paragraph (i) enables the policy holder to elect to take benefits in fund form. Paragraphs (ii) and (iii) are in these terms:-

"(ii) The payment of benefits which I have selected shall discharge all liabilities and obligations of the Society under the above-mentioned policy(ies).

(iii) The above election shall be irrevocable".

These paragraphs, therefore, effect the renunciation by the policy holder of his GAR based annuity, assuming he has elected to take benefits in fund form.

87. Having set out the background to the allotment by the Society of final bonuses to GAR policy holders, I must now consider the objections, articulated by Mr Sumption, to the Society's policy and practice in that regard. Mr Sumption posed this question: Is the Society entitled to take into account, in fixing a final bonus, the form in which the policy holder elects to take his benefits under the contract? He submitted that the answer must be `No', first because the Society, in taking into account the form of the benefits elected to be taken, was acting in breach of contract, and second because the Society was, in doing so, improperly exercising its discretion.

Breach of Contract

88. Mr Sumption based his breach of contract argument on the proposition that before a policy holder can be required to renounce his GAR based annuity, or any part of it, he is contractually entitled to know the amount of the GAR based annuity that he is renouncing. The amount of the GAR based annuity is the sum of the Annuity, as defined, and any Related Bonuses. Under paragraph 1.2 of the Third Schedule "the Annuity increased by Related Bonuses" is payable from the Selected Pension Date. A final bonus becomes part of the Related Bonuses, as defined. The policy holder cannot be required to decide whether to renounce until the final bonus has been allotted and the additional annuity it produces has been ascertained. The Directors' practice, pre the 1999 Bonus Declaration, was to declare a final bonus for all policy holders and then to purport to reduce it for those policy holders who elected to take a GAR based annuity. This practice is inconsistent with a policy holder's contractual right to know the amount of his Related Bonuses, including a final bonus, not later than the date on which he must decide whether or not to renounce.
89. This argument was well constructed but, as it seems to me, is wholly dependant on the proposition that it is not contractually open to the Society to allot a conditional final bonus.
90. The effect of the Society's policy and practice was, and is, to allot final bonuses to GAR policy holders on a conditional basis: £X final bonus if a GAR based annuity is taken; £Y final bonus if benefits in fund form are taken. With a conditional allotment of that character, there is no problem in the policy holder knowing, at the time he is called upon to decide whether or not to renounce, the amount and value of the benefits to be renounced. If he takes the GAR based annuity, he must forgo the £Y final bonus. If he renounces the GAR based annuity, he is renouncing also the £X final bonus but is obtaining, as part of his benefits in fund form, the £Y final bonus. There is no uncertainty that might, if it were present, be used as a stepping stone to a conclusion of contractual invalidity.
91. In my judgment, the short point on which the contractual issue turns, is whether the contract between policy holder and Society permits an allotment of final bonus to be conditional. My short answer is that there is nothing in the contract to prevent it. The definition in the first Schedule of "Related Bonuses" refers to "such amounts as shall under the rules and regulations of the Society have been allotted ..." etc. The "rules and regulations" must mean the Articles. There is nothing else the expression can mean. Article 65 permits the Directors to apportion the total declared bonus among the participating policy holders "on such principles and by such methods as they may from time to time determine". These are words which allow a very wide choice of action, well wide enough, in my judgment, to justify an apportionment expressed to be conditional on the form of benefits taken by a policy holder.
92. For these reasons I can see nothing contractually improper in the allotment of final bonuses on the conditional footing adopted by the Society in the 1994 to 1998 bonus declarations, or in the 1999 bonus declaration.
93. Mr Grabiner 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 Mr Grabiner 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.

Discretion

94. There is no dispute as to the legal principles applicable to the question whether the Society's Directors, in taking decisions as to the final bonus, if any, to be paid to GAR policy holders, have been exercising their discretion in a legally permissible manner. It is accepted that, under Article 65, the Directors had a very wide discretion. It is accepted that in order to attack the exercise of the discretion it must be shown that they took into account irrelevant, improper or irrational factors or failed to take into account factors that they should have taken into account or reached a decision that reasonable directors properly directing themselves could not have reached (Edge -v- Pensions Ombudsman [1998] Ch. 512).
95. In Scott -v- National Trust [1998] 2 All ER 705, Robert Walker J. had to consider the role of legitimate expectation in an attack on the National Trust's decision not to renew licences permitting stag hunting over its land in Devon and Somerset. He said that he was "inclined to think that legitimate expectation may have some part to play in trust law as well as in judicial review cases" (p. 718g). In cases such as the present I, too, am inclined to think that PRE has some part to play. PRE, is, in my opinion, something that directors should take into account in deciding what bonus policy to adopt. But this conclusion, of itself, solves nothing. It simply gives rise to another question. What is the PRE that the directors should take into account? It cannot be the reasonable expectations of any individual policy holder. It can only be the collective reasonable expectations of the policy holders as a class. What must be looked for, in my opinion, is an objectively ascertained, reasonable expectation of the policy holders.
96. It is, in my view, fair to conclude that the communications received by GAR policy holders from the Society over the period up to 1994 and, perhaps, for a while thereafter, and the Society's practice regarding final bonuses up to 1994, did produce in GAR policy holders a reasonable expectation that the final bonus declared for all policy holders would be added to the previously guaranteed fund in order to produce the fund to which GARs would be applied or, at the election of the policy holder, taken in fund form. I do not, on the other hand, think that the communications and previous practice provided the basis for any reasonable expectation that a GAR policy holder who elected to take his benefits in fund form would be entitled to take a fund equal to the value at current rates of the GAR based annuity that he could have elected to take. Nor, in my view, did policyholders have a reasonable expectation that the same rate of final bonus would be applied to all policy holders. As I have noted, a variable final bonus had for some time been used in order to cater for variations in guaranteed investments returns.
97. However, a reasonable expectation does not become a contractual right. PRE was no more than one of the factors to be taken into account by the Directors. Its effective weight in the balance would depend upon all the other relevant factors taken into account. And the balance was, and is, one for the Directors, not the court, to strike.
98. It is clear, in my judgment, that the downward movement of current annuity rates from 1993, briefly checked in 1994, was a factor that the Directors, advised by the Actuary, were entitled to take into account in deciding on the manner in which the total declared bonus should be apportioned among policy holders. The Directors' intention was always an intention to use final bonus so as to enable each policy holder to receive benefits with a value that equated to the policy holder's notional asset share. Once a situation had been reached in which GARs exceeded current annuity rates and, therefore, in which a GAR based annuity would have a value, and a cost to the Society, in excess of the amount of the policy holder's asset share, the Directors were, in the exercise of their discretion, entitled to apply a solution which involved reducing the final bonus taken by those who took GAR based annuities. And it cannot, in my judgment, realistically be suggested that in taking the decision the Directors did not take account of what their previous practice had been. They knew what their previous practice had been. 1994 did represent a change. It is true that the Directors did not do much, until 1996, or perhaps even 1998, to communicate to GAR policy holders that the change was being made and the reasons for the change. But it cannot, in my judgment, reasonably be inferred that the Directors did not take into account that they were making a change. Paragraphs 70 and 71 of Mr Nash's first affidavit and paragraphs 9 to 11 of his second affidavit show that the Directors did take into account the aspects of PRE to which I have referred.
99. In a very recent case, Piglowska -v- Piglowski reported in The Times of 25 June 1999, and now in [1999] 1 WLR 1360, Lord Hoffmann commented that:-

"an appellate court should resist the temptation to subvert the principle that they should not substitute their own discretion for that of the judge by a narrow textual analysis which enables them to claim that he misdirected himself".

The same warning is, to my mind, relevant to a submission that the Directors failed to take into account that the introduction in the 1994 Bonus Declaration of the qualifying sentence regarding final bonuses would fail to give effect to PRE built up by the Society's previous practice. I am not satisfied that the Society failed, when exercising its discretion regarding final bonus over the period since 1994, to take into account PRE.

100. Mr Sumption submitted, and I would accept, that policy holders are entitled to expect that, when exercising their discretion as to final bonus, the Directors will take into account, and act consistently with, the contractual rights of the policy holders. I have already given my reasons for concluding that the Society's decisions regarding final bonus were not in breach of any contractual rights of the policy holders. There were, however, some specific points made by Mr Sumption in support of his argument that the directors, in exercising their discretion, failed to take into account GAR policy holders' contractual rights. He said that policy holders had a contractual right to share in the profits of the Society and that the final bonus was a tool for giving effect to that right. I agree. He said that a policy holder's asset share represented the policy holder's notional share in the profits of the Society. I agree. He said that the final bonus was calculated so as to provide each policy holder with the policy holder's asset share. I agree. He submitted that the Society's decision to reduce the final bonus of a policy holder who took his benefits in GAR based annuity form was a decision which deprived the policy holder of some part of his asset share and was, therefore, irrational and inconsistent with the object the Society purported to be trying to achieve. This final step in the argument is, in my opinion, a non sequitur. A policy holder's asset share is, and remains, a notional sum. It is not a sum of capital that the policy holder is entitled to be paid. It is a yardstick by which to measure the value of the benefits the policy holder receives from the Society. A policy holder who receives an annuity of £500 per annum receives a benefit worth, say £X. Another policy holder who receives an annuity of £600 per annum receives a benefit worth £X plus £Y, £Y being the value of an annuity of £100 p.a. If both policy holders have the same asset share, the amount of the final bonus necessary to bring each policy holder up to the asset share yardstick will be £Y more in the case of the first policy holder than in the case of the second. The second policy holder is not being deprived of any part of his asset share. He is being allotted a lesser final bonus because a lesser final bonus is all that is needed to bring the value of the benefits he receives up to his asset share. I reject the argument that the Society's policy involves depriving policy holders of part of their asset share.
101. Mr Sumption pointed out, correctly, that the Society's contractual obligation to provide GAR policy holders with GAR based annuities was the reason for reducing the final bonus of those who elected to take GAR based annuities. This, he submitted was not fair. The Society ought to have asked "What is the notional share in the with-profits fund that the policy holder is entitled to?". Instead they had asked "What is the share that should be attributed to the policy holder in order to avoid the cost of the contractual GAR commitment?".
102. I do not accept that there is any necessary inconsistency between these two questions. The "cost of the contractual GAR commitment" is the same as the current value of the GAR based annuity. The current value of the GAR based annuity is a measure of the benefits funded by the Society's assets that the policy holder receives. The amount, if any, of the top-up can be calculated accordingly. Mr Sumption pointed out, again correctly, that the Society's final bonus policy did not aim to bring policy holders' guaranteed funds up to notional asset share. What it did aim to do was to bring the value of the benefits they received up to notional asset share.
103. It would have been open to the Directors, if they had wanted to do so, to have adopted a quite different final bonus policy. They could have ignored the value of the benefits receivable by the GAR policy holder and, instead, have concentrated on the policy holder's guaranteed fund. They could have awarded as a final bonus a sum sufficient to bring the guaranteed fund up to the level of the policy holder's notional asset share. If they had done so, the policy holder would have become entitled to a GAR based annuity of the amount attributable under Table B to a capital sum equal to the notional asset share. The value of the annuity taken by the policy holder would, if GARs exceeded current rates, necessarily exceed the notional asset share. It would, in my opinion, have been open to the Directors, exercising their Article 65 discretion, to have allotted final bonus on that basis. But they were not contractually obliged to do so and their decision to allot final bonus on a different basis, a basis that used asset share as a yardstick for the value of benefits taken rather than as a yardstick for the capital sum by reference to which the amount of the annuity taken was calculated, was, in my judgment, a decision well within their discretion.
104. I can see no basis on which the manner in which the Directors exercised their Article 65 discretion can be categorised as irrational. I can see no irrelevant factors that they took into account or any relevant factors that they should have taken but failed to take into account.
105. I would give an affirmative answer to the question expressed in the first paragraph of this judgment and, in these circumstances, I propose to make the declarations set out in paragraphs 1 and 2 of the Originating Summons.