I am delighted with the result which was a resounding victory by five to nil

Stockbroker, David Hyman

The five Law Lords were unanimous in their ruling.

After the judgement, semi-retired stockbroker David Hyman, whose claim provided the basis for the case, said: "I am delighted with the result which was a resounding victory.

"The Law Lords decided that Equitable Life acted illegally because they did not have the absolute discretion which the High Court suggested they might have had."

Takeover fears

Analysts had previously warned that the 238-year-old society could face a takeover bid if the appeal failed.

The decision could also have a knock-on effect on other life insurers which offered GARs and which could be facing difficulty meeting the terms of the policies.

The court battle focused on GAR policies sold by Equitable Life, which allowed policyholders to opt for minimum pension pay-outs and land a bonus when their policy matured.

About 90,000 Equitable Life policyholders out of a total of 500,000 have GAR policies.

They bought products with a guaranteed minimum annuity - typically �12,500 a year for �100,000 in pension savings.

The guarantees were made by many life insurers, but longer life expectancy and lower interest rates mean they are now much more expensive to honour than had been expected.

A shortfall in funding led Equitable to ask the GAR policyholders to accept a cut in their bonuses or give up their right to guaranteed annuity rates.

This led to an outcry among policyholders, who launched the legal action alleging breach of contract and abuse of discretionary powers by the society's board.

Won first round

Equitable Life won the first round of the legal battle in the High Court last September when a judge ruled that the society was acting lawfully in cutting final bonuses to GAR policyholders.

But the Court of Appeal overturned the judgment by two to one, ruling that the society was obliged to pay out the guaranteed rates and bonuses.

The aggrieved policyholders now could enjoy higher retirement incomes after winning the battle.

But the money to pay for that will have to come from somewhere - and Equitable's other customers may find they are left footing the bill.

Equitable was founded in 1762 and is the UK's second-largest life and pensions groups.