Insurance giant Equitable Life yesterday sought British High Court approval of its decision to reduce final bonus pay-outs to 100,000 pension policyholders who opted for a guaranteed income on retirement.

The legal dispute between the assurance society - the UK's sixth-largest insurer - and "guaranteed annuity rate" policyholders who stand to receive up to 25 per cent less than expected is seen by some observers as a battle for the very existence of the 237-year-old Equitable Life as a mutual insurer.

At the start of an expected four-day hearing, Vice-Chancellor Sir Richard Scott heard that, because of the fall in interest rates in recent years, guaranteed annuity payments on policies written between the 1950s and 1980s had begun to exceed current market annuity rates.

Mr Anthony Grabiner QC, for Equitable Life, said "some adjustment" had been necessary to make sure the total benefits obtained by persons on a guaranteed annuity rate (GAR) basis were not inconsistent with the principle that all "with profits" policyholders should receive a "fair share from the with profits pot".

If the GAR pensioners succeeded in opposing the adjustment, "every extra pound they become entitled to constitutes a pound less for distribution to nonGAR policyholders", said Mr Grabiner.

Before the case opened, the judge said that, in case he needed to declare an interest, he had checked through the policies he took out when he was called to the Bar, but none was with Equitable Life.

The judge added that he had received letters from two policyholders concerned about the fact that the society was funding both sides of the argument.

Mr Grabiner said the society accepted it would be contractually bound to its policyholders on whatever basis the court determined.

He contended that the society's board had the power, under its articles of association, to decide how much should be paid in terminal bonuses to policyholders who were taking their annuity benefits in guaranteed income form rather than withdrawing the full value of the policy and buying an annuity on the open market.

There were no grounds for attacking the board's decision, he said. It had acted properly, legitimately and in good faith and had exercised its discretion reasonably to ensure that all policyholders received annuities which corresponded to their contributions to the fund.

The hearing was adjourned until today.