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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Prudential Assurance Company Ltd, Re [2019] EWHC 2245 (Ch) (16 August 2019) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2019/2245.html Cite as: [2019] WLR(D) 487, [2020] 1 All ER (Comm) 955, [2020] 2 All ER 393, [2019] Lloyd's Rep IR 660, [2019] EWHC 2245 (Ch) |
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BUSINESS AND PROPERTY COURTS OF ENGLAND & WALES
COMPANIES COURT (CHD)
Rolls Building, Fetter Lane, London, EC4A 1NL |
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B e f o r e :
____________________
IN THE MATTER OF THE PRUDENTIAL ASSURANCE COMPANY LIMITED | ||
AND IN THE MATTER OF ROTHESAY LIFE PLC | ||
AND IN THE MATTER OF PART VII OF THE FINANCIAL SERVICES AND MARKETS ACT 2000 |
____________________
Nehali Shah for the Prudential Regulation Authority
Robert Purves for the Financial Conduct Authority
A number of policyholders appeared in person
Hearing dates: 10, 12, 13 and 20 June 2019
____________________
Crown Copyright ©
MR JUSTICE SNOWDEN:
Introduction
Background to the Scheme
PAC and the Prudential group
"Providing financial security since 1848
Successive generations have looked to Prudential to safeguard their financial security from industrial workers and their families in Victorian Britain to over 26 million customers worldwide today. Our financial strength, heritage, prudence and focus on our customers' long-term needs ensure that people continue to turn to our trusted brands to help them plan for today and tomorrow."
(my emphasis)
The sale of annuities and the Reinsurance Agreement
"In line with this strategy to transition towards a more capital efficient, de-risked business model, M&G Prudential also announces the sale of £12.0 billion of its shareholder annuity portfolio to Rothesay Life. Under the terms of the agreement, M&G Prudential has reinsured £12.0 billion of liabilities to Rothesay Life, which is expected to be followed by a Part VII transfer of the portfolio by the end of 2019. The capital benefit of this transaction will be retained within the Group to support the demerger process."
" Rothesay Life is acquiring a £12 billion annuity portfolio from Prudential, covering c.400,000 policyholders, in the largest transaction of its type in the UK.
- The transaction makes Rothesay Life the UK's largest specialist annuity insurer with over £37 billion of assets under management and over 750,000 lives insured.
Rothesay Life, one of the leading life insurers specialising in providing de-risking solutions to UK defined benefit pension schemes and insurance companies, announces today that it has entered into an agreement to purchase £12 billion of annuities from Prudential plc. The transaction has been structured initially as a reinsurance contract and is expected to lead to a Part VII transfer of the underlying assets and policy liabilities to Rothesay Life subject to regulatory and court approval. Rothesay Life's shareholders have invested additional equity to finance the transaction.
The transaction will result in a significant increase to Rothesay Life's asset base to over £37 billion. Following completion, Rothesay Life will be the largest specialist annuity insurer in the UK."
Rothesay
The Scheme in Outline
Transfers under Part VII of FSMA
"29. There are four layers of protection for policyholders in relation to business transfers. First, there are the regulators who have general supervisory functions. They have involvement in the Part VII process through the appointment of the independent expert and the structure of his report. They have involvement in the production of their own reports. They have the entitlement to appear in this court And the Financial Conduct Authority has an involvement in the communications exercise and the objectives of the Scheme.
30. The second layer is the independent expert who is charged with assessing the application .
31. The third level of protection is the communication programme, including a directions hearing and appropriate waivers which can be obtained for good reason
32. The final layer of protection is the approval of the court, taking account of all the objections which are raised following the communication exercise.
"Notwithstanding that detailed perusal of a proposed Scheme both by an independent expert and by the [regulators] are conditions precedent to the exercise of the court's discretion to sanction it, the discretion remains nonetheless one of real importance, not to be exercised in any sense by way of rubber stamp ."
"The court must consider that, in all the circumstances of the case, it is appropriate to sanction the scheme."
"(1) The 1982 Act confers an absolute discretion on the Court whether or not to sanction a scheme but this is a discretion which must be exercised by giving due recognition to the commercial judgment entrusted by the Company's constitution to its directors.
(2) The Court is concerned whether a policyholder, employee or other interested person or any group of them will be adversely affected by the scheme.
(3) This is primarily a matter of actuarial judgment involving a comparison of the security and reasonable expectations of policyholders without the scheme with what would be the result if the scheme were implemented. For the purpose of this comparison the 1982 Act assigns an important role to the Independent Actuary to whose report the Court will give close attention.
(4) The FSA by reason of its regulatory powers can also be expected to have the necessary material and expertise to express an informed opinion on whether policyholders are likely to be adversely affected. Again the Court will pay close attention to any views expressed by the FSA.
(5) That individual policyholders or groups of policyholders may be adversely affected does not mean that the scheme has to be rejected by the Court. The fundamental question is whether the scheme as a whole is fair as between the interests of the different classes of persons affected.
(6) It is not the function of the Court to produce what, in its view, is the best possible scheme. As between different schemes, all of which the Court may deem fair, it is the company's directors' choice which to pursue.
(7) Under the same principle the details of the scheme are not a matter for the Court provided that the scheme as a whole is found to be fair. Thus the Court will not amend the scheme because it thinks that individual provisions could be improved upon.
(8) It seems to me to follow from the above and in particular paragraphs (2) (3) and (5) that the Court, in arriving at its conclusion, should first determine what the contractual rights and reasonable expectations of policyholders were before the scheme was promulgated and then compare those with the likely result on the rights and expectations of policyholders if the scheme is put into effect."
The Independent Expert
i) the security of benefits;
ii) the profile of risks to which the relevant policies are and will be exposed at PAC and Rothesay; and
iii) the reasonable expectations of policyholders (including in particular the likely effect of the Scheme on the standards of administration, service management, and governance).
Solvency II metrics
PAC's and Rothesay's Solvency II metrics
Capital management policies
Corrective actions and parental support
" no significant financial resources are available to Rothesay from its parent holding company, whereas those potentially available to PAC from its parent, Prudential plc, are significant."
"credible actions that have the potential to be effective in counteracting a deterioration in [Rothesay's] solvency."
"In summary, given that:
- both companies' capital management policies provide a very high level of security for policyholders, even without allowing for management actions;
- both companies actively manage their solvency coverage on a continuous basis, and the capital management policies simply provide a framework within which this management takes place;
- management actions are available to both PAC and Rothesay to mitigate a deterioration in solvency and this reduces even further the likelihood that they will be unable to meet their liabilities; and
- scenarios which could lead to the entire own funds of either company being dissipated are so extreme that any comparison of probabilities is subject to very high degree of uncertainty,
I concluded in my main report that the protection provided by Rothesay's and PACs capital management policies were broadly comparable and I remain of this view."
Size and risk profile
Policyholders' reasonable expectations
"The Transferring Policies are non-profit in-payment annuities, and therefore policyholders' reasonable expectations in respect of their policies are principally that:
- they receive their benefits as guaranteed under the policy, on the dates specified, from the point of purchase;
- the administration, management, and governance of the policies are in line with the contractual terms under the policies; and
- the standards of service received are at least as good as those they currently receive."
Effects of implementation of the Scheme on holders of non-transferring policies
Overall conclusion
"The implementation of the Scheme will not have a material adverse effect on:
- the security of benefits of the policyholders of PAC and Rothesay, including the Transferring Policyholders;
- the reasonable benefit expectations of the policyholders of PAC and Rothesay, including the Transferring Policyholders; or
- the service standards and governance applicable to the PAC and Rothesay policies, including the Transferring Policies."
The position of the FCA and PRA
Policyholders' objections to the Scheme
Notice of the Scheme
The independence of Mr. Dumbreck
Records and data
Irrelevant issues
Selection of Transferring Policies and opt outs
"The Transferring Business was selected in order to achieve a target level of capital release to support the proposed demerger of M&G Prudential. Various practical constraints were taken into account in the original selection process, including the need to avoid separating policies covered by a single reinsurance arrangement.
In order to finalise the selection of transferring policyholders under the Scheme, a number of modifications have been made to the original selection, to ensure that the composition of the Transferring Business meets the commercial requirements agreed between PAC and Rothesay. In addition, modifications have been made to ensure that the transferring business can legally and effectively be transferred by means of the Part VII transfer.
There is no single selection approach that can be considered fairer to policyholders than any other, and so choosing the Transferring Policies on the basis of commercial, practical and legal considerations is in my view reasonable."
"I have reviewed the approach used by PAC to determine which portfolios of annuities should be covered by the Reinsurance Agreement and the proposed Part VII transfer. I am satisfied that there was no "cherry picking" aimed at skewing the re-insured or transferring business in terms of the age or health profile of the annuitants, or at selecting annuities that were particularly onerous from a capital perspective. In particular, I note that more than half of the liabilities included in the Reinsurance Agreement were already subject to longevity reinsurance with third-party reinsurers, which means that their capital requirements are likely to be lower than average."
The main objections to the Scheme
Can annuity policies be transferred under Part VII?
"You have used your benefits under the Scheme to buy a lifetime annuity with Prudential."
(my emphasis)
"Its aims
- To pay you a regular guaranteed income for the rest of your life.
Your commitment.
- You buy your guaranteed pension annuity with money from your pension scheme. Once you have done this you cannot move the money back again.
- If you're entitled to take tax-free cash from your pension scheme you must take it when you buy your annuity. You cannot do it afterwards.
- Once your annuity starts, you are committed to receiving an income from Prudential for the rest of your life. You will not be able to exchange your annuity for a different annuity with us, or anyone else.
- The only money you can take out of your annuity is your retirement income."
(my emphasis)
"Its aims
- To pay you a regular income for the rest of your life
Your commitments
- To give us some or all of your pension pot in return for a regular income for the rest of your life.
- To take any tax-free cash that you're entitled to (and want) when you buy your annuity. You can't take it later.
- To choose the options you want to include in your annuity when you buy it. You can't choose or change these options later.
- You can't transfer/switch your annuity to another provider or cash it in."
(my emphasis)
"Once your annuity starts, you are committed to receiving an income from Prudential for the rest of your life."
But this statement is headed "Your Commitment" and deals with the commitment of the policyholder to receive an income from PAC for the rest of his or her life. It is also followed by a sentence that explains that the policyholder will not be able to exchange their annuity for a different one with another provider.
General approach to the exercise of discretion under section 111(3) FSMA
"Any scheme of this nature is instigated by the commercial parties concerned, not by the policyholders. Parliament has seen fit to introduce legislation providing for business transfers, one statutory result of which is that the contractual obligations of the transferor are extinguished, with corresponding obligations being imposed on the transferee. Sometimes different policyholders are treated in different ways, in which case a balance has to be struck between their interests, and in all cases the policyholders must be treated properly. The four layers of protection which I have mentioned are there to ensure that policyholders are treated properly. But policyholders are not given a veto over what the commercial parties wish to do. Instead the appropriate balance has to be struck between the interests of the policyholders on the one hand and the commercial parties on the other hand, just as it has to be struck between different groups of policyholders amongst themselves."
(my emphasis)
The nature of annuity policies
The reasonable expectations or assumptions of policyholders
Current SCR metrics
Capital management, corrective actions and likely support from other sources
"no reason to believe that such support would not be forthcoming in respect of the future development of the business or that such investors would not be motivated to protect their existing, significant, financial investment in [Rothesay] should it require further capital in the future."
" any comfort that may be drawn from the potential for capital support from Prudential plc must be considered in the context of the likelihood of it being called upon, which is remote. Therefore it should not be considered material in comparison to the comfort that can be drawn from the capital resources of, and the strength of the regulatory capital requirements and capital management policies applicable to, PAC and Rothesay."
"Under the Solvency II regulatory framework, solo insurers such as [PAC and Rothesay] are required to hold sufficient capital and liquid resources to meet their liabilities as they fall due, independently of resources which may be present in other group entities. Insurers are further required to hold a capital requirement (i.e. the SCR) corresponding to a value-at-risk of basic own funds subject to a confidence level of 99.5% over one year (in more broad brush terms, this can be thought of as sufficient capital to absorb the impact of a 1-in-200 year stress event within the next twelve months). Given that the Scheme is not expected to threaten either [PAC or Rothesay]'s ability to maintain their respective SCRs, the PRA's view is that there is no material impact upon policyholders' reasonable expectations as to their security of benefits as a result of the transfer.
With respect to [Rothesay], given the strength of its balance sheet as at the date of figures quoted in the Scheme Report (and there being nothing to suggest any imminent deterioration of its balance sheet such that group support would be required) the availability of possible group support was not considered necessary for the purposes of the Scheme."
"Accordingly, in approaching this application I shall be concerned to see whether there is any material adverse effect on the position of policyholders in any of the three groups to which I have referred. The word "material" is important. The court is not concerned to address theoretical risks. It might be said that a transfer of business from a very large company to a large company involved a reduction in the cover available to the transferring policyholders, but assuming that the transferee is in a financially strong position it matters not that the level of cover in the transferee is less than that in the transferor. What the court is concerned to address is the prospect of real, as opposed to fanciful, risks to the position of policyholders."
Based upon this dictum, Mr. Moore QC submitted that the risk of failure of either PAC or Rothesay was fanciful, and hence questions of the relative lack of availability of parental support for Rothesay were not material.
The age and reputation of the transferor and transferee
"114. [A representative of an opposing policyholder] emphasises the unfairness, as she sees it, of compelling her elderly father to transfer to a new company from the venerable [Scottish Equitable] which he deliberately chose. He wants to be given a choice, in particular to transfer to [Legal & General] rather than to [Rothesay].
115. There are two points to make. Firstly, the venerable position of [Scottish Equitable] is not, I am afraid, of itself a relevant factor. Even venerable institutions can fail as those who work in this area of the law are well aware. In any case, [Scottish Equitable] is part of a group, about the age and venerability of which I have no idea. So the point, if it had any force, is not made good.
116. Secondly, a newish body, that is to say, [Rothesay], is not to be regarded as an unsuitable provider simply because it is new, otherwise we could never have new entrants into the market for transfers. The question is not its age but its financial strength, record and expectations. As to this, the independent expert and the regulators are clearly satisfied about its financial strength, there is no criticism made of its record, and I have no reason to think that it will not be properly and prudently managed into the future."
"[In accordance with its statutory objectives] in broad terms the PRA assesses whether the insurers will have appropriate financial resources; appropriate resources to measure and manage risk; be fit and proper to conduct their business prudently; and be capable of being effectively supervised by the PRA.
The PRA considers each insurance Part VII transfer on its own merits, in accordance with [such principles] whether in relation to a general or long-term insurance business transfer, to include (in the latter case) the transfer of annuity business. It takes a risk-based approach to supervision and assessment of the impact of the transfer and takes account of the nature of the business being transferred. The long-term nature of annuity business is reflected in the regulatory regime, including (but not limited to) the amount of capital insurers writing annuity business are expected to hold under applicable regulatory requirements, which will vary between the different types of business being carried on.
In evaluating a scheme, the PRA does not place weight on the fact that one firm may have a longer history or perceived better reputation than another. Neither does the PRA's approach to supervision and risk assessment place a capital value on a firm's venerability, reputation or policyholders' perception of the firm's strength and firms are not permitted to claim an explicit capital benefit for these intangible concepts."
"Providing financial security since 1848 Our financial strength, heritage, prudence and focus on our customers' long-term needs ensure that people continue to turn to our trusted brands to help them plan for today and tomorrow."
The Reinsurance Agreement
"...the economic risk and reward has already passed to Rothesay and the purpose of the Scheme is to give legal form to approximately 90% of that economic reality since it seeks to transfer about 90% of the business reinsured under the arrangements."
"If the Scheme were not to be sanctioned, the reinsurance arrangements are expected to endure in their entirety, not least because to terminate them would involve the loss of the capital benefits PAC gained by reason of them."
Mr. Moore QC also confirmed that, except perhaps in relation to its timing, the Demerger was not in any way dependent upon the Scheme being sanctioned.
Service standards and governance
Conclusions