Scottish Equitable Plc and Another
| Jurisdiction | England & Wales |
| Judge | Mr Justice Warren |
| Judgment Date | 15 June 2017 |
| Neutral Citation | [2017] EWHC 1439 (Ch) |
| Docket Number | Case No: CR-2016-007725 |
| Court | Chancery Division |
| Date | 15 June 2017 |
and
[2017] EWHC 1439 (Ch)
Mr Justice Warren
Case No: CR-2016-007725
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
CHANCERY DIVISION
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Hearing dates: 15 th June 2017
Thursday, 15 th June 2017
(10.34 am)
Ruling by Mr Justice Warren
Introduction:
This is an application by Part 8 claim, issued on 17th February 2017 by Scottish Equitable Plc, which I will call SE, and Rothesay Life Plc, which I will call RL, for an order under Section 111 of the Financial Services and Markets Act 2000, the FSMA, sanctioning a business transfer scheme, the Scheme, of the transfer to RL of a book of annuity policies of SE and for ancillary orders under Section 112.
I approved the Scheme on Tuesday of this week. I deliver this judgment today, Thursday, to give my reasons for that decision.
Mr Martin Moore QC appears for SE and RL. The regulators, the Prudential Regulation Authority and the Financial Conduct Authority, do not appear but have each filed, as is usual, preliminary and supplemental reports. Neither takes any objection to the Scheme.
I have received oral representations from two individuals. First, Mr Bethell-Jones, a policyholder who objects to the Scheme, and secondly, Miss Hutchins, who speaks on behalf her elderly father, another policyholder who objects to the Scheme. Miss Hutchins has sent me, a further written submission since the hearing to which Mr Moore has responded. Mr Bethell-Jones has also added some material in response to Mr Moore's response.
I have had my attention drawn to the objections of a number of other policyholders, including a Mr Bamford, who do not appear but who have asked that their objections be brought to the attention of the court. I had read all of the relevant correspondence and took account of the objections in reaching my conclusions.
Also Mr Crowfoot, Mr Newell and Mr Henderson have made submissions in writing, which I think will be covered in what I say about the other objections, although I will mention Mr Henderson expressly.
The claim is supported by the evidence of Mr Stephen McGee, who has filed three witness statements, the chief financial officer of SE, and of Antigone Loudiadis, who has filed two witness statements, she being the chief executive officer of RL.
The independent expert appointed for the purposes of this claim is Mr Nick Dumbreck FIA of Millimans. He is, I am satisfied, eminently qualified to act as an independent expert with a wealth of experience of schemes of this nature. He is fully aware of the importance of his role and of his responsibilities as a truly independent expert. He has produced a report dated 23rd February 2017, and a supplemental report dated 2nd June 2017 to update the former as near to the hearing as may be sensible.
I have read these two reports with care. I have also read with care two reports from SE's chief actuary and two reports from SE's with profits actuary and two reports from the chief actuary to RL.
The two regulators have each produced two reports, which again I have read, and neither now takes any objection to the Scheme, certain concerns initially made by the FCA having been addressed by SE and RL.
The Background:
The background is not contentious and I take much of it from Mr Moore's helpful skeleton argument.
SE is a wholly owned subsidiary of Aegon NV. SE's main focus is on its non-profit business. As at 31st December 2015, it comprised some 2.5 million policies with gross reserves of £51 billion. It also maintains a much smaller with profits fund which is closed to new business and which, as at 31st December 2015, comprised about 114,000 policies with gross reserves of £5.3 billion.
As at 30th June 2016, its solvency capital requirement, SCR, cover was 142 per cent as is shown in paragraph 4.30 of the independent expert's first report. The SCR cover has been updated in the supplementary report which shows that as at 31st December 2016, SE's SCR cover was 151 per cent.
Aegon concluded that writing annuities was not part of the group's core business and, as a result, SE determined to exit the annuity business in order to focus on its workplace and retail platform and protection business. SE considered that the best option for this annuity business was to identify suitable and specialist annuity providers in the market. Following a competitive auction process, which included bids for the whole and part of the book, this led to the identification of RL and Legal & General Assurance Society, LGAS, for two books of annuities. SE identified RL as what it considers to be a suitable provider, having both the scale and experience to take on the book representing the transferring business.
That book comprises approximately 187,000 contracts, of which 183,000 are annuities and payments to individuals. The reserves are approximately £6.4 billion. The great majority of the policies proposed to be transferred, about 173,000, are allocated to SE's non-profit sub-fund and the balance is allocated to the with-profits sub-fund. The latter reflect policies where the annuities have commenced payment and no longer share in profits or losses.
At 30th September 2016, RL had 51 bulk purchase annuities where a Scheme trustee purchased for the benefit of its members a policy to enable it to meet its obligations to the Scheme members whose number in aggregate comprised many hundreds of thousands of individuals and approximately 63,000 individual policies holders with individual contracts.
As at 30th June 2016, its assets were £23.8 billion and liabilities £21.1 billion and its SCR cover was 162 per cent as shown by paragraph 4.80 of the independent expert's report. The SCR cover has been updated in the supplementary report which shows that at 31st December 2016, RL's SCR cover was 177 per cent. In addition, the board of RL approved a voluntary capital policy which required RL to maintain a level of capital between 130 per cent and 150 per cent of its SCR, which target it currently exceeds.
SE and RL entered into a series of annuity reinsurance agreements and a business transfer agreement on 11th April 2016, as amended and supplemented (I will refer to them as the reinsurance agreements) which has delineated the annuities to be transferred, some of the objecting policyholders having something to say about this process to which I will return.
Under the reinsurance agreements, assets to a value of about £7 billion to back the liabilities have been passed from SE to RL that are held in separate collateral accounts with security arrangements, such that the assets would be available to SE to cover termination amounts due from RL to SE in relation to reinsurance arrangements. It can be seen therefore that the economic risk and reward relating to the transferring business has already transferred to RL and the Scheme will align the legal position to that economic reality provided that RL remains solvent. SE remains of course liable to policyholders until the Scheme has taken effect. Once it does take effect, the collateral account and associated security arrangements will fall away and RL will take full control of the assets.
At the time of entering into the reinsurance agreements, the parties entered into a supplementary policies option deed which provided an option for SE to add additional policies to the existing reinsurance arrangements subject to a premium being agreed. This option was exercised on 16th March 2017 which resulted in an additional 3,100 policies having been added to the reinsurance agreements which will form part of the transferring policies under the Scheme.
SE administers and makes payments under the policies that are proposed to be transferred, except for about 5,000-odd which are outsourced. As part of the administration arrangements, SE maintains funding accounts beneficially held in its name with RBS from which to effect payments to policyholders. These were funded by monthly reinsurance advance payments from RL.
On the effective date of the Scheme, which I have approved, the cash equal to be the opening balances on the funding accounts will be transferred under the Scheme from SE to RL. It is intended that the administration of the majority of the transferring policies that are currently undertaken by SE will be outsourced by RL to Capita Employee Benefits Limited and it is intended that the buy-out policies transferring from the with-profits sub-fund will be administered by another provider, JLT, with which RL already has a relationship.
I should mention another scheme Part VII FSMA under which part of the business was transferred from Zurich Assurance Limited to RL. That had not taken place when the independent actuary gave his first report, and he expressed his views on the alternative bases that the ZAL scheme did and did not go through.
There is need to obtain court approval in Jersey and Guernsey to transfer some of the policies which are subject to the jurisdiction of those courts and sanctions hearings are fixed for those later this month. If sanction is not obtained, those policies will continue to be reinsured under the reinsurance agreements until some alternative means of transfer have been identified.
The Scheme:
The Scheme itself is not particularly complex. Its final form takes account of the concerns of the regulators. In outline its structure is as follows: clauses 1 and 2 contain the definitions and introduction. Clause 1 identifies the business and defines the assets and liabilities to be transferred to RL. The conventional concepts of residual assets and residual liabilities are included to deal with cases where there is some difficulty with...
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