The Equitable Life Assurance Society
| Jurisdiction | England & Wales |
| Judge | Mr Justice Zacaroli |
| Judgment Date | 04 December 2019 |
| Neutral Citation | [2019] EWHC 3336 (Ch) |
| Date | 04 December 2019 |
| Docket Number | Case No: CR-2019-004715 & CR-2019-004716 |
| Court | Chancery Division |
[2019] EWHC 3336 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMPANIES COURT (ChD)
Royal Courts of Justice
Rolls Building
Mr Justice Zacaroli
Case No: CR-2019-004715 & CR-2019-004716
and
and
Martin Moore QC and Stephen Horan (instructed by Freshfields Bruckhaus Deringer LLP) for The Equitable Life Assurance Society and Utmost Life and Pensions Limited (instructed by Linklaters LLP)
Tom Weitzman QC for the Prudential Regulation Authority
Theodor Van Sante for the Financial Conduct Authority
Mark Beddow, Dean Buckner, Christopher Gibbons, Michael Johnson and Gareth Jones, current or former policyholders of The Equitable Life Assurance Society appeared in person
Hearing dates: 22 and 25 November 2019
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
The Equitable Life Assurance Society (“Equitable”) seeks the court's sanction, pursuant to Part 26 of the Companies Act 2006 (“CA 2006”) of a scheme of arrangement. In addition, Equitable and Utmost Life and Pensions Limited (“Utmost”) seek the court's sanction, pursuant to Part VII of the Financial Services and Markets Act 2000 (“ FSMA”) of a scheme providing for the transfer of most of Equitable's business to Utmost.
I will refer to the scheme of arrangement under CA 2006 as the “Scheme” and I will refer to the transfer scheme under FSMA as the “Transfer”. The Scheme and the Transfer are inter-conditional, with the Scheme intended to take effect immediately prior to the Transfer.
The background and essential features of the Scheme and the Transfer were succinctly described by Norris J in paragraphs 1 to 13 of his judgment dated 23 July 2019 following the hearing to obtain directions in relation to the Scheme and the Transfer (the “Convening Hearing”) [2019] EWHC 2345 (Ch). For convenience I set out those paragraphs in full:
“1. Equitable Life Assurance Society (“Equitable”) was the first mutual assurance society, being founded in 1762. Its excess assets, unused in its business, belong to its members. The members are, under its constitution, the policyholders who have effected life assurance and pension contracts which permit participation in profits (“with profits policyholders”).
2. Equitable does conduct some “non-profit business” by way of re-insurance. Equitable also does offer life assurance and pension contracts that are “unit linked”, where the sum payable is directly linked to the quoted price of units in specific in-house funds with identified investment objectives. By contrast, with-profits policyholders are entitled to a sum which is indirectly linked to the return made by Equitable upon its general funds. Such part of the current investment returns as the directors think prudent are added to the policy value on an annual basis; and when the policy matures, such part of Equitable's own funds (which include accumulated capital profits) as the directors think prudent, are then added to the sum otherwise payable.
3. “Unit-linked” policies are incompatible with guaranteed returns; the holders of “unit-linked” policies are fully exposed to the benefits of all the rewards of growth and to the risks of all falls in value. The vast majority of “with-profits policyholders”, however, have guaranteed returns: whatever the actual investment performance, the return on their policy will be at a specified or calculable level based on the premiums that they have paid. These maybe called “guaranteed investment returns” or “GIRs”. Sometimes the GIRs are explicitly referred to in the policy as such; but sometimes they are implicit in the policy terms, having regard to the sum that is payable under the policy.
4. The guaranteed investment returns range from 0 per cent where (whatever the performance of Equitable's investments) the policy value cannot fall below the premiums paid, to a positive return such that (whatever the performance of Equitable's investments) at the point the claim is paid the premiums paid must show a growth of 2.5 per cent or 3.5 per cent per annum. Because this investment risk is borne by Equitable, Equitable must carry capital to cover even the remotest risk of the guarantee being called on.
5. This GIR represents a floor. If Equitable's performance exceeds the guaranteed minimum, then the “with-profits” policyholder is entitled to his or her actual share of the With-Profits Fund that is distributed rateably between policyholders irrespective of whether or not they have a guaranteed return, and irrespective of the level of the guarantee. I should emphasise in this summary that the interest of a policyholder in the assets of Equitable is through his policy and not through some independent membership right.
6. As is well known, since 2000 Equitable has been closed to new business and is in solvent run-off. At present there are, firstly, some 180,000 policies issued directly to individuals or to an individual. They are held by some 164,000 policyholders. Secondly, there are some 2,600 policies issued to trustees of group pension schemes for the benefit of some 143,000 pension scheme members. Thirdly, there are some 2,100 individual pension plans issued to employers for the benefit of an employee but where there has been no assignment to an individual employee. There is some £6 billion under management in relation to these policies.
7. There are also, I should mention, some niche products. These arise out of marketing campaigns conducted between 1993 and 2000. First, there are some German policies. These consist partly of UK-style German “with-profits” policies which participate in profits and losses of Equitable in the same way as the English “with-profits” policies. There are 319 of these policies. They have a value of about £6 million. Alongside these there are some German-style German “with-profits” policies which participate in profits in accordance with an agreed business plan with the German financial regulator and are effectively funded by a covered by a fund. They total some £6 million. I will refer to these as “the German policies”.
8. Secondly, there were some long-term insurance contracts, now denominated in Euros, governed by Irish law, which were written from a distribution office in Dublin. There are some 2,400 of these Irish policies. These had a “best estimate” liability of about £44 million as at 31 March 2019.
9. I mention the German policies because they fall outside the arrangements with which I am concerned. I mention the Irish policies because they form part of the first element of the arrangements with which I am concerned (namely the scheme) but will not form part of the second element (namely the transfer).
10. A fundamental issue of principle is raised by Equitable's business model being conducted in solvent run-off. It is perfectly encapsulated in the report of the Independent Expert for the policyholders, Mr Jones. He explains:
“In order to ensure continuing solvency, Equitable must hold back assets in order to meets its statutory capital requirements. Since the Society is in run-off, the requirement to hold these assets back means that it will become difficult to distribute assets fairly and quickly amongst the with-profits policyholders over time. In addition, as the number of policies reduce, it becomes difficult to reduce expenses in line with how policies run off, and expenses per policy could rise.”
11. He expands on this at paragraph 1.4.2 of his report. He points out that the Equitable's overall strategy for its run-off is (i) to distribute all the assets amongst “with-profits” policyholders as fairly and as soon as possible; (ii) carefully to manage solvency to enable capital distribution and only then to seek to maximize returns; (iii) to provide a best “value for money” cost base. This strategy must be implemented in the context of the necessity to hold back of assets in order to meet statutory requirements. Most pension policies have the flexibility to claim payment (and invoke their GIRs) at any time after a certain date; this means that the Society is required to hold capital against the risk that policyholders defer taking their investments when long-term interest rates are low, thereby increasing the risk that the investment guarantees reduce solvency levels. Long-term interest rates remain low, and so Equitable is required to hold back capital to support the higher solvency requirements. The requirement to hold back these assets means that it will become difficult to distribute assets fairly and quickly amongst the “with-profit” policyholders over time.
12. Each year, the Equitable board decides whether an adjustment in capital distribution is warranted. At present a capital enhancement factor (“CEF”) of 35 per cent is added to the policy value. This is set at a level such that there is an acceptably low risk of having to cut a future CEF in order to protect the interests of policyholders taking benefit for the longer term. But, as Mr Jones points out, judgement is required to avoid the development of any “tontine”; that is to say, the circumstance in which an unduly large proportion of the assets remains to be distributed at a time when disproportionately few policyholders remain to share in that distribution.
13. To address the potential “tontine” effect engendered by the requirement to hold very high levels of capital occasioned by the GIRs Equitable has for some time been preparing a restructuring package, first announced...
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