The Prudential Assurance Company Ltd
| Jurisdiction | England & Wales |
| Judge | Mr Justice Snowden,Mr Justice Snowden: |
| Judgment Date | 16 August 2019 |
| Neutral Citation | [2019] EWHC 2245 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: CR-2018-003686 |
| Date | 16 August 2019 |
[2019] EWHC 2245 (Ch)
Mr Justice Snowden
Case No: CR-2018-003686
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND & WALES
COMPANIES COURT (CHD)
Royal Courts of Justice
Rolls Building, Fetter Lane,
London, EC4A 1NL
Martin Moore QC (instructed by Allen & Overy LLP) for the Applicants
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
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.
Introduction
The Prudential Assurance Company Limited (“PAC”) and Rothesay Life Plc (“Rothesay”) seek the court's sanction pursuant to Part VII of the Financial Services and Markets Act 2000 (“Part VII” and “ FSMA”) for a scheme (the “Scheme”) providing for the transfer to Rothesay of about 370,000 annuity policies written by PAC. If sanctioned, the Scheme will mean that the policyholders will no longer be entitled to look to PAC to pay or service their annuities, but will have sole recourse in that respect against Rothesay.
The Scheme has been motivated by PAC's desire to reduce its regulatory capital requirements in connection with a planned demerger of the group headed by Prudential plc (“the Prudential group”) of which PAC is a significant member. The Scheme makes no changes to the terms of the policies to be transferred and offers no benefits to the transferring policyholders in connection with the enforced change of their annuity provider from PAC to Rothesay.
The Scheme has been the subject of detailed consideration by an independent expert as required by Part VII, who has concluded that the Scheme will not materially affect the interests or reasonable expectations of policyholders. The Scheme and the report of the independent expert have also been considered by the Prudential Regulation Authority (“PRA”) and the Financial Conduct Authority (“FCA”), who do not object to the Scheme.
The Scheme is, however, strenuously opposed by a number of annuitants who appeared at the hearing before me. The policyholders contend that they selected PAC as their annuity provider based upon its long history as a leading UK insurance company, its established reputation for prudence, its size, and the fact that it is an integral member of the larger Prudential group which could be relied upon to support PAC if the need ever arose. They also thought that in the same way as they would be unable to transfer or encash their policies, that PAC would likewise be committed to make payments to them for the remainder of their lives, and they told me that they trusted PAC to honour that commitment.
The opponents of the Scheme contend that their choice of PAC as the provider of their annuities for the remainder of their lives ought not to be negated by the compulsory transfer of their policies to Rothesay, which, in contrast to PAC, is a relatively recent entrant to the annuity market, is smaller in size and with a less diverse business, does not have an established reputation for prudence, and does not form part of a larger group of companies which could be relied upon to stand behind it if the need arose.
In support of the Scheme, PAC and Rothesay contend that there is no reason in principle why transfers of annuities should be treated in any different way from transfers of any other insurance business under Part VII. They contend that the cases on Part VII demonstrate that transfer schemes can be proposed by insurance companies for purely commercial reasons, and that the court should exercise its discretion to sanction such a scheme if satisfied that it will not have a material adverse effect upon (i) the security of payment of benefits to policyholders and (ii) the service standards and governance applicable to the relevant policies.
In relation to security of benefits, PAC and Rothesay contend that the only reliable basis for the court's decision are objective factors, in particular those derived from the requirements of the recast EU Directive on the taking up and pursuit of the business of insurance and reinsurance (2009/138/EC) (“Solvency II”), which measure the financial strength of the companies and form an important basis for regulatory oversight by the PRA. The applicant companies contend that such Solvency II metrics demonstrate that annuitants will have at least as much financial security with Rothesay as they would with PAC, and that factors such as longevity and reputation are much less reliable indicators of whether an insurance company will be able to honour its commitments in the future. The applicants also submit that the ultimate shareholders of Rothesay are substantial entities who have made an investment in it for the long-term, and that in the extremely unlikely event that Rothesay were to be at risk of failure in the future, there is no reason to suppose that such shareholders would be any less willing and able to support it than the other members of the Prudential group would be willing to support PAC.
So far as service standards are concerned, the applicants rely on the fact that PAC has already contracted out the administration of the relevant annuities to a third-party administrator. The Scheme provides for the same administrator to be employed for between one and two years before Rothesay has an opportunity to consider whether to continue to use it or engage another service provider. The applicants say that there is thus no reason to suppose that there will be any material change in service standards for policyholders.
Background to the Scheme
PAC and the Prudential group
PAC is an English company which is wholly owned by M&G Prudential Limited (“M&G Prudential”), which is itself wholly owned by Prudential plc, which is listed in London, New York, Hong Kong and Singapore. The Prudential group is, by any standards, very large indeed. According to its 2018 consolidated financial statements, the group had assets of over £508 billion, and a group capital surplus for Solvency II purposes of £17.2 billion.
PAC has been in existence since 1848, when it was established as The Prudential Mutual Assurance Investment and Loan Association. It became a limited company in 1881, and has, over the years, established a strong reputation in the UK for providing long-term insurance. PAC's business consists of a with-profits fund and a shareholder-backed business, and it is authorised by the PRA and regulated in the UK by the PRA and the FCA.
The reputation of PAC and the Prudential group, built up organically over many years, is encapsulated in the following description on the current website of Prudential plc. Although none of the opposing policyholders suggested that they had seen this particular description, it neatly reflects their submissions as to why they chose PAC as the provider for their annuities,
“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)
Although the business of PAC and the Prudential group is venerable, its structure is changing. The international business of the group essentially breaks down into two segments: the UK and Europe on the one hand; and Asia, the US and Africa on the other. The Prudential group sees the market in the UK and Europe as a mature market for its savings and retirement business, whereas Asia (in particular) is a rapidly growing market which offers potential for growth and attractive returns.
These considerations led to an announcement by Prudential plc on 14 March 2018 that it was intended to divide the Prudential group into two separate parts (“the Demerger”). The Demerger will ultimately involve the demerger of M&G Prudential from the Prudential group, so that Prudential plc and M&G Prudential will each be an independent listed company heading a separate group of subsidiary companies. M&G Prudential (and its subsidiaries including PAC) will focus on business in the market in UK and Europe, and Prudential plc will focus on business in Asia, the US and Africa. Each of M&G Prudential and Prudential plc will, however, have its headquarters and a premium listing in London.
The sale of annuities and the Reinsurance Agreement
As part of the preparation for the Demerger and the separation of business along the geographical lines which I have described, it was necessary for PAC to transfer two Hong Kong subsidiaries to a subsidiary of Prudential plc. One of those subsidiaries made a substantial contribution of excess (surplus) capital to PAC's Solvency II capital position.
To address the consequences for Solvency II purposes of the transfer of the Hong Kong subsidiaries to Prudential plc, and hence to enable the Demerger to proceed, it was necessary for PAC to reduce the solvency capital requirement of its shareholder-backed business. To achieve this, immediately prior to announcing the Demerger plan on 14 March 2018, PAC entered into two agreements with Rothesay: a business transfer agreement (the “Business Transfer Agreement”) and a collateralised reinsurance agreement (the “Reinsurance Agreement”). A transitional services agreement (the “Transitional Services...
To continue reading
Request your trial
-
The Equitable Life Assurance Society
...Decision 56 The first objection arises out of the recent decision of Snowden J in Prudential Assurance Company Limited [2019] EWHC 2245 (Ch) in which he declined to sanction an insurance business transfer scheme under Part VII of FSMA from Prudential Assurance Company Limited to Rothesay L......
-
Legal and General Assurance Society Ltd
...most substantial of the policyholders' objections echoed those made in Re Prudential Assurance Company Limited; Re Rothesay Life PLC [2019] EWHC 2245 (Ch) “ Prudential/ Rothesay” which caused Snowden J to refuse to sanction the Part VII scheme in that case. These include the concerns about......
-
The Prudential Assurance Company Ltd
...the reasons he gave in a reserved judgment handed down on 16 August 2019 ( In Re The Prudential Assurance Company Limited and another [2019] EWHC 2245 (Ch)), the application for sanction was refused. PAC and Rothesay appealed, and, on 2 December 2020, the Court of Appeal (Sir Geoffrey Vos ......
-
Rothesay Life Plc v Monument Life Insurance Dac
...respects, some of the policyholders drew attention to my decision in re Prudential Assurance Company Limited and Rothesay Life plc [2019] EWHC 2245 (Ch) (“ Prudential”) and suggested that similar factors were present in this case to those that caused me to refuse to sanction the transfer o......
-
UK High Court Declines to Sanction Transfer of Annuity Portfolio
...the scheme was subject to the court’s sanction and thus was not guaranteed to be approved. In re Prudential Assurance Co. Ltd. [2019] EWHC (Ch) 2245 Alex Silverman function JDS_LoadEvent(func) { var existingOnLoad = window.onload; if (typeof window.onload != 'function') { window.onload = fu......