High Court refuses to approve Prudential's annuity transfer
The High Court has refused to sanction the transfer of £11.2 billion worth of annuities from the Prudential Assurance Company (PAC) to Rothesay Life. Prior to the judgment, many viewed the court approval as a rubber stamping exercise not least because a number of hurdles had already been cleared.
An Independent Expert recognised by the regulators confirmed that the statutory tests were met and both the Prudential Regulation Authority and the Financial Conduct Authority had "blessed" the transfer (by not objecting). However Mr Justice Snowden found that the court's discretion gave him greater latitude, in particular to take into account non-financial factors (if his discretion mirrored that of the regulators and the expert, what purpose did the court serve?)
PAC wished to reduce the solvency capital requirement of its shareholder-backed business to facilitate the proposed demerger of the Prudential group into two separate parts. To achieve this, it entered into a reinsurance agreement with Rothesey Life for around 400,000 annuity policies in 2018 with the aim of obtaining the court's approval to their subsequent transfer under Part VII of the Financial Services and Markets Act 2000 (referred to as "the Scheme"), although (perhaps crucially) the commercial agreement was not conditional on the court ultimately approving the transfer.
The Scheme did not propose any changes to the policies being transferred and, in accordance with the legal requirements, reports were obtained from an independent expert who concluded that the transfer would have no material adverse effect on the security of benefits or the reasonable benefit expectations of policyholders.
However Mr Justice Snowden refused to sanction the Scheme, on the grounds that:
- Although Rothesay Life currently has solvency capital requirement metrics at least equal to PAC's, "it does not have the same capital management policies or the backing of a large group with the resources and a reputational imperative to support a company that carries its business name should the need arise". If support was needed, policyholders having to rely on "an uncertain capital raising exercise from the investors in Rothesey or the markets more generally, is a material disadvantage"
- The policyholders chose PAC to provide their annuities on the basis of its age, reputation and the financial support it would be likely to receive from the wider Prudential group, and it was reasonable for them to have assumed that PAC would not seek to transfer their policies to another provider
- PAC's need to release regulatory capital to support its proposed demerger was achieved by the reinsurance agreement (which continues even if the Scheme is not sanctioned). The judge did not consider the additional costs that PAC and Rothesey Life will incur as a result of the judgment to be significant when set against the "fundamental change in status and material disadvantage that they seek to impose" on the policyholders.
The judge stressed that the transfer of bulk annuity business was legally possible under Part VII but the court has a wider discretion than the regulators who were constrained by "objective financial related factors". In exercising its discretion the court was required to take into account wider factors including what individual policy holders would have taken into account when placing their business.
The judge found that it was highly likely that the age and reputation of the Prudential brand was a material factor on which the policy holders relied in making their decision and therefore it was a relevant factor for the court to take into account when deciding whether to sanction the Scheme. Comparing the age and reputation of PAC with Rothesay Life and balancing the impact on all parties, the judge did not approve the Scheme.
However, this may not be the end of the story as we understand that PAC and Rothesay Life have been granted leave to appeal to the Court of Appeal.
The case concerned policyholders who had placed business with PAC on an individual business rather than as part of a bulk buy-out transaction by trustees. However, irrespective of whether any appeal is successful, insurers may ask trustees, when purchasing buy-out policies, to explicitly acknowledge that the contract can be transferred to another insurance company subject to the statutory safeguards. There could be merit in communicating this possibility to members.
The judge often referred to the "reasonable expectation of policyholders" and he found it to be entirely reasonable for the policyholders to assume that their annuities would remain with PAC because:
- the policyholders were not able to transfer to another insurer
- PAC's own "mission statement" on its website and communications suggested that annuities would be paid by PAC for life, and
- the key information supplied to policyholders when they decided to place business with PAC was entirely silent on whether PAC could transfer the policy.
A timely reminder never to assume how the court will exercise its discretion!