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Court approves Prudential-Rothesay annuity transfer

Simon Perry Simon Perry

On 24 November 2021 the High Court approved the proposed transfer of c. 350k annuity policies from Prudential to Rothesay. Simon Perry examines the final judgement and the impact on Part VII transfers.

This was the second time this case was brought to the court, following the previous refusal and subsequent successful appeal. The original refusal of the Prudential Assurance Company (Prudential) to Rothesay transfer was unprecedented and sparked conversations about the predictability of future Part VII Transfer Scheme applications. These applications are costly and time-consuming for insurers. If the original decision had been upheld, it may have triggered significant changes for the UK insurance market and the occurrence of future applications.

The judgement has significant implications for insurers. Here, we discuss the background of this case, the final judgement and some interesting considerations raised in the hearing surrounding the application of the Matching Adjustment (MA) and the right of the policyholder to be heard.

Court refusal and successful appeal

There were two key reasons for the original refusal. The first centred around the differences in solvency capital management practices and the lower amount of non-contractual support available to Rothesay compared to Prudential, highlighting possible lower security of benefits for policyholders.

Secondly, many policyholders had opposed the transfer, stating they had chosen Prudential due to the age, venerability, and strong reputation of the company – they were not made aware of the possibility that their policy may be transferred in the future. Due to the nature of annuity contracts, policyholders would also not have the option to change provider if they wished to do so.

The judgement was successfully appealed on 2 December 2020 where it was concluded that the court generally should not depart from recommendations of the Independent Expert (IE) and non-objections from the regulator unless it had “significant and appropriate reasons"1 to do so, which it did not believe was the case in this transfer. The Court of Appeal explicitly stated that the judge had “failed to accord adequate weight to the expert’s conclusion”2, explaining that the likelihood of either company requiring non-contractual support (which is not guaranteed in any case) was remote, and should therefore not have been a consideration in whether to approve this transfer.

Additionally, the transfer should only be refused if found to have a material adverse impact on policyholders. Therefore, no consideration should have been given to the fact that policyholders may have specifically chosen Prudential due to subjective factors such as age, venerability and reputation.

Transfer approved

The hearing took place over 8-10 November 2021, with the final judgement being handed down on 24 November 2021. The final judgement cited the following reasons for the approval:

There were no significant reasons raised for departing from the recommendations of the IE and the non-objection of the regulators.

Rothesay has a stronger financial position than Prudential in terms of Solvency Coverage Ratio. Rothesay has a ratio of 204%, which already allowed for the financial impact of the annuity transfer through a reinsurance arrangement. This led the judge to conclude it is “most improbable that it will have a material adverse effect”3.

There's no reason to believe the service standards or security of benefits will be affected by this transfer. Therefore, it could not be concluded that this transfer would have a material, adverse effect on policyholders.

The appeal judgement also provided clarity around the way in which the court may apply discretion, highlighting that the process is not simply a “rubber stamp” and the discretion applied by the court is “unfettered and genuine”4.

Application of the Matching Adjustment

A focus of the hearing was the existence and appropriateness of the MA under Solvency II regulations. This conversation was sparked from a note in the IE ‘s report stating that without the existence of the MA, Rothesay’s Solvency Coverage Ratio would drop to 17% while Prudential’s would only fall to 92%. This, combined with comment from industry commentators with and interest in the MA, led to some policyholders feeling concerned about the safety of their benefits, particularly as the PRA is currently reviewing the way that the MA is used by insurers. However, the IE concluded the following in his report:

“Whatever the arguments for and against its use, the Matching Adjustment is permitted under the Solvency II regulations (which still apply to UK insurers under UK law) and the PRA has granted approval for its use to a significant number of UK life insurers. While it is possible that the rules governing the Matching Adjustment may change for UK insurers, it is in my view unlikely that the Matching Adjustment will be discontinued, or its benefits very significantly constrained.”5

It was also noted by the judge that the hearing was not a “suitable vehicle for reaching a view on the question of whether matching adjustment is flawed as a matter of principle, or even as to the way in which it has been applied in this or in any other case.”6

This echoed the previous discussion of the MA in the Equitable Life case, with Justice Trower stating he believed it was appropriate to take the same approach as taken in the Equitable Life decision and citing the following quote from the judgement:

“In considering whether Utmost satisfies the solvency criteria laid down by Solvency II, I must apply the regulatory regime as it exists, and it is not for me to go behind the requirements embodied in legislation.”7

Who can submit expert evidence?

The reports submitted on the application of the MA were written by Dr Dean Buckner, who is not a policyholder of either company, and were instead submitted on his behalf by a policyholder. This led to some discussion on whether the reports should be allowed to be heard given that policyholders do not have permission from the court to submit expert evidence. Instead, the role of 'expert' in Part VII applications sits with the IE.

The case of Eagle Star was referenced in this discussion with the following quote: “It seems to me that there must be strong grounds for supposing that the independent expert has mistaken his function or made an error before a challenge to the report can be mounted.”8

In the Prudential-Rothesay judgement, although Buckner technically had no right to be heard, Justice Trower exercised discretion to allow the submissions. This decision was due to two key factors:

1 He believed it would be better to hear the arguments first-hand, rather than from a policyholder who had adopted these views.

2 He wanted to ensure that policyholders who were worried about the issues raised by Buckner were not left with any concern that he was not heard by the court. 

The allowance of these submissions presents an interesting question on whether this may set a precedent for future Part VII applications.

The future of Part VII transfers

Following this approval, the sale of this book of annuities will go through on 15 December 2021.The court proceedings for policyholders in Jersey and Guernsey were held on the 26 and 29 November, respectively.

This approval will give additional comfort to the industry by providing an additional level of clarity and predictability for future Part VII transfers. However, it remains true that the initial objection has highlighted that the court’s role is not simply a rubber-stamp, and its decision may not necessarily concur with the opinions presented by the regulators or the independent expert.

The case also raised some interesting questions on the application of the MA under Solvency II, which is clearly very topical in the context of the wider review by the PRA.

Firms considering the use of these transfer should ensure they fully understand the implications of this decision.

To understand the impact on Part VII transfers or other aspects of restructuring in the Life Insurance Market, contact Simon Perry.

1 Appeal judgement paragraph 82

2 Appeal judgement paragraph 132

3 Approval judgement paragraph 58

4 Appeal judgement paragraph 78

5 Approval judgement paragraph 84

6 Approval judgement paragraph 82

7 Equitable Life judgement paragraph 83

8 Eagle Star judgement paragraph 13


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