Prudential Assurance Company Ltd, Re

Under section 111(3) of the Financial Services and Markets Act 2000, the court must decide whether a scheme is appropriate in all the circumstances. The court’s discretion is not confined to actuarial assessments or regulatory capital metrics, and policyholders have neither a veto nor a presumption in favour of the transfer.

In an annuity transfer, the court may give material weight to the policyholders’ inability to change provider, their reasonable assumption that the original insurer would remain responsible for life, the transferor’s reputation and longevity, and the availability of group support. Commercial benefits to the insurers must be balanced against those interests. The scheme was refused because those disadvantages outweighed the applicants’ commercial interests.

Prudential Assurance Company Limited sought, with Rothesay Life plc, court sanction under Part VII of the Financial Services and Markets Act 2000 for the transfer of about 365,791 annuity policies. The transfer formed part of a wider commercial and capital-management plan connected with the proposed demerger of the Prudential group.

The independent expert concluded that the scheme would not materially adversely affect policyholders’ security of benefits, reasonable benefit expectations, service standards or governance. The PRA and FCA did not object. A number of annuitants opposed the transfer, relying on their choice of Prudential as a lifelong provider and the differences between Prudential and Rothesay. The central issue was whether, despite the expert and regulatory assessments, it was appropriate in all the circumstances to sanction the scheme.

1. Discretion under section 111(3). The court refused to sanction the scheme. The statutory question was whether, in all the circumstances, sanction was appropriate. The court’s discretion was of real importance and was not a rubber stamp for the independent expert or the regulators. Policyholders had no veto, but there was also no presumption in favour of a commercially motivated transfer. The court had to balance policyholders’ interests against those of the transferor and transferee.
2. Relevant factors. Actuarial assessments of security of benefits and service standards deserved considerable weight, but did not exhaust the relevant considerations. The nature of annuities was important: policyholders had invested substantial pension savings, could not normally encash or change provider, and depended on the insurer for income for life. It was reasonable for them to have chosen the original insurer for its age, reputation, financial standing and expected group support, and to have assumed that it would remain responsible for their annuities. Those matters could be considered under section 111(3), although they did not amount to contractual promises preventing a Part VII transfer.
3. Financial security. Comparable SCR coverage ratios did not provide a complete answer. The court had to consider capital-management policies, the likely availability of external support and the consequences of failure over the potentially several-decade duration of the policies. The substantial resources and reputational imperative of the Prudential group offered comfort that was not equivalently available from Rothesay’s shareholders. That difference was material and could not be dismissed as fanciful. The possible availability of FSCS compensation did not cure the disadvantage.
4. Commercial interests. Prudential had already achieved its principal capital-release objective through the reinsurance agreement, which would continue if sanction were refused. The additional costs and lost commercial opportunities relied upon by the applicants were insufficient to outweigh the fundamental change imposed on the annuitants.
5. Annuity policies were capable of transfer under Part VII, and the policy documents did not contain a sufficiently clear contractual promise that Prudential would not seek such a transfer. Nevertheless, the scheme was not appropriate in all the circumstances and sanction was refused.