UK Court Refuses To Sanction Transfer Of Annuity Portfolio - Re Prudential Assurance Company

On 16 August 2019, the UK High Court declined to sanction the transfer of a portfolio of annuity policies from Prudential Assurance Company Ltd (Prudential) to Rothesay Life PLC (Rothesay) under Part VII of the Financial Services and Markets Act 2000. In an unexpected decision, the Judge exercised his discretion to refuse to sanction the transfer principally based on the annuity holders' argument that they had reasonably assumed that Prudential would provide their annuities for the rest of their lives. The implications of this decision could be far reaching and affect future proposed transfers of long term life insurance portfolios.

Background

In March 2018, the parties entered into a reinsurance agreement under which Rothesay agreed to reinsure GBP12.0 billion of Prudential's annuity liabilities, with the intention that the policies would later transfer to Rothesay by way of Part VII Transfer. The parties sought the Court's sanction for the Part VII Transfer of approximately 370,000 annuity policies from Prudential to Rothesay (the Scheme). The Scheme was motivated by Prudential's desire to reduce its regulatory capital requirements in connection with a planned demerger of the Prudential group.

The independent expert's report reached a number of conclusions supportive of the Part VII transfer, including that:

both companies have a very high level of security for policyholders (based on SCR coverage ratios); the protection afforded by both companies' capital management policies was broadly comparable; the fact policyholders would be transferring from Prudential (a multi-line insurer with a wide variety of life and pensions business) to Rothesay (a mono-line insurer which was only exposed to annuity policies) would not have a material effect on the security of transferring policyholders' benefits; Rothesay, like Prudential, would continue to be subject to FCA and PRA regulation; and Rothesay would use the same outsourced service provider so there was no reason to believe that service levels experienced by policyholders would change. The PRA and the FCA also reported to the Court that they had no objections to the Scheme.

However, a number of the transferring policyholders opposed the Scheme, largely on the basis that they had specifically selected Prudential as their annuity provider for life and their policies should not, therefore, be transferred against their will to a smaller insurer with a very different history and reputation, simply...