Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
MR JUSTICE EVANS-LOMBE
IN THE MATTER OF :
EQUITABLE LIFE ASSURANCE SOCIETY | Applicant |
- and - | |
IN THE MATTER OF CANADA LIFE LIMITED |
Martin Moore QC (instructed by Lovells and Slaughter & May) for the Applicant
Ian Glick QC, Hilary Stonefrost (instructed by The FSA) for the FSA
Dr. Weyer appeared for DAGEV
Mr. Hitman, Mr. Girdley, Mr. Wren, Mr. Horner, Mr. Newman all appeared in person as Objectors
Hearing date: 1st February 2007
Judgment
Mr. Justice Evans-Lombe :
REASONS
Section 111 of the Financial Services and Markets Act 2000 (“the Act”) provides:-
“111. - (1) This section sets out the conditions which must be satisfied before the court may make an order under this section sanctioning an insurance business transfer Scheme or a banking business transfer Scheme.
The court must be satisfied that-
the appropriate certificates have been obtained (as to which see Parts I and II of Schedule 12);
the transferee has the authorisation required (if any) to enable the business, or part, which is to be transferred to be carried on in the place to which it is to be transferred (or will have it before the Scheme takes effect).
The court must consider that, in all the circumstances of the case, it is appropriate to sanction the Scheme.”
Section 105 of the Act provides:-
“105. - (1) A Scheme is an insurance business transfer Scheme if it-
(a) satisfies one of the conditions set out in subsection (2);
(b) results in the business transferred being carried on from an establishment of the transferee in an EEA State; and
(c) is not an excluded Scheme.
(2) The conditions are that-
(a) the whole or part of the business carried on in one or more member States by a UK authorised person who has permission to effect or carry out contracts of insurance (“the authorised person concerned”) is to be transferred to another body (“the transferee”);
(b) …
(c)…”
Section 105 and Section 111 are part of Part VII of the Act which deals with the control of transfers of insurances businesses. On Thursday the 1st February 2007, I had before me an application for a sanction, under section 111, of the Scheme for the transfer of part of the insurance business being conducted by the Equitable Life Assurance Society (“Equitable”) to Canada Life Ltd (“Canada Life”). I will refer to the proposed transfer for which sanction is being sought as “the Scheme”. The part of Equitable’s insurance business intended to be transferred is almost the entirety of its non-profit annuity business. In addition, the Applicants seeks ancillary orders under section 112 of the Act.
Equitable needs no introduction. It was founded in 1762 and incorporated on the 18th August 1892 as an unlimited company without a share capital. It is closed to new business and, as a mutual society, the profits and losses of all types of its business (including non-profit business) is borne by its members who are the with-profits policyholders. As at the 31st December 2005 it had long term assets valued at £15.4Bn of which £5.5Bn was attributable to its non-profit business and £9.8B to its with-profits business. Its with-profit business is sub-divided into ordinary with-profits policyholders and the holders of with-profits annuities in payment (“WPAs”). It has approximately 550,000 policyholders of which 129,456 are the subject of the proposed transfer and are the holders of non-profit annuities in payment (“NPA’s”). These are the NPAs’ existing at the cut-off date provided for under the Scheme. Interim review of Equitable shows an excess of “realistic assets” over liabilities of £786M.
Canada Life is a company incorporated in England which has carried on a predominantly non-profit insurance business in the United Kingdom since 1903. As at the 31st December 2005 it had two small with-profits funds having assets of approximately £580M and a non-profit fund of £11.5Bn. Canada Life’s ultimate parent company is incorporated in Canada. However, because it is “authorised” to carry on insurance business in the United Kingdom by the Financial Services Authority (“the FSA”), it is subject to that authority’s prudential supervision of its business activities and, in particular, its investment policies.
In the course of the hearing I satisfied myself that the Scheme concerned the transfer of insurance business within section 105(2)(a) and that the substantive and procedural requirements prescribed by Part VII of the Act had been complied with. In the result I made an order sanctioning the Scheme but, because of time constraints, indicated that I would give my reasons for doing so in writing later. These are those reasons.
One of the documents circulated to policyholders for the purposes of the Scheme was a “summary of the Scheme and of the independent expert’s report” prepared by Mr John Jenkins, a partner in KPMG LLP, and the duly appointed independent expert under the Scheme. That document summarised the Scheme in these words:-
“It is proposed that most of the non-profit annuity pension business (the “NPA pension business”) of ELAS [Equitable] be transferred to Canada Life Limited [Canada Life]…
Transfer of Equitable Life’s NPA pension business
On the Effective Date, the NPA Pension Business of Equitable Life will be transferred to Canada Life. Under the terms of the Transfer, Equitable Life will retain all liabilities arising from its acts or omissions in relation to the Business which occur on or before the date on which the Transfer becomes effective, including any liability for the mis-selling of any policies included in the Business, for the breach of the terms of any such policies or for tax liabilities (the “Retained Liabilities”). Consistent with that, all claims in respect of the NPA Pension Business in which Equitable Life is the defendant will remain with Equitable Life. The Transfer will however secure the continuation by Canada Life of any legal proceedings in which Equitable Life is the plaintiff, claimant or applicant that relate to rights and obligations in respect of the NPA Pension Business other than with respect to the Retained Liabilities. All claims in respect of the NPA Pension Business arising after the Transfer becomes effective will be dealt with by Canada Life.
Policies included in the NPA Pension Business will (except as set out in the paragraph headed Excluded Policies below) therefore be transferred on the Effective Date to Canada Life, which will become the insurer under those policies in place of Equitable Life. Other than the substitution of Canada Life for Equitable Life as insurer, the terms of the policies to be transferred to Canada Life from Equitable Life under the Scheme will remain the same.”
The “price” payable by Equitable to Canada Life for the assumption by Canada Life of the obligations to holders of transferring NPAs was the transfer to Canada Life of approximately £4.6Bn of assets.
The Independent Expert
The Independent Expert approved by the FSA to report on the Scheme has made a report dated 5th October 2006. He also made a “clarificatory note” dated the 12th January 2007 to deal with the particular position of WPA’s as non-transferring policyholders. The conclusions of Mr Jenkins’ report are set out at paragraph 10 as follows:-
“My conclusions in relation to the transactions and in relation to the effect of the transactions on the various classes of policyholders can be summarised as follows:
1. The effect of the transactions is to remove all the risks (other than potential misselling risks) associated with the Relevant Business [the business being transferred] from the remaining with-profits policyholders within ELAS [Equitable]. This applies both to the basic risks of the Relevant Business, and to the additional effect of those risks bearing upon a with-profits portfolio which will run off more quickly than the Relevant Business.
2. The price which ELAS is paying to CLL [Canada Life] for CLL to assume the risks in relation to the Relevant Business is in my opinion reasonable in absolute terms given the current level of consensus (as evidenced by published valuation bases) in relation to assumed future mortality improvement levels, and moreover has been subject to a competitive tender process.
3. The benefit expectations and the level of benefit security of the remaining ELAS policyholders (after the Relevant Business has been transferred) will not in my opinion be materially diminished as a result of the transactions. The transactions will however have the effect of bringing forward, into the next few years, the need for active consideration by ELAS of the ways of mitigating the emerging diseconomy of scale which ELAS faces as a closed mutual life company.
4. CLL will remain adequately capitalised after the transactions in line with the company's established practice in relation to capital levels. There is thus in my opinion no adverse effect on level of benefit security of the existing non-profit business within CLL.
5. The position of the policyholders within the two small closed to new business with-profits funds within CLL remains in my opinion unaffected by the transactions, both as to benefit expectations and benefit security. The additional risks in relation to taking on the Relevant Business from ELAS fall entirely to CLL shareholders.
6. The transferring policyholders comprising the Relevant Business have benefits which are fixed, either in absolute terms or in relation to published inflation indices. There is thus no change in their benefit expectations. In relation to their benefit security, they are transferring to a company which is adequately capitalised and which has access to additional shareholder capital should the need arise. There is thus in my opinion no adverse effect on their level of benefit security.”
The conclusions of the clarificatory note are to be found in the following quotations from it:-
“As noted above, it is not possible for holders of WPAs to effect individual transfers of their benefits to another insurer. It is theoretically possible that, for whatever reasons, holders of ordinary with-profits policies could elect to surrender or transfer out in large numbers leaving the holders of WPAs as the main or only class of with-profits business. In this scenario, and absent the proposed transfer, the risks relating to the non-profit annuity business would fall even more heavily on the WP As. The proposed transfer particularly removes the risk from the WPAs in this scenario
I am aware that many holders of WPAs feel aggrieved that their policies have not performed as they have hoped for and that initial annuity amounts have been reduced due to reductions in bonus rates, or due to bonuses actually being declared at levels lower than those anticipated by policyholders when they took their policies out. It is not part of my scope to consider these aspects, although I note that any policyholder with a potential mis-selling claim will not be prevented from pursuing such a claim against Equitable Life either before or after the proposed transfer. I am able to confirm that the proposed transfer will not adversely affect the position of the WPAs and, as noted above, the proposed transfer will remove from the WPAs risks which in certain scenarios could bear upon them heavily.”
The FSA
The FSA has been actively consulted in the course of the preparation of the Scheme. As the relevant regulator the FSA has a right to attend at the hearing of the application for sanction in order to make representations. In the result the FSA appeared at the hearing to sanction the Scheme by leading counsel Mr Glick QC. The FSA has given the certificates required of it under the relevant legislation and indicated that it found the Scheme satisfactory.
The Court
I refer back to the provisions of Section 111 of the Act which I have set out above. Having satisfied itself that the prescribed substantive and procedural requirements have been met the Court “must consider that, in all the circumstances of the case, it is appropriate to sanction the Scheme.” The Court therefore has an overriding discretion whether to grant or refuse its sanction.
The leading authority on the function of the Court in these circumstances is the decision of Mr Justice Hoffmann, now Lord Hoffmann, in re London Life Association Ltd an unreported decision decided on 21st February 1989 under the provisions of the Insurance Companies Act 1982 schedule 2C the predecessor of the present legislation. In the second of my judgments in re Axa Equity and Life Assurance Plc [2001] 2 BCLC p 447 at 452 I sought to summarise the relevant passages from Mr Justice Hoffmann’s judgment as follows:-
“(1) The 1982 Act [as does section 111 of the Act] confers an absolute discretion on the Court whether or not to sanction a Scheme but this is a discretion which must be exercised by giving due recognition to the commercial judgment entrusted by the Company’s constitution to its directors.
(2) The Court is concerned whether a policyholder, employee or other interested person or any group of them will be adversely affected by the Scheme.
(3) This is primarily a matter of actuarial judgment involving a comparison of the security and reasonable expectations of policyholders without the Scheme with what would be the result if the Scheme were implemented. For the purpose of this comparison the 1982 Act [and the Act] assigns an important role to the Independent Actuary [now the independent expert] to whose report the Court will give close attention.
(4) The FSA by reason of its regulatory powers can also be expected to have the necessary material and expertise to express an informed opinion on whether policyholders are likely to be adversely affected. Again the Court will pay close attention to any views expressed by the FSA.
(5) That individual policyholders or groups of policyholders may be adversely affected does not mean that the Scheme has to be rejected by the Court. The fundamental question is whether the Scheme as a whole is fair as between the interests of the different classes of persons affected.
(6) It is not the function of the Court to produce what, in its view, is the best possible Scheme. As between different Schemes, all of which the Court may deem fair, it is the Company’s directors’ choice which to pursue.
(7) Under the same principle the details of the Scheme are not a matter for the Court provided that the Scheme as a whole is found to be fair. Thus the Court will not amend the Scheme because it thinks that individual provisions could be improved upon.”
More recently in the judgment of Mr Justice Briggs, in re Pearl Assurance (Unit Linked Pensions) Limited [2006] EWHC 2291 (Ch) quoting Mr Justice Rimer in re Hill Samuel Life Assurance Limited [1998] 3 All ER 176 at 177 commenting on the roles of the Independent Expert and the Court, said:-
“Notwithstanding that detailed perusal of a proposed Scheme both by an independent expert and by the FSA are conditions precedent to the exercise of the court's discretion to sanction it, the discretion remains nonetheless one of real importance, not to be exercised in any sense by way of rubber stamp. The principles to be applied by the court in considering whether to exercise its discretion are well settled. They were first set out by Hoffmann J. (as he then was) in the unreported decision Re: The London Life Association Limited and others on 21st February 1989, albeit then under section 49 of the Insurance Companies Act 1982, and more recently reaffirmed by Evans-Lombe J. in Re: AXA Equity and Law Life Assurance Society plc and another [2001] 2 BCLC 447, in particular at paragraph 6 of his judgment. The relevant principles are concisely summarised in the following passage from the judgment of Mr. Justice Rimer in Re: Hill Samuel Life Assurance Limited [1998] 3 All ER 176, at 177:
“Ultimately what the court is concerned with is whether the Scheme is fair as between different classes of affected persons, and in arriving at a conclusion as to whether or not it is, amongst the most important material before the court is material which the Act requires to be before it, namely the report of an independent actuary as to his opinion on the Scheme.””
Section 110 of the Act permits various parties to be heard on the application for court approval of an insurance business transfer Scheme. The parties entitled to be heard are the FSA and “any person (including an employee of the authorised person concerned or the transferee) who alleges he would be adversely affected by the carrying out of the Scheme.”
A total of six individuals attended the court and made oral submissions including a Dr Weyer a German qualified advocate who made submissions on behalf of German policyholders of Equitable; virtually all of whom were WPAs. My attention was also drawn to the correspondence between Equitable and 38 other objectors who did not attend the hearing or make oral submissions. A number of the grounds of opposition to the Scheme were common to several of those persons who only wrote in and those who attended and made oral submissions. In these reasons I have sought to group the grounds of opposition dealing with each group together under general headings. I hope it will not be taken as any disrespect for the oral (and written) submissions of those who attended the hearing if I deal with their complaints under one or more of the groups.
1Complaints by non-transferring policyholders who will, almost all, be ordinary with-profits policyholders in Equitable or WPAs.
A common complaint of almost all objectors of this group was that, as a result of the proposed transfer, the capital base of Equitable would be reduced thereby diminishing the assets available to secure their rights under their policies or annuities. There were a few objectors who were actively making claims against Equitable arising from their past relationship with that company and who were concerned that if their claims succeeded they would not be in a position to enforce them. The objectors tended to overlook the fact that at the same time as the Scheme required the transfer of some £4.6Bn of assets to Canada Life the Scheme also involved the assumption by Canada Life of the liability attaching to the non-profit annuities in payment of the NPAs whose total claims under their policies had been calculated slightly to exceed the value of the assets being transferred. The Independent Expert deals with this issue between paragraphs 6.3 and 6.6 of his report and concludes:-
“Taking all the above into account, my overall conclusions in relation to this area are that the magnitude of any diseconomy of scale arising from the Scheme is so small in relation to the remaining with-profit assets and could be more than covered by [Equitable’s] surplus assets available for future distribution.”
At paragraph 6.4 the effect of the Scheme is calculated to add to the assets of Equitable approximately £8M. It is the Independent Expert’s view that this effect is mainly brought about by a reduction in the individual capital adequacy requirement that the FSA will place on Equitable because of the removal, as a charge on Equitable’s with-profits fund of the obligation to meet the obligations to the NPAs, particularly in circumstances where the increased longevity of policyholders may have been underestimated.
There were complaints by those holding relatively small pension policies or where the transfer required a policyholder holding two or more policies some of which were covered by the transfer and others not that the effect of the Scheme was, as a result, inconvenient to them. I regret that this is an unavoidable consequence of the Scheme but which I cannot regard as having a significant bearing on my judgment as to whether the Scheme is fair as between all those affected by it.
There were those holding WPAs who wished to have their policies or annuities transferred to Canada Life which company they regarded as likely to produce better results for them in future than Equitable. Again I regret that the Scheme does not permit this and it was not part of the bargain between Equitable and Canada Life. The Court is not in a position to require the parties to vary the Scheme so as to make it include provisions which the Court may think might constitute a better or a fairer Scheme. The Court’s judgment is whether the Scheme as it stands is fair.
Much emphasis was placed on the peculiarly exposed position of WPAs. This arises from the fact that, by contrast with ordinary with-profits policyholders, they were unable to leave Equitable and transfer their policies or annuities to other insurance providers. In extreme circumstances this might leave them as the only remaining members of Equitable having to carry all the costs of Equitable’s, admittedly much smaller, continuing business. The Independent Expert’s clarificatory note is directed particularly to this group and I have already set out its conclusions, namely, that the proposed Scheme will operate to relieve but not entirely remove the threat to the position of the WPAs. Hereafter their position will be governed by the extent to which ordinary with-profits policyholders leave Equitable.
2 Objections by transferring NPAs.
The main concern of this group was the status of Canada Life and the consequent security for the performance by Canada Life of the terms of their policies or annuities. One complaint was the fact that Canada Life, although incorporated in England was controlled from abroad – by a Canadian parent company. I have already pointed out the protection conferred on policyholders by the prudential supervision of the FSA of all companies authorised by the FSA to conduct insurance business in this country. That supervision should give protection to policyholders from any future and more risky investment policies of Canada Life utilising the assets transferred to it from Equitable, another cause of anxiety to objectors. The Independent Expert deals with this issue at paragraphs 4.5 and 9.2 of his report. He deals with the financial position of Canada Life both before and after the proposed Scheme is put into effect at paragraph 7, and in particular the security of policyholders’ benefits for existing and future Canada Life policyholders at paragraph 7.4, and, at paragraph 8.1 he concludes:-
“Overall my conclusion is that the security of the benefits of transferring policyholders will not be reduced by the transactions, and moreover, post transactions the transferring policyholders will benefit from a possibility of backing from shareholders which is not currently present.”
The report shows that there has been a transfer to Canada Life from its related companies of £170M of further capital in order to ensure that the “solvency cover ratio” of Canada Life for its policy obligations is maintained at 140%, this being an accepted solvency cover rate for insurance companies conducting this sort of insurance business. Policyholders should also be reassured by the fact that their claims will not be on a closed fund but on the totality of the assets of Canada Life and that, even in the worst circumstances of the insolvency of Canada Life it is highly unlikely that its parent companies would be prepared to cut this subsidiary adrift.
It was objected that Canada Life were not taking on the possible claims for misselling policies in the past. The relevant term of the arrangement between Equitable and Canada Life required liability for any past misselling claims to remain with Equitable. It was no doubt a term which, in the balance of advantage the parties to the arrangement found acceptable. I cannot see that policyholders having such claims are materially disadvantaged by this provision.
It was objected that the £4.6Bn of assets transferred to Canada Life would not be ring fenced among Canada Life’s assets for the benefit of transferring NPAs. It appears that policyholders objecting on this ground were under the misapprehension that assets to this value had been ring fenced in Equitable from other assets forming its with-profits fund. It follows that transferring policyholders are not disadvantaged as a result. As I have already pointed out they will be able to enforce of their policies providing their annuities against the totality of the assets of Canada Life.
It was objected that the operational arrangements of Canada Life, in particular the actual payment of benefits, might fail or not reflect policyholders’ entitlement. This is a matter between transferring annuity holders and Canada Life which, if incapable of being solved by agreement, a court may have to rule upon. I can see no reason why the operations of Canada Life need be less efficient that those of Equitable. There was no evidence that they would be so.
3 Generally
A number of NPAs, ordinary with-profits policyholders of Equitable and WPAs complained that they had not been consulted in the form of meetings before the promulgation of the Scheme. It was suggested that if there had been such consultation a number of the provisions which were objected to would not have been included. A transfer of the whole or part of an insurance business under Part VII of the Act does not require that the policyholders or annuitants of the transferor or the transferee have to be consulted in the way suggested. The process leading to the Courts sanction is designed to ensure that such a transfer, which will result from a business decision of the managements of the transferor and transferee, and so must be taken to suit the purposes of those parties, does not operate unfairly on those who are relying on the parties to the arrangement to provide their pensions. It is for this purpose that the FSA has a supervisory role and appoints an Independent Expert to report on the Scheme which ultimately must obtain the Courts sanction before it can take effect.
It was objected that the Scheme was premature because sanction was being sought before the Parliamentary Ombudsman’s report and that of the European Union, as a result of enquiries into the difficulties of Equitable, were available. It was suggested that those reports might result in further assets being made available for policyholders in Equitable. However those two bodies have no power to require Equitable or others to contribute funds to the assets of Equitable for the purpose of compensating policyholders. In any event, even if the result of those reports were to “shame” any organisation or individual to make such a contribution I see no reason why a proper share of any additional assets transferred to Equitable being passed to transferring NPAs to the extent that they are found to have been affected by the past mismanagement of Equitable. It must be borne in mind that NPAs will only suffer if, at the end of the day, their fixed annuities are not paid in full and on time. That will only occur if Canada Life defaults and the Independent Expert has reported that there is no material prospect that this will occur. Policyholders remaining with Equitable, overwhelmingly with-profits policyholders and WPAs, will take the benefit of any resulting accretion to the assets in Equitable’s with-profit fund.
Questions were raised about the qualifications of the Independent Expert Mr Jenkins. Mr Jenkins was appointed by Equitable and Canada Life from a cadre of actuaries whose specific skill is to forecast the future prospect for groups of life insurance policyholders and the insurance companies with which their policies have been taken out. As is apparent from the passages from the decisions of the Courts in these cases, great reliance is placed by the Court on those skills. There was no evidence that Mr Jenkins was less qualified to conduct an enquiry into this Scheme than any others of the pool of experts.
As in previous cases, objection was taken to the use by the Independent Expert of such words as “material” when, for instance, describing particular risks. It was objected that an assurance by the expert that there was no “material” risk of something happening was not a sufficiently definite assurance. The use of such words in these reports is commonplace and I, and other judges confronted with giving the Court’s sanction to Schemes, construe such words as meaning that the expert concerned, while not being capable of giving an absolute assurance that a given event will not happen, is satisfied, as far as possible, that it will not.
Complaints were made about the past management of Equitable. The Court acknowledges that policyholders in Equitable have had a very raw deal. It has to be said that NPAs who, by contrast with with-profit policyholders and WPAs, whose benefits are fixed, will not have suffered significant loss of benefit. Be that as it may the Court has to look at the present position of Equitable and of the transferee Canada Life and decide whether the Scheme for the transfer of the NPAs to Canada Life is fair in present circumstances. The past short comings of the management of Equitable are irrelevant to that decision.
Dr Weyer, as I have already described, appeared on behalf of German policyholders who were almost all WPAs and was concerned to stress the particular disadvantages of their position. His main point was the average size of their policies was substantially greater than the overall average size of policies of a similar type in Equitable. Accordingly the difficult position of WPAs bore particularly hard on them. He stressed the difficulties they encountered in dealing with those administering the business due to the language barrier. I am not satisfied that any criticism can be properly levelled at the proponents of the Scheme for failure to provide German policyholders with the necessary information from which they could properly evaluate their position. In particular I am satisfied that proper arrangements had been made to provide them with the necessary Scheme documents translated into German. I do not think that German WPAs have any greater ground for objection to the Scheme than WPAs generally.
For these reasons I was not persuaded that the various submissions, both written and oral, led to the conclusion that the views of the Independent Expert should be disregarded and the Court’s sanction to the Scheme refused.