Legal And General Assurance Society Ltd, Re

This is an application to sanction a scheme (the “Scheme”) under Part VII of the Financial Services and Markets Act 2000 (“FSMA”) for the transfer of insurance business from Legal and General Assurance Society Limited (“LGAS”) to ReAssure Limited (“ReAssure”).

LGAS was founded in 1836. It is the main UK regulated insurance subsidiary of Legal & General Group Plc (“L&G”) and is part of the Legal & General group of companies (“L&G Group”). It is authorised by the Prudential Regulation Authority (“PRA”) and regulated by the Financial Conduct Authority (“FCA”). As at 31 December 2019, LGAS had assets (net of current liabilities and deferred tax) of £148.8 billion, own funds of £10.7 billion and excess funds of £4.1 billion.

Following a strategic decision to transition its business away from “mature” savings products towards other areas including new non-profit annuities, insurance contracts and workplace investment products and services, LGAS decided, in 2017, to dispose of its traditional insurance-based savings, pensions, life and with-profits business (the “Transferring Business”). The Transferring Business has been closed to new business and in run-off since 2015.

After considering proposals from a number of bidders, ReAssure was identified as the company best placed to receive the Transferring Business, because of its specialism in acquiring and consolidating similar books of business.

On 6 December 2017 LGAS and ReAssure entered into a business transfer agreement (“BTA”), for the transfer of the Transferring Business. The BTA provides that the transfer will take effect, subject to the approval of the court, by way of the Scheme.

At the same time, LGAS and ReAssure entered into a risk transfer agreement (“RTA”), a reinsurance agreement which effected the transfer of the risk and reward associated with the Transferring Business to ReAssure with effect from 1 January 2018. An advance claim amount of £650 million was paid by ReAssure to LGAS under the RTA.

LGAS’ essential commercial rationale for entering into the Scheme is, having made the strategic decision referred to above, to enable it to pursue its objective of concentrating its resources on its core businesses, taking into account in particular the following factors:

The Transferring Business, on the other hand, is compatible with ReAssure’s own business model. ReAssure was incorporated in 1963, although it was then called Occidental Life Insurance Company Limited. Since then it has developed a business of acquiring and integrating closed life and pensions businesses, having to date completed 21 such acquisitions. It was acquired by the Swiss Re group in 2004.

As at 31 December 2019, ReAssure had assets (net of current liabilities and deferred tax) of £40.9 billion, restricted own funds of £4.9 billion, and excess own funds of £2 billion.

On 6 December 2019 Phoenix Group Holdings plc (“Phoenix”) announced its intention to acquire ReAssure Group plc (“RGP”). This was subsequently approved by the PRA, with a legal completion date of 22 July 2020. The Phoenix group, with £248 billion of funds under management, also specialises in the acquisition and management of closed life insurance and pension funds.

Accordingly, ReAssure is better placed than LGAS to devote its resources to managing the Transferring Business (as it is exactly aligned with its core business strategy) and is able to take advantage of economies of scale in the administration of that business.

While the Scheme is undoubtedly to the commercial advantage of both LGAS and ReAssure, the following significant benefits for policyholders of the Transferring Business have been identified. First, they will benefit by being administered by a company whose strategy is concentrated on administering closed books of business. Second, they will benefit from ReAssure’s ability to take advantage of economies of scale. This is to be manifested, so far as the with-profits policyholders are concerned, in a fixed fees expenses agreement which will provide certainty and, over the life of the fund, is expected to result in significant costs savings. I refer to this agreement in more detail below. Third, whereas LGAS has only one with-profits fund, so there is no possibility

The hearing of the application to sanction the Scheme originally took place over three days on 10 to 12 March 2020 (the “March hearing”). A number of objectors (as I describe in detail below) appeared to make representations in opposition to the application. In the days following the hearing I received further submissions in writing from certain of the objectors, further update reports from the independent expert and submissions from counsel for the applicants. A particular focus of these was the potential impact on the Scheme of the Covid-19 pandemic which was then (in the UK at least) in its early stages.

In the evening of 23 March 2020 the government announced a lock-down across the whole of the UK. The following evening I received an application from the companies to adjourn the application on the grounds of the operational challenges that Covid-19 presented to the successful migration of the business. I granted an adjournment for reasons set out in a short judgment dated 30 March 2020: see [2020] EWHC 756 (Ch).

The resumed hearing of the application took place on 13 and 14 August 2020 (the “August hearing”). In view of the number of people that were likely to want to attend the hearing, the social distancing measures (and potential travel difficulties) still in place in light of the pandemic meant that it was impossible to hold the hearing in a courtroom. Accordingly, it was held remotely, by way of a Skype for Business video conference.

Section 111 of FSMA provides as follows:

“(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 […]

(2)

The court must be satisfied that–

(a)

[…] the appropriate certificates have been obtained (as to which see Parts I and II of Schedule 12); […]

(b)

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).

(3)

The court must consider that, in all the circumstances of the case, it is appropriate to sanction the scheme.”

The principles which guide the court in the exercise of its discretion under section 111(3) have been explained in a series of previous decisions.

In London Life Association Limited (unreported, 21st February 1989), a decision concerning the transfer of long-term insurance business, Hoffmann J said:

In Axa Equity & Law Life Assurance Society plc [2001] 1 All ER (Comm) 1010, Evans-Lombe J referred to Hoffmann J's judgment and summarised eight principles governing the approach of the court to applications for the sanction of transfers of long-term business. The eight principles which he derived from that decision are as follows:

In Re Royal & Sun Alliance Insurance plc [2008] EWHC 3436 (Ch) David

The fact that the transferor’s purpose in putting forward a scheme is to provide commercial benefits to it (for example through a corporate rationalisation to simplify its capital structure) does not preclude the court sanctioning the scheme provided it does not materially disadvantage any policyholder: see Re Norwich Union Linked Life Assurance Limited [2004] EWHC 2802 (Ch), per Lindsay J at [17].

The importance of the independent expert report has been stressed in a number of cases. In Eagle Star Insurance Co Ltd [2006] EWHC 1850 (Ch), Pumfrey J noted the special role played by the independent expert in cases such as this. Addressing, specifically, the circumstances in which the court might permit a challenge to be made to an expert’s conclusions and a further expert to be instructed, he said (at [13]):

“Where it seems that the independent expert has identified the possible problems with a particular scheme and has, on what appear to be satisfactory grounds, rejected them, it seems to me that rather more than the normal requirement to give the opponent an opportunity to impugn the report is required before permitting that opponent either to see the independent expert's detailed workings or to instruct a further expert. 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.”

In the Royal & Sun Alliance case (above), David Richards J approved the following statement in counsel's skeleton (at [6]):

Nevertheless, as pointed out by Briggs J in Re Pearl Assurance (Unit Linked Pensions) Limited [2006] EWHC 2291 (Ch), at [6], “the discretion remains nonetheless one of real importance, not to be exercised in any sense by way of rubber stamp”. Rimer J, in Re Hill Samuel Life Assurance Limited [1998] 3 All ER 176, at 177, said:

“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.”

The Scheme involves the transfer of approximately 900,000 policies and assets valued (as at 31 December 2019) at approximately £30 billion. The Transferring Business includes various pension products, with-profits business, with-profits annuities and related non-profit annuities, unit-linked insurance products (including protection products) and conventional nonprofit products, and approximately 7,000 self-invested personal pensions (“SIPPs”).

If the Scheme were to be implemented, on the legal effective date the assets and liabilities associated with the Transferring Business would be transferred from LGAS to ReAssure. Specifically: (i) all of the business of the LGAS with-profits fund would be transferred to a newly created ring-fenced fund within ReAssure (the “LGWPF”); and (ii) the transferring LGAS unit-linked and non-profit business outside the LGAS with-profits fund would be transferred to the ReAssure non-profit fund.

The investment management services in respect of the Transferred Business will remain with Legal & General Investment Management Limited (“LGIM”), for a minimum period of seven years (provided LGIM maintains requisite standards of management), pursuant to an investment management agreement between LGIM and ReAssure.

The transfer of the SIPPs gives rise to particular complexities. Although, from the customer’s perspective, a SIPP is a single product, its operation involves contractual and trust arrangements between LGAS and other companies in the L&G Group. Unless all of these are successfully transferred to ReAssure, there would be a number of potentially adverse consequences for SIPP members. I will address these complexities and the manner in which it is proposed to deal with them below at paragraphs 189-193.

The Transferred Business also includes LGAS’s stakeholder pension scheme. This gives rise to a particular complexity arising for the need to ensure that the tax benefits of members are retained. I address this issue below at paragraph 194.

The Scheme does not effect any changes to the contractual rights of policyholders within the unit-linked and non-profit business. The Scheme contains, however, certain provisions relating to the management of the LGWPF intended to benefit policyholders.

First, the expenses charged for administration services in respect of the LGWPF by ReAssure shall be fixed by reference to the per-policy expenses charged for the 2018 financial year, increasing annually by RPI plus 0.5% (the “Fixed Expense Agreement”). As the fees will be charged on a per-policy basis, this means that as the number of policies declines over the period of the run-off of the LGWPF, the amount of expenses charged to the fund will similarly (in real terms) decline.

The independent expert has reviewed the Fixed Expense Agreement. In his most recent supplemental report he has identified four benefits for policyholders within the LGWPF: (1) an immediate reduction to per-policy expenses; (2) a reduced exposure to the expenses of diseconomies of scale; (3) increased certainty in respect of future unit costs; and (4) coverage of one-off additional expenses for new business. He has valued these benefits over the life of the agreement at approximately £90 million.

Against this sum, however, must be set the figure of £50 million which is to be paid from the assets of the LGWPF. Provision has already been made within the LGAS with-profits fund for this sum, which would be released upon payment of the fee. This was originally described in the Scheme as a consideration payable “due to the agreed migration costs”. If this was an accurate description, then the payment of £50 million would be problematic, first because it is generally inappropriate for the policyholders to bear the costs of the transfer of business pursuant to a scheme and, second, because it would breach the FCA’s Conduct of Business Rules 20.1A.10R, which requires a firm to use or apply assets in a with-profits fund solely for the purposes of the business in the with-profits fund.

It was explained at the March hearing, however, by reference to the “Project Actaeon With Profits Expense Term Sheet”, that the description of the payment of £50 million in the Scheme document was inaccurate. Pursuant to the term sheet, while the £50 million payment from the LGWPF was described as “a contribution towards migration costs of [ReAssure]” it was “in consideration for the other provisions contained in these Terms”. The other provisions relate to the Fixed Expense Agreement. Accordingly, although the use to which ReAssure was to put the money was towards payment of migration costs, the payment was the consideration for the obligations of ReAssure under the Fixed Expense Agreement. The Scheme has been amended to correct this mis-description.

Importantly, having re-reviewed the Fixed Expense Agreement in his second supplementary report of July 2020, the independent expert is satisfied that it is expected to be of value to the LGWPF even in adverse conditions and would not have a materially adverse effect on the transferring LGWPF policyholders.

Second, the Scheme provides for a power to reallocate LGWPF nonparticipating business from the LGWPF to the ReAssure non-profit fund, to merge the LGWPF into other ReAssure with-profits funds and vice versa (exercisable only once the value of the assets in the LGWPF has fallen below

Pursuant to section 109 of FSMA, an application in respect of a business transfer scheme must be accompanied by a report of an independent expert on the terms of the scheme. For this purpose LGAS and ReAssure appointed Mr Oliver Gillespie, a consulting actuary of Milliman LLP and a Fellow of the Institute and Faculty of Actuaries. He has about 25 years’ experience in the long-term insurance sector, including acting as independent expert on other Part VII transfers. Mr Gillespie’s fees are borne by LGAS and ReAssure.

Mr Gillespie’s appointment was approved by the PRA after consultation with the FCA. His independence is emphasised and ensured by the provisions of the PRA’s statement of policy, the PRA’s involvement in the process of nomination and oversight and Mr Gillespie’s own understanding of his role and his confirmations of independence in his main report. I address challenges made to Mr Gillespie’s independence below, when considering policyholders’ objections.

Mr Gillespie’s main expert report was dated 3 July 2019 (with an addendum dated 12 July 2019). He produced a supplementary report dated 24 February 2020 (with a supplementary addendum dated 6 March 2020) in advance of the March hearing. In response to various matters raised during the March hearing, Mr Gillespie provided three further short reports by way of letter to the court (dated 11 March 2020, 12 March 2020 and 22 March 2020). In advance of the August hearing, he has provided a second supplementary report dated 29 July 2020, updated by a further letter to the court dated 10 August 2020. Finally, in response to questions raised by me during the August hearing, Mr Gillespie provided a further letter to the court dated 17 August 2020.

In his reports, Mr Gillespie considers the effects of the Scheme upon the following groups of policyholders: (i) transferring LGAS policyholders; (ii) existing ReAssure policyholders; and (iii) non-transferring LGAS policyholders. In respect of each group of policyholders, Mr Gillespie considers whether the Scheme would have an effect upon the following four key areas:

So far as security of benefits under the policies is concerned, Mr Gillespie points out that a group of policies derives its security of benefits from three sources:

I will address these three sources in turn.

The starting point in the calculation for SCR purposes is the quantification of the firm’s “best estimate liabilities”, being the present value of future liability cash flows. There is then added to this a “risk margin”, calculated by reference to what another insurance undertaking would require in order to take over and meet the insurance obligations on an arms’ length basis. The resulting sum is known as the firm’s “technical provisions”. The SCR, being the amount of capital which a firm is required to hold, is then calculated as the amount required to ensure that the firm’s assets exceed its technical provisions over a one-year time frame with a probability of 99.5% (i.e. sufficient to enable it to withstand a 1 in 200 year stress event and remain able to pay its liabilities).

The SCR coverage ratio is the product of the firm’s own funds divided by the SCR.

A firm’s risk appetite statement will operate as early warning signals, breach of which will trigger action to strengthen their capital base.

In his February 2020 report, Mr Gillespie calculated the impact of the Scheme on the SCR ratio relevant to the affected policyholders, as follows (all figures being as at 30 June 2019):

Given the delay to the hearing, in his July 2020 report, Mr Gillespie revised those calculations so as to present them as at 31 December 2019, as follows:

These figures did not account, however, for a dividend of £400 million paid by ReAssure in May 2020. The dividend related to the financial year ended 31 December 2019. If that dividend had been allowed for in the financial information as at 31 December 2019, then:

More importantly, in light of the market turmoil that has occurred since the onset of the Covid-19 pandemic the figures as at 31 December 2019 are substantially out of date. It is well-known that the financial markets, generally, were very badly affected when the scale of the pandemic was first appreciated in around March 2020, although there has been improvement since then. This is reflected to some extent in the value of the assets transferring under the Scheme, which dipped from £29.5 billion as at 31 December 2019 to £25.6 billion as at 31 March 2020, but recovered somewhat to £27.4 billion as at 30 June 2020 (although fluctuations in the value of the overall business may reflect other considerations than market movements).

Mr Gillespie’s July 2020 report, and subsequent letter to the Court dated 10 August 2020, provide an update as at the end of March 2020 and as at the end of June 2020.

An important point to note, as Mr Gillespie states in his July 2020 report, is that LGAS and ReAssure have both been exposed to the same considerable volatility in the equity markets, credit spreads and gilt yields resulting from the pandemic. In considering whether to sanction the Scheme, therefore, the focus is not on the impact of Covid-19 on the solvency coverage ratios, generally, but on whether ReAssure has been impacted differently from LGAS such that policyholders would be materially adversely affected by being transferred from LGAS to ReAssure.

A good example of this is that there had been a suspension of withdrawals from the Linked Life and Linked Pension property funds of LGAS following the uncertainty in the property market as a result of the pandemic. Mr Gillespie pointed out that it is common practice to suspend withdrawals in this manner in times of uncertainty and that while this is clearly detrimental to policyholders it would have occurred, and had the same effect, whether the relevant funds remained in LGAS or had been transferred to ReAssure.

If the Scheme had been implemented as at 31 March 2020, Mr Gillespie concluded that both LGAS and ReAssure would have experienced a similar impact on their solvency coverage ratios as shown by the financial information at the early dates considered in his reports. He concluded:

“This provides comfort that, if the Scheme were to be implemented, both LGAS and ReAssure would be well capitalised and would comfortably meet the requirements of their respective risk appetite statements and therefore that there is no reason to change the conclusions of my Main Report and my Supplementary Report.”

In his letter of 10 August 2020, Mr Gillespie reached a similar conclusion, having been provided with finalised pre-Scheme financial information from both LGAS and ReAssure which reflected economic conditions as at 30 June 2020. That information “showed that both LGAS and ReAssure remained financially strong and comfortably above the requirements of their respective risk appetite statements.”

It was notable that Mr Gillespie’s updated reports contained no financial information to demonstrate or support the conclusions he reached. I accept, as Mr Moore QC (who appeared for the applicant companies) submitted, that it is unnecessary for the independent expert to show all of their “workings”, and significant comfort can be taken from the fact that both the PRA and the FCA indicated that they had seen the underlying financial information and are content with the independent expert’s conclusions based on it. It is the Court, however, that is required to be satisfied that the Scheme will not materially adversely affect the interests of policyholders and, for that purpose, it is essential that it is provided with at least some indication of the level of any potentially adverse impact, in order that it can test the conclusion that it is not material.

In light of my questions in this regard, at the August hearing Mr Moore QC provided me with the headline figures for the respective SCR ratios for LGAS and ReAssure. Notwithstanding the extreme market conditions experienced in the first six months of this year, and even taking into account the dividend paid in May 2020, ReAssure’s SCR ratio stood at 164% as at 30 June 2020. I was also provided with management’s estimate for the capital coverage ratio for LGAS, which stood at 150%. These were subsequently confirmed in Mr Gillespie’s letter of 17 August 2020.

The one thing that is missing from this analysis is the estimate of the postScheme SCR ratio for each of the applicant companies, in light of the short time available between obtaining the requisite financial information for the end of the second quarter and the August hearing. Mr Gillespie noted, however, that at each of the “as at” dates that he had analysed the effect of the Scheme on the SCR ratio of the applicant companies, the effects had been materially consistent. Moreover, since the principal focus of objections to the Scheme, as I describe below, has been on the impact upon the LGAS policyholders on being transferred to ReAssure, the most important metric relates to ReAssure, since that demonstrates the continuing financial strength of the company to whom the policies are to be transferred.

Mr Gillespie has also reviewed the projections of solvency, including updated Covid-19 scenario test results. Under a central scenario (that is, neither pessimistic nor optimistic) ReAssure was expected to meet the requirements of its risk appetite statement over a five-year period. In light of actual performance over the first six months of 2020 the central scenario was considered to remain appropriate.

The LGAS with-profits fund was particularly badly hit by the market turmoil caused by the Covid-19 pandemic. In his July 2020 report, Mr Gillespie noted that its solvency coverage ratios “reduced significantly” in the first three months of 2020, although this improved during the second quarter. As I have noted above, however, the critical issue to consider is not the impact external events have had on the fund, since it is being transferred en bloc to ReAssure and those external events would have the same impact whether the transfer takes place or not. The important issue is whether the Scheme is likely to have a materially detrimental effect on policyholders including in light of those external factors. As to this, Mr Gillespie has noted, first, that as a result of certain refinements and model changes ReAssure intends to implement, the solvency positions for the fund would be slightly higher post-Scheme. More importantly, having taken into account the commitment by ReAssure to manage the fund in a broadly similar way and that similar management actions would be taken to address issues within the fund, he concludes that the Scheme would not have a material adverse effect on the future benefits of the transferring LGAS with profits fund policies.

Mr Gillespie has examined the risk appetite statements of LGAS and ReAssure including, for ReAssure, a revised risk appetite statement which was intended to take account of an initial public offering previously proposed (but not pursued) (the “IPO risk appetite statement”).

Both companies operate on the basis that the SCR ratio should be maintained at or above a level set out in their respective risk appetite statement. If the SCR Ratio was to fall below that level, then management would be required to take action to restore the SCR ratio to the appropriate level.

In his July 2019 report, Mr Gillespie noted that the original ReAssure risk appetite statement might appear to be less strong than the LGAS equivalent, although this was mitigated to an extent by the subsequent adoption by ReAssure of the stronger IPO risk appetite statement. He pointed out, however, that there are many differences as between firms (for example as to the inputs and formulae used) in arriving at their target capital levels, so that apparent differences on the face of the statements may not reflect substantial differences. He also pointed out that as ReAssure is closed to new business, all else being equal one might expect it to have a lower target capital level, because it does not need to finance new business in the way that (for example) LGAS does.

Having analysed the risk appetite statements of the two applicant companies in detail, his conclusion is that the Scheme is unlikely to have a material adverse effect in terms of security of benefits for any of the affected groups of policyholders.

This is another area where the Court was provided with the expert’s conclusions, but without being provided with the information to test whether any difference between the two companies was in LGAS’s or in ReAssure’s favour or how the conclusion that the difference was not material was justified. This included his conclusion following his analysis of the most upto-date financial information that Covid-19 had not caused either company to breach any trigger points provided for in their risk appetite statements so as to require management to consider taking action.

During the August hearing, Mr Moore QC provided the underlying headline data for each company which provided further support in this regard. An important metric is the lower limit of their respective “green” levels, that is, the point which, if the SCR ratio falls below it, management action would be required. These were described as commercially sensitive in respect of both applicant companies, and there was therefore a reluctance to provide them in a public forum. It seems to me, however, that significant comfort is taken by Mr Gillespie from the fact that notwithstanding the market turmoil as a result of Covid-19, both LGAS’s and ReAssure’s SCR ratios are comfortably in excess of the level which would trigger management action. The court should therefore have sufficient information, not so as to review the independent expert’s “workings”, but so as to be able to assess that Mr Gillespie’s conclusions in this important respect are soundly based.

For LGAS the “green” level is an SCR ratio of 130% or greater. The equivalent SCR Ratio for ReAssure is currently 132%. While being careful not to place too much reliance on headline numbers in comparing LGAS with ReAssure (for the reasons I have already given), I nevertheless draw some comfort from the fact a comparison of the two is not unfavourable to ReAssure and, more importantly, from the fact that ReAssure’s most recent SCR ratio is substantially in excess of the level set by its own risk appetite statement.

One difference remains, as clarified in the letter provided after the hearing by Mr Gillespie, in that LGAS chooses to manage its business at a higher capital coverage ratio level in order to reduce the risk of falling below the risk appetite statement level in the normal course of its business. As a general proposition, little if any regard is to be paid to the amount of excess own funds held by an insurance company, first, because there is no legal or regulatory requirement that it continues to holds such excess funds and, second, because policyholders are sufficiently protected (for the reasons I have already given) by the regulatory requirement to maintain an SCR ratio of 100%: see, for example, Re HSBC Life (UK) Limited [2015] EWHC 2664 (Ch), at [46]-[47] (where Snowden J referred to the comment of Lindsay J in Norwich Union Life Assurance Limited [2004] EWHC 2802, at [15] that an insurance company is in general free to dispose of its surplus funds above the regulatory requirement) and Re Rothesay Assurance Limited [2016] EWHC 44 (Ch) at [33]-[39] (where Henderson J noted the lack of any principled basis for assessing what is the “right” level of excess capital for a firm to hold).

While some policyholders were alarmed at the dividend paid by ReAssure in May 2020, of £400 million, this has to be seen in its proper perspective. The dividend related to 2019. L&G, in relation to the same year, paid a final dividend of £754 million and LGAS declared an interim dividend in respect of the first half of 2020 in the sum of £276 million. The applicant companies have obligations to their shareholders, as well as their policyholders, and the fact that they are operating businesses for their (and their shareholders) commercial benefit cannot be ignored. Moreover, there are multiple safeguards around the declaration and payment of dividends, including the requirements of the Companies Act 2006 as to sufficiency of profits, and those arising from the regulation of these entities by the PRA and FCA.

It follows that where (as here) ReAssure operates in accordance with a risk appetite statement that requires it to maintain an SCR ratio in excess of 132% (which compares favourably to that operated by LGAS, taking into account the factors identified by Mr Gillespie including the fact that ReAssure is closed to new business), the fact that it would be free (subject to all other applicable legal requirements surrounding payment of dividends) to pay excess funds held above that level by way of dividend does not imply the conclusion that policyholders would be adversely affected.

Mr Gillespie has also reviewed the respective management and governance of the two companies, and concluded that the governance arrangements in place in respect of ReAssure do not represent a material change relative to those in place in respect of LGAS. Concerns were raised, by reason of the recent acquisition of ReAssure by Phoenix, as to whether changes to governance policies in the future might be made which could impact adversely on policyholders. The fact is, however, that any insurance company might in the future change its governance policies. I will deal with issues such as the relative venerability of the two companies (and their respective parent groups) in the context of policyholders’ objections, but so far as the safeguards for policyholders surrounding potential governance changes are concerned, I have no reason to question Mr Gillespie’s conclusions that the transfer to ReAssure would not materially adversely affect policyholders.

The third source to consider in respect of security of benefits is any additional support, in particular from a parent company. The extent to which ReAssure’s parent group was likely to step in to provide support if needed, and the comparison with the likelihood of LGAS’s parent group doing the same, was the subject of many of the objections raised against the Scheme. I will deal with the detail of those objections below. For present purposes, I consider only the financial strength of ReAssure’s parent and thus its ability to provide support if needed.

Mr Gillespie’s conclusion in his main and first supplemental reports that policyholders would not be adversely affected, in terms of availability of parental support, by the transfer to ReAssure was based on the fact that ReAssure was then part of the Swiss Re group.

In his July 2020 report, he addressed the same question taking account of the acquisition of ReAssure by Phoenix. His conclusion that this has not given rise to a material change in this respect is based on the fact that as at 31 December 2019 the Phoenix group had excess own funds of £3.1 billion and an SCR ratio of 161%. As I have noted above, Phoenix has total funds under management of £248 million.

I can deal with the next two factors considered by Mr Gillespie (the impact of the Scheme in risk profile and policyholder expectation) relatively briefly. He noted that the implementation of the Scheme would inevitably result in a change to the risk exposures of the policies. Nevertheless, he had regard to the fact that the SCR would reflect the risk exposures of the relevant company and that the capital held in ReAssure comfortably exceeded the required SCR. The independent expert paid particular regard to ReAssure’s liquidity risk policy which was updated in light of a review of LGAS’ policy and also ReAssure’s commitment to maintain the prevailing liquidity management standards for the with-profits business in the medium term. He concluded that he was satisfied that although the implementation of the Scheme would cause a change to the profile of risks to which the policies are exposed, this would not have a material adverse effect on the security of benefits of the relevant policyholders.

So far as the reasonable expectations of policyholders are concerned, Mr Gillespie noted that for the vast majority of policyholders, those with nonprofit policies, there was to be no change to their terms and conditions. As I have noted above, the Scheme will effect changes in relation to the LGAS with-profits fund. These include the Fixed Expense Agreement, and the related one-off contribution of £50m from the fund, changes to bonus methodology and to the capital management of the with-profits business, provisions for reallocation of non-profit business within the LGAS withprofits fund and for merger of the with-profits fund with existing ReAssure with-profits funds, and the introduction of “sunset” clauses. Having noted the safeguards around these potential changes (including the oversight of the PRA and FCA) he concluded that these aspects of the Scheme would not have a material adverse effect on the reasonable expectations of any of the policyholders in respect of their benefits.

The last principal area covered by the independent expert (standards of administration and service levels) requires more consideration, particularly in light of the Covid-19 pandemic. This breaks down into two areas: (i) the risks for policyholders arising from the process of migration of data to ReAssure and (ii) comparative levels of service going forward, as between LGAS and ReAssure.

In his reports provided in relation to the March hearing, Mr Gillespie analysed the plans for migration of the Transferring Business onto ReAssure’s platforms. This included a review of the development of new customer portals. These plans were monitored closely by the ReAssure Board and the LGAS Board. In his Supplementary Report dated February 2020, Mr Gillespie considered updates on the data migration from ReAssure and the conclusions from two separate reports from KPMG (who were specifically appointed to report on the migration process). He concluded that it was unlikely that the migration would lead to a material adverse effect on policyholders going forward.

The risks to policyholders arising from migrating such a large amount of data at the outset of the Covid-19 pandemic was the major factor in the decision by the applicants to pause the process at the end of March 2020 and to request an adjournment of the sanction hearing. In his July 2020 report, Mr Gillespie explains in detail the work that has been carried out within both companies since March in order to ensure a successful migration process.

This included a full “end-to-end” migration test at the end of May 2020, testing the ability for the migration to be performed by staff working remotely. (Both firms have taken actions to adapt to the restrictions imposed by the UK government, so that 85% of LGAS staff (as at 2 June 2020) and 90% of ReAssure staff are able to carry out their roles remotely.)

In addition, a number of “readiness criteria” (totalling 146) have been identified and these have been (or are to be) tested at three key “readiness gates”: 7 July 2020, 31 July 2020 and 21 August 2020. They are assessed against a colour system: blue (meaning the criterion has been met successfully); green (meaning the criterion is in line with expected progress to

Concerns as to ReAssure’s service levels are the subject of objection by a number of policyholders, and I address these in more detail below. I record here merely two points. First, Mr Gillespie concluded in his reports relating to the March hearing that there were sufficient controls in place within ReAssure to ensure that there would not be a material adverse effect on the standards of administration, servicing, management and governance. Second, having reviewed the steps taken by the companies (and in particular ReAssure) to address the UK government’s restrictions during the pandemic, he is satisfied that his earlier conclusions as to the operational readiness of the firms remain valid.

The PRA and the FCA have ongoing regulatory functions in relation to both LGAS and ReAssure. In addition, they have statutory functions in relation to the Scheme and typically provide reports for the court. They take on the role previously undertaken by the Secretary of State, as described by Hoffmann J in the passage from the London Life Association case cited above.

They have each produced three reports regarding the Scheme (including to take account of the circumstances arising since the March hearing). Their reports are prepared from the perspective of their regulatory functions.

The PRA has two primary objectives under FSMA: to promote the safety and soundness of the firms they regulate and to contribute to the securing of an appropriate degree of protection for those who are or may become policyholders. In line with its statutory objectives, the PRA’s general approach to the evaluation of Part VII insurance business transfer schemes is, in summary, to assess whether the applicants: (i) have appropriate financial resources; (ii) have appropriate resources to measure, monitor and manage risk; (iii) are fit and proper to conduct their business prudently; and (iv) are capable of being effectively supervised by the PRA. The PRA confirmed that it was not aware of any issue that would cause it to object to the Scheme. It does not, however, attach any weight to the venerability of and/or group support available to LGAS and ReAssure, considering those matters to be beyond its regulatory remit. These are issues for me to consider, and I do so in detail elsewhere in this judgment.

The FCA’s statutory objectives under FSMA include its strategic objective of ensuring that the relevant markets function well, and three operational objectives of protecting consumers, ensuring market integrity, and promoting effective competition. In line with the FCA’s general approach to its evaluation of insurance business transfer schemes, the FCA reviewed the Scheme for conduct issues. The matters the FCA considers and comments on include but are not limited to: the communication plan including any waivers, communications to be sent to policyholders, links to its objectives, business rationale for the Scheme, background regulatory issues, competition considerations, changes affecting policyholders, ongoing regulatory requirements, objections and unresolved issues. The FCA confirmed that the Scheme was within the range of reasonable and fair schemes available to LGAS and ReAssure. Accordingly, the FCA did not object to the Scheme.

Each of the PRA and the FCA has considered the objections that have been made to the Scheme by policyholders, and has confirmed that these objections have not caused either of them to change its conclusion in relation to the Scheme.

Following the Directions Hearing on 11 July 2019, a communication pack was sent to all transferring LGAS policyholders (approximately 0.7 million policyholders) and a letter was sent to all existing ReAssure policyholders (approximately 1.7 million policyholders). LGAS received approximately 1,159 objections in respect of the Scheme, which is equivalent to less than 0.1% of the overall number of transferring policyholders (and approximately 3.2% of the total number of communications received in response to publicity of the Scheme). ReAssure received approximately 53 objections, which is equivalent to less than 0.01% of the overall number of letters sent to policyholders (and approximately 1% of communications received in response to publicity of the Scheme).

Before I consider the objections made in more detail, it is important to record that the court’s role in scrutinising the Scheme is just as great where there are (as here) proportionately very few objections as in those cases where there are many. The fact that the vast majority of policyholders have not voiced an objection cannot be considered a significant factor. As one of the objectors, Mrs Mulholland, was keen to stress, the silence of the large majority of policyholders can in no way be equated with their consent. There are many reasons why policyholders who are dissatisfied with the Scheme may nevertheless keep silent. In the Royal Sun Alliance case (above), David Richards J at [28] noted:

“…in a scheme for the transfer of general business where there are large numbers of policyholders whose individual policies, when seen on their own, may have a relatively low value and in circumstances where the issues raised are often (as I have mentioned earlier) highly technical, it should come as no surprise that policyholders do not go into the detail of the information that is provided to them. In most cases, I suspect, they rely on those charged with statutory responsibilities in this respect and on the companies proposing the transfers to have full regard to the protection of their interests and, in my judgment, they are fully entitled to do so.”

The communications with each policyholder, where that policyholder made a formal objection, have been included in the materials provided to the Court. This included transcripts of telephone calls with the helplines set up by LGAS and ReAssure and emails and letters between policyholders and LGAS/ReAssure. Prior to the start of the March hearing these filled five lever-arch files. Two further lever-arch files were produced at the start of the March hearing, mostly consisting of more recent communications with the same objecting policyholders but also containing communications with a few further objecting policyholders. A further file was provided of communications with objecting policyholders since the March hearing.

In addition to these source materials, I have had the benefit of a detailed analysis of the objections (in addition to that contained in the witness evidence filed on behalf of each of the companies) from the PRA, the FCA and the independent expert. While there are many in number, similar themes emerge from most of the objections. I refer in detail below to the manner in which the objections were expressed by certain policyholders. I mean no disrespect to any particular policyholder if I do not refer specifically to them or to the way in which they expressed their objection, but that is because the substance of their point is addressed in responding to a similar objection raised by others. The objections from LGAS policyholders made in advance of the March hearing were helpfully categorised in the second witness statement of Mr Davies (a director of LGAS) as follows:

The objections from ReAssure policyholders received prior to the March hearing were categorised in the second witness statement of Mr Cuhls (the chief executive officer of ReAssure) as follows (leaving aside those which are either based on a mistaken assumption by policyholders as to whether they hold transferring policies or relate to matters outside of the Scheme):

In the days prior to the March hearing, approximately 39 policyholders had expressed a wish to address the Court. In the event, only six chose to do so: Dr Platman, Mr Gorrod, Mr Sebastian, Ms Schillinger and Mrs Mulholland (all of whom are LGAS policyholders) and Mr Nathan (a ReAssure policyholder).

Most of the further objections received since the March hearing fall into the same categories. An additional category, however, is the impact of the Covid19 pandemic on policyholders’ interests.

At the August hearing, Mr Gorrod, Mr Nathan and Mrs Mulholland spoke again. In addition, the following policyholders who had not spoken at the March hearing voiced their objections in person at the August hearing: Mr Smith (on behalf of his wife), Mr Mallon, Mr Tarling, Mr Phillips, Mr Saxby and Mr Francis.

The most significant objection voiced by many policyholders was based on the fact that they had specifically chosen LGAS in light of the long-standing reputation of the L&G Group, whereas they knew little about, and had little faith in, ReAssure which had nothing like the same pedigree. This was expressed by some policyholders simply as they “did not want” a policy with ReAssure (or Phoenix, if its purchase of ReAssure went through). Others stressed that they had chosen LGAS because “it was an insurance company that I knew and trusted”, because of its “depth and experience”. Some policyholders made the point that their choice of provider had been a “forever” decision for them, being one that was almost impossible for them to get out of. They had anticipated, from the literature provided to them when they took out their policies, that LGAS would pay their benefits for the remainder of their lives. Mr Gorrod referred to a statement on the current L&G Group website, notifying policyholders that once an annuity was set up and the cancellation period had expired “you can’t change your mind. Your decision could affect your financial circumstances for the rest of your life”. In some cases it was said that specific assurance was given, at the time that the policy was entered into, that it was non-transferrable by LGAS (although no-one identified written terms to that effect). Mr Mallon also raised this objection when speaking at the August hearing, saying that he had entered into a policy with L&G on the basis it was a “long-lasting relationship”.

A vivid analogy was provided by a Ms Ward-Large in her written objection. She said “it is like I bought a house in a location that I had researched thoroughly, where I felt safe and paid for legal advice and I wake up one day to find my home is being moved to a location I have never heard of and where I do not feel secure and do not want to live.” This was a sentiment echoed by many others (for example, Mrs Mulholland likened it at the August hearing to taking out a mortgage and then finding that her house was sold by the mortgagee).

Concerns were exacerbated by the fact that Swiss Re had sought, but failed, to divest itself of part of ReAssure via the aborted IPO, and that it had now sold it to Phoenix. In short, uncertainty was voiced as to (1) the extent to which parental support would be available in the event that ReAssure ran into financial difficulties; (2) the extent to which the current policies as to maintenance of capital above SCR would be maintained; and (3) whether the service levels achieved by LGAS would be maintained by ReAssure.

One policyholder, Sir Ian Kennedy, developed his objections in writing as follows. He had chosen LGAS because it was a major company with a successful history and was expected to continue for many years. While the authorities show that due weight is to be given to the directors’ commercial objective, he submitted that the weight to be given will depend upon the nature of the objective and how it was to be achieved. The reasons in this case are no more than “ordinary business housekeeping” and not within the proper purpose of the legislation. He submitted that the cost to LGAS of refocussing its business cannot possibly be of such an order that it can reasonably be invoked in order to justify freeing LGAS from its contractual obligations.

He submitted that the reputation of L&G Group is important in two respects:

Finally, he submitted that the Scheme would result in LGAS breaking its promises to those policyholders whose premiums were invested in L&G Group’s own managed funds, and that was an impermissible use of the Part VII jurisdiction.

Mr Angus Rodger submitted objections in writing. He holds a personal pension plan. He stressed the importance to the holders of such a plan of the choice of provider. He chose LGAS because it is one of the world’s oldest and most respected financial institutions: it has greater benefits of scale than ReAssure, given the volume of assets managed by it. He referred to its claim on its website that “practice makes perfect, and for over 175 years we made sure that we are always here for our customers, providing … a clear, fair service and a safe pair of hands for your money.” He contrasted that with the fact that ReAssure is a relative newcomer, that the Scheme will result in a sudden doubling of assets under management and that ReAssure is having to introduce “new and untested governance arrangements.”

Mr Rodger echoed Sir Ian Kennedy’s point as to ReAssure’s lack of incentive to provide proper service levels, since the success of its business model depended only on enticing other insurance companies to sell closed books of business to it: such companies may be interested in its customer service levels but that was not necessarily so and would in any event only be one factor among others, such as the purchase price and speed of purchase.

Mr Rodger also referred to standardised complaints data published by the FCA (for the second half of 2018) which revealed that LGAS received 1.52 complaints per 1000 customers, whereas ReAssure received almost seven times as many complaint (10.49 per 1000). He himself holds a policy with ReAssure and said that his experience with their customer service “had been poor: I have sometimes been unable to contact it by telephone and correspondence has gone unanswered”. Finally, he pointed to the uncertainty as to the future ownership of ReAssure, noting that ReAssure had recently changed its risk appetite statement and there was no basis for confidence that this would not be changed again.

Mr Nathan, who spoke at both the March and August hearings, is a ReAssure policyholder. While he did not object to the Scheme as such (so far as it affected his own position) he was concerned to warn customers as to ReAssure’s customer service levels, based on the handling of his own longstanding complaints. Others (including Mr Gorrod and Mrs Mulholland) also expressed concerns about ReAssure’s service levels. Mr Francis, a policyholder with LGAS, who also had a plan with another insurer that was, some years ago, transferred to ReAssure, complained that ReAssure changed its terms and conditions rendering it effectively useless. In light of his experience he regards ReAssure as a dishonourable, even dishonest, organisation. He wished to know that the hearing was conducted without bias or prejudice, and felt that no judge could possibly grant the application.

Dr Platman provided her objections in writing and developed them orally at the March hearing. She has held a unit-linked stakeholder pension since 2009. She actively manages it, as it is an essential element of her income in retirement. She described herself as a “lay” active manager, conducting regular reviews of the available funds. She is heavily dependent on the efficiency and expertise of LGAS’s administrative staff with whom she has been very happy. Their execution of her instructions had been exemplary.

Of utmost importance to her is the functionality of the LGAS online portal, which enables her to switch between funds at the press of a button. When presented with a comparison of functionality as between the LGAS portal and the ReAssure portal, which demonstrated certain advantages of the latter over the former, she said that none of those advantages were relevant to her (or to others in her position). That same comparison pointed out that following the Scheme she would be able to switch funds only by sending instructions via email (as opposed to via the secure online portal with LGAS).

She is very concerned that the high levels of service that she has received from LGAS (built up over decades) will not be replicated by ReAssure. Her belief that this will not happen is based on simple economics: LGAS is unable to generate enough income from policyholders such as her to justify an appropriate level of administration (and the costs of doing so have effectively been subsidised by income made on LGAS’s core business), so how can ReAssure be expected to provide proper service levels given the limited profits to be made? If the Scheme were not to be sanctioned, she does not believe that LGAS would allow its service levels to drop, despite the simple economics she referred to, because that would be too damaging for its reputation. The same was not true of ReAssure.

Dr Platman recognised that she had the theoretical option to transfer her policy to another provider, but felt that she was trapped, at least for the short to medium term, because the volatility currently affecting the markets meant that transferring was a very risky proposition. Her concerns were increased by a communication from LGAS after the March hearing informing her that to enable a smooth transfer of policy data in time for the transfer of policies on 6 April 2020, the fund switching service would be withdrawn for 11 days from Wednesday 25 March 2020. In view of the adjournment of the sanction hearing, the force of these points was diminished, but although Dr Platman did

She also made the point that the thousands of policyholders had no effective voice in responding to this Scheme. There was no effective co-ordination of policyholders’ objections and they did not have their own legally qualified advocate to match the legal firepower of the applicant companies.

Mr Gorrod (who holds a with-profits annuity contract) contended that there were too many elements of risk which, taken collectively, made the Scheme unacceptable in its current form. He objected to its description as a “transfer” when in reality it was a commercial “sale” for £650 million where the buyer could reasonably be anticipated to want to make a substantial profit: the only people who would end up paying for the transaction were thus the policyholders. He said that the Scheme failed the FCA’s consumer protection objective, because it circumvented the reasonable expectations of annuity holders. It also failed the FCA’s integrity and competition objectives. He developed these points at the August hearing, submitting that there had been a failure (on the part of LGAS and the FCA) to provide full disclosure at the point of sale: no-one was told that there would come a point in time where diseconomies of scale would prejudice policyholders. He suggested that consideration should be given to carving out the annuity policies from the Scheme, or that LGAS should engage with policyholders to find another solution.

Ms Schillinger’s overall objection was that LGAS was holding her money and she wanted her money to stay where it had always been. She also complained that LGAS had already transferred her money away to Aegon. Following investigation of this point by LGAS, Mr Moore QC explained that this was probably a reference to the fact that some years ago LGAS outsourced the administration of her investments to Aegon. There was no transfer of the insurance obligation, however, which throughout remained with LGAS, and the administration was in any event transferred back (and this was notified to policyholders at about the same time as the notification to policyholders of the proposed Scheme).

Mr Sebastian objected that under the terms of his personal retirement plan he would be subject to serious detriment (such as the loss of guarantees). He sent me details of his policies after the March hearing. Mr Moore QC explained, however, that the terms Mr Sebastian was referring to were those that restricted his rights when he chose to transfer the policy to another provider and that, in contrast, whatever contractual obligations LGAS owed to Mr Sebastian under his plan would be transferred to ReAssure pursuant to the Scheme. Mr Sebastian also reiterated similar concerns to those raised by others, as to the risks arising from the upgrade to ReAssure’s IT systems, the possibility of different bonus calculations as between LGAS and ReAssure, and the current market disruption, which made this a poor time to be transferring policies.

Mrs Mulholland objected on a number of different grounds. She spoke at length both at the March hearing and at the August hearing. In addition she sent to the court numerous detailed emails and supporting documents after the March hearing, in advance of the August hearing and also after the August hearing. She was obviously very distressed by the whole process and feels intensely that the Scheme itself and the process surrounding it are grossly unfair to her and other policyholders.

I will develop the points made by Mrs Mulholland further below, in seeking to address policyholders’ complaints. At this point, I merely summarise her heads of complaint, which were succinctly grouped under nine headings in one of her recent emails: (1) the legislation itself, and her concern about what she understood to be amendments introduced to enable transfer of insurance business without policyholder consent; (2) the fact that her policies had in fact been “sold” by LGAS to ReAssure in 2017 prior to any application for transfer being made; (3) the lack of independence of the parties involved, including but not limited to the independent expert; (4) misleading statements made about ReAssure’s company history; (5) certain points arising from the February 2020 supplementary report of the independent expert; (6) concerns as to who was really benefitting from the proposed transfer; (7) concerns that the parties had not met the criteria for treating customers fairly; (8) the practice of reinsuring customer policies without their knowledge; and (9) data protection concerns.

She also had complaints about the service she received from the LGAS policy transfer team, whom she had called for advice following receipt of the Scheme communications pack. Her distrust of LGAS and its advisors led her to request that the transcripts of her calls (which she complained were inaccurate) were not forwarded to the court or the independent expert. She wished to voice her concerns directly to the court.

Mr Mallon expressed concerns about the lack of up to date financial information, contending that the stress tests conducted had been irrelevant because they failed to take account of the unprecedented economic disruption caused by Covid-19. He also objected to the lack of transparency over the independent expert’s fees, the failure of ReAssure to give a straight answer to his question whether any of the directors had criminal convictions and the lack of choice to invest in ethical funds (although I note that LGIM will continue to manage the funds according to the same policies for at least the next seven years). In fact, as he had no desire to have his policies moved to ReAssure, Mr Mallon had, as he put it, determined to vote with his feet and transfer his policies to another insurer.

Mr Smith (on behalf of his wife) objected to the with-profits fund bearing the cost of £50m relating to the Fixed Expense Agreement, to the fact that ReAssure, by paying a dividend of £400m and reducing its SCR ratio to 150% (adopting the figures as at 31 December 2019), was able to enhance its income stream from funds accumulated by the policyholder, and to the fact that switching charges were to be introduced and that under the Fixed Expense Agreement fees would increase by reference to RPI, not CPI. Mr Smith provided figures showing that after 10 years a policyholder would be paying

Mr Tarling and Mr Saxby echoed the sentiment expressed by others that they had felt their pensions would always remain with LGAS. Mr Tarling additionally raised a question about merger of his policies (one of which was with LGAS and one with ReAssure). This, however, was not an objection to the Scheme and it is not the role of the independent expert to engage in such policy-specific queries. Mr Phillips’ concern was, given LGAS’ wish to transfer the business to ReAssure, whether either company had enthusiasm to manage the funds and whether ReAssure possessed the freedom of management to be “light on its feet” to keep the funds secure and buoyant (this last point being met by the fact that LGIM will continue to manage the funds for at least the next seven years).