Re Legal and General Assurance Society Ltd and another company  EWHC 2299 (Ch)
On 7 September 2020, the mature-savings business (the “Business”) of Legal and General Assurance Society Limited (“LGAS”) transferred to ReAssure Limited (“ReAssure”). That transfer was the result of an agreement signed in December 2017, under which ReAssure agreed to purchase the Business for £650m. At the time of the transfer, the Business comprised over 900,000 insurance policies and over £30bn of assets. This included LGAS’s with-profits fund, which accounted for over £20bn of assets.
As is typical in a transaction of this type, while the economic benefits and risks of the Business had been contractually transferred between the parties from 1 January 2018, the expectation when signing the agreement was that the Business would be legally transferred under Part VII of the Financial Services and Markets Act 2000 (“FSMA”). Part VII transfers are effected by way of a scheme document, which must be sanctioned by the High Court. Herbert Smith Freehills acted for ReAssure, while Slaughter and May acted for LGAS. The parties appointed Martin Moore QC as joint counsel for both parties.
The scale and complexity of the Business was such that the court’s judgment was always likely to be of interest within the insurance sector. In August 2019 Mr Justice Snowden had issued a judgement (the “Pru/Rothesay Judgment”) that (for the first time in any Part VII transfer) declined to sanction a transfer of annuities from Prudential Assurance to Rothesay Life. Consequently, the transfer from LGAS to ReAssure was of even more interest within the insurance sector, and was also closely watched by those in the banking sector, where Part VII transfers are also used.
On 20 August 2020, Mr Justice Zacaroli issued a lengthy judgment (the “LGAS/ReAssure Judgment”), which explained why it was appropriate to sanction this scheme. In doing so, the judge gave thoughtful responses to a range of objections that policyholders had raised, as well as in respect of issues that arose from the scheme proposed by ReAssure and LGAS. The following are the most important themes to come from the judgment:
- Pru/Rothesay Judgment: while it remains the subject of an appeal, the Pru/Rothesay Judgment represented the current state of the law for the purpose of the LGAS/ReAssure Judgment. While Zacaroli J did not express a view on the merits of the Pru/Rothesay Judgment, he was satisfied that the transfer from LGAS to ReAssure was distinguishable from the transfer rejected by Snowden J in at least three important respects:
- The judge in this case did not feel that the transfer would result in an increased risk that parental support would not be forthcoming if the transferee insurer experienced financial difficulties, and so the concerns in that regard which were expressed in the Pru/Rothesay Judgment did not arise. The Phoenix group, of which ReAssure is a part, was noted by the judge as being “substantial and well capitalised”, and the judge was satisfied that the Phoenix group had adequate incentive to support ReAssure.
- The profile of the Business was quite different from that in Prudential and Rothesay. The vast majority of policyholders in the current transfer had the option to transfer their policy to another insurer if they did not want to transfer to ReAssure. On a connected point, annuities (which cannot be transferred in practice) represented less than 1% of the Business, which was in stark contrast to the portfolio that was the subject of the Pru/Rothesay Judgment (that portfolio consisted entirely of annuities).
- In order for the commercial objectives of ReAssure and LGAS to be met, a formal transfer of the insurance policies was required. This was different from Snowden J’s assessment in the Pru/Rothesay Judgment, where he was not convinced that either Prudential nor Rothesay’s commercial objectives would be materially prejudiced if the scheme was not sanctioned.
- Closed-book consolidators: some policyholders challenged whether ReAssure was as incentivised as LGAS to provide high levels of service, given that it does not sell insurance policies directly to the market. The LGAS/ReAssure Judgment rejected this argument, and observed that the fact that ReAssure chose not to sell directly to policyholders meant that it was particularly dependent upon retaining policyholders to sustain its business model and realise the value it had paid for the Business. As such, the judge agreed that ReAssure had a real incentive to treat its customers fairly.
- Impact of Covid-19: the judge considered the financial impact of the pandemic on the parties, as well as the operational disruption that the parties had experienced due to staff having to work remotely. In both cases, the judge was satisfied that policyholders were unlikely to experience any material adverse effect due to the proposed transfer. Importantly, the LGAS/ReAssure Judgment confirms that the test is whether the transferring policyholders will be materially worse off as a result of the transfer (whether that is due to the transferee being financially less secure, unable to provide comparable levels of service or otherwise). The fact of a transferor or transferee being adversely affected by an event (as was undoubtedly the case for practically all businesses in the context of the pandemic) is not of itself enough to convince the court that a scheme should not be sanctioned.
The LGAS/ReAssure Judgment also has some important clarifications on the law connected with Part VII transfers. It expressly confirms that approving “sunset” clauses, which generally aim to address issues that arise when a with-profits fund becomes too small to be efficiently operated, is within its jurisdiction and can be approved where those clauses are subject to appropriate safeguards. The judgment also helpfully clarified that the SIPP part of the Business, which had insurance and non-insurance elements, could be transferred under the court’s ancillary powers.
Additionally, the judge addressed a number of objections from policyholders about the fairness of the Part VII process. These included that the policyholders were not able to co-ordinate their response, did not have the same access to legal advice as ReAssure and LGAS and were unsure as to the independence of the independent expert (the “IE”). Having considered the Part VII process overall, however, Zacaroli J concluded that the policyholders have sufficient opportunity to make objections, that these objections were given considerable consideration, that the objections had been fairly presented to the court and that the fact that FSMA did not provide a means for co-ordinating objections and providing policyholders with legally qualified representation did not render the Part VII process unfair. The judge also firmly rejected the challenges to the IE’s independence, saying that he was satisfied that Mr Gillespie of Milliman had “properly carried out his obligation as an independent expert in this case”.
The LGAS/ReAssure Judgment is undoubtedly good news for insurers and banks that want to use the Part VII process. In particular, the court’s approach to distinguishing the current transfer from the transfer from Prudential to Rothesay is helpful, and will allow many schemes to go ahead without the parties being unduly concerned about falling foul of the Pru/Rothesay Judgment.
It is not, however, true to say that the Pru/Rothesay Judgment (at least pending the outcome of the planned appeal) has no ongoing impacts. The following points remain relevant, even if the extent of that relevance will vary from scheme to scheme:
- Balancing of interests: the most noticeable shift in the approach of the court in recent times has been the way in which policyholder interests have been weighed against those of the parties. In the Pru/Rothesay Judgment, the judge concluded that the parties’ interests in having the scheme approved did not outweigh the perceived disadvantages that would be imposed on policyholders once the scheme took effect. While Zacaroli J accepted that an appropriate balance was struck in the scheme proposed by ReAssure and LGAS, he did not do so lightly. It was clearly of importance to him that the parties had clearly articulated the rationale for the scheme, that the approval of the scheme was necessary to fulfil the parties’ commercial objectives, and that many policyholders stood to benefit from the scheme being sanctioned. That said, the LGAS/ReAssure Judgment should not be interpreted as meaning that policyholders will need to receive benefits from every scheme; rather, it should just be read as meaning that policyholder benefits will bear a material weight in the scales when assessing if interests have been appropriately balanced.
- Approach to objecting policyholders: while it has always been the case that objections need to be carefully considered, those objections appear to be getting more scrutiny than in the past. Zacaroli J gave objectors considerable amounts of time to articulate their points, and transcripts from calls with objectors were in some cases looked at in detail. Professional and diligent management of objections, as well as fair presentation and categorisation of the objections made, will be vital, and it should be assumed that the content of all calls, letters and other correspondence with objecting policyholders will be reviewed in detail by the judge, and that any apparent shortcomings will need to be explained.
- Profile of transferring business: it will be important to assess whether any products within the scope of a Part VII scheme have features that mean the transferring customers cannot freely move their business to another provider. If there are any such restrictions (which will be the case for annuities and may also apply to other products where, for example, medical underwriting requirements mean a policyholder cannot obtain an alternative product either at the same price or at all) there will be a need to assess how much of the transferring book is affected. If it is a significant portion, a more detailed analysis of the portfolio may be needed (particularly for long-term products), such that the parties can clearly explain why the judge need not be concerned about the restrictions. One area that might be clarified by the Court of Appeal when it considers the Pru/Rothesay Judgment is the extent to which such restrictions might represent a barrier to a scheme being approved (the Pru/Rothesay Judgment was concerned with a portfolio entirely comprised of annuities, while the LGAS/ReAssure Judgment applied to a Business containing less than 1% in annuities, with the result that a considerable “grey area” remains).
- Parental support: Zacaroli J clearly considered the issue of parental support quite carefully when writing the LGAS/ReAssure Judgment. As a result, the judgment provides more sophisticated guidance on this topic than was previously available. Zacaroli J did not place the same importance on the parties’ respective brands as Snowden J did in the Pru/Rothesay Judgment, but rather focused on the incentives that the parent companies would have to provide support to their respective subsidiaries. While Zacaroli J accepted the possibility that the Phoenix group’s incentive to provide support might be different in nature than that of the Legal & General group, he rejected the notion that it followed that the Phoenix group would be any less incentivised than Legal & General to support its subsidiaries.
One other area of interest was the extent of attention that the judge gave to the reports from the IE, the PRA and the FCA. In quite a few instances, the judge asked for information beyond that contained in the IE’s report, and was clear in his judgment that he needed to have all information necessary to satisfy himself that any opinion of the IE was “soundly based”. This was particularly the case in areas where the Covid-19 pandemic had given rise to increased uncertainty. For example, the judge insisted on receiving solvency ratios that were as current as possible for both the transferor and transferee so that he could satisfy himself (in line with the conclusion of the IE) that volatility in financial markets as a result of the pandemic had not given rise to a reason to change the view that it was appropriate to sanction the scheme.
Similarly, the judge required further information as to the methodology used by the IE when assessing that the implementation of the scheme would not have a material adverse effect on the standards of administration and service experienced by LGAS and ReAssure’s policyholders. While a judge will always pay close attention to the reports from the IE and the regulators, it is probably safe to assume that the court will require more information than usual where there is a particular reason for uncertainty, as was the case here due to the effects of the Covid-19 pandemic.