The Chancery Division held that it had not been appropriate in the present case to exercise the court’s discretion under s 111(3) of the Financial Services and Markets Act 2007 on an application to sanction a scheme for the transfer of annuity policies to a new company. Even though an independent expert had been of the opinion, with which the regulators had not disagreed, that the implementation of the scheme would cause no material adverse effect upon the security or benefits and reasonable expectations of the transferring policyholders as regards service standards and governance, such views were not determinative of whether it was appropriate in all the circumstances to exercise the discretion to sanction the scheme, and there had been a number of factors that weighed heavily against the exercise of the court’s discretion.
 All ER (D) 83 (Aug)
*Re Prudential Assurance Company Ltd and another company
 EWHC 2245 (Ch)
Chancery Division (Companies Court)
16 August 2019
Pensions – Annuities – Transfers
The first applicant company (PAC) was part of the Prudential Group. PAC had a number of annuity policies which, under a planned demerger, it had sought to, by way of a scheme, transfer to the second applicant (Rothesay). The applicants sought the sanction of the scheme pursuant to 111(3) of the Financial Services and Markets Act 2007 (FSMA 2007). The scheme, if sanctioned, would have meant that policyholders would no longer be entitled to look to PAC to pay or service their annuities, but would have sole recourse to Rothesay. The scheme had been the subject of consideration by an independent expert, as required by FSMA 2007 Part VIII, who concluded that the scheme would not materially affect the interests or reasonable expectations of the policyholders. The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) did not object to the scheme.
However, a number of the policyholders objected on the grounds, amongst other things, that it had not been legally permissible, or at least appropriate, that persons who had specifically selected PAC as their annuity provider for life should be transferred against their will to a smaller insurer with a very different history and reputation and without a larger group to support it, simply in order to further the commercial purposes of PAC and that, in addition, it had amounted to a breach of contract.
Whether the court should exercise its discretion under FSMA 2007 s 111(3) to sanction the scheme.
The fact that FSMA 2007 Part VII had existed had meant that policyholders were not given a veto over what insurers wished to do for commercial reasons. However, neither was there any presumption in favour of a transfer for such reasons. In each case, a balance had to be struck and it had to be for commercial parties to the proposed transfer to satisfy the court that, in all the circumstances of the case, it was appropriate to sanction a change to the contractual status of the policyholders. In striking that balance of interests, any purely subjective likes or dislikes of policyholders carried little or no weight (see ,  of the judgment).
Although PAC had made no contractual promise to policyholders that it would not seek to transfer their policies to another provider, there had been considerable force in the submissions made by the opposing policyholders that they had reasonably assumed that PAC would not transfer its obligations under the annuity policies to any other company. It had been entirely reasonable for policyholders to have made the assumption that if they gave their pension pot to PAC and could not change that choice, that it would be PAC and no other company that would be providing them with the resultant annuity for the rest of their life. Whilst that did not mean that as a matter of law PAC could not seek to transfer the annuity policies under FSMA 2007 Part VII, that was a matter that could and should be taken into account in the exercise of discretion under FSMA 2007 s 111(3) (see , , ,  of the judgment).
There was a disparity between the external support potentially available to PAC and Rothesay in respect of a solvency intervention, which was a material factor affecting the interests of policyholders to be taken into account in the exercise of discretion. It could not be disregarded as fanciful the possibility that PAC or Rothesay might require external financial support over the lifetime of the annuitants. In that respect, there had been a material difference in the potential availability of assistance for the two companies in that, if the need arose, PAC was likely to be able to be supported from the very substantial resources of the Prudential Group, whereas no equivalent measure of comfort had been available in relation to Rothesay (see , ,  of the judgment).
Where consumers had made a choice of annuity provider based on the respective ages and reputations of the transferor and transferee, that was something that the court could take into account in exercising its discretion under FSMA 2007 s 111(3) (see , ,  of the judgment).
There had been a number of factors that weighed heavily against the exercise of the court’s discretion to sanction the scheme. On the other side of the balance, PAC’s reasons for selecting the transferring policyholders had been entirely driven by a need to release regulatory capital in support of the proposed demerger. PAC had achieved that commercial objective by the reinsurance agreement, which would continue even if the scheme was not sanctioned (see - of the judgment).
In all the circumstances, it was not appropriate to exercise the court’s discretion to sanction the scheme (see  of the judgment).
Re London Life Association Ltd; Re Australian Mutual Provident Society  Lexis Citation 1731 considered; AXA Equity & Law Life Assurance Society plc and AXA Sun Life plc, Re  1 All ER (Comm) 1010 considered; Re Scottish Equitable plc; Re Rothesay Life plc  All ER (D) 127 (Jun) considered.
Martin Moore QC (instructed by Allen & Overy LLP) for the applicants.
Nehali Shah instructed by PRA.
Robert Purves instructed by the FCA.
A number of policyholders appeared in person.
Peter Fuller - Barrister.