Trustees insulated from Rothesay-Pru back-book fallout

The transfer of 400,000 retail policies from Prudential to derisking expert Rothesay Life was denied in the High Court in August over concerns about capital guarantees, and because Prudential had failed to inform clients of the option.

Mr Justice Snowden said the provider had never mentioned to its clients that a transfer to another provider could occur. Rothesay Life is appealing the decision, arguing that the judgment contained “material errors of law”.

Recently, the Financial Times reported that the Prudential Regulation Authority came under fire for playing “fast and loose” with pensions over its willingness to nod through transfers of savings from long-established insurers to newer specialist rivals, following a letter by a group of pensions experts and policyholders to the watchdog’s chief executive querying its involvement in the case. 

Hopefully the appeal process will shed some welcome light on the circumstances where it is or is not reasonable to transfer books of annuities

Charlie Finch, LCP

The authors claimed the watchdog downplayed the “weak financial position” of Rothesay Life relative to Prudential by neglecting to flag its heavy dependence on “artificial capital”.

In a response, also published by the Financial Times on November 1, Rothesay Life chairman Naguib Kheraj said the insurer had “capital far in excess of the regulatory requirement to protect policyholders”.

He wrote: “As part of the court process to consider the transfer of annuities from Prudential, both the independent expert and the judge concluded that Rothesay Life’s capital strength is as strong as (or stronger than) that of the Prudential Assurance Company.”

Issues with transfer extend far beyond capital requirements

The High Court ruling was a big surprise to the industry as such transfers have generally been approved in the past, according to Charlie Finch, partner at LCP.

“Hopefully the appeal process will shed some welcome light on the circumstances where it is or is not reasonable to transfer books of annuities,” he said.

Trustees buying out liabilities with bulk annuity insurers transfer responsibility for paying pensions without member consent in a similar way to back-book transfers. However, experts said schemes should be well insulated from any fallout.

“In my view, this shouldn’t be a cause for concern as Rothesay Life is a well-capitalised insurer under the same regulatory protections and has become well-established over the past 10 years, providing pensions to more than 750,000 individuals,” Mr Finch said.

Indeed, Rothesay Life has been one of the most active bulk annuity insurers in the market in recent years, writing multiple multibillion pound contracts with DB schemes in 2019.

Stephen Scholefield, partner at Pinsent Masons, agreed: “I don’t think the case would make trustees more reluctant to transact with new entrants. Trustees have always been willing to do that and new entrants soon become established players, for example the Pension Insurance Corporation.

“Inevitably, new entrants will rightly need to explain their covenant to trustees, [who] will need to assess how this compares with other alternatives.”

Mr Scholefield continued: “Trustees currently take a variety of approaches when looking at the covenant of an insurer. For most insurers this tends to be based largely on publicly available information for smaller to mid-sized deals, with more detailed analysis done for larger deals. As you’d expect, a new entrant tends to be subject to more scrutiny than an established player.

“The case highlights that covenant, arguably, goes beyond finances and looks at wider issues. It also highlights that the insurer one transacts with might not be the one from whom members ultimately receive their pensions. Given that pensions could be paid over 50 years or so that’s not surprising.”

For any trustee to be challenged on their prerogative to seek a bulk annuity contract, members would probably have to prove that they have taken an entirely unreasonable decision when transferring.

However, Mr Scholefield said: “We may start to see insurers being clearer with trustees (and even members) about the possibility of back-book transfers taking place in the future, so there is not an expectation that this will not happen.”

Members still safe

When the policyholders were choosing how to use their retirement pots to buy an annuity, they picked Prudential because of its reputation, explained Andrew Patten, pensions Lawyer at Fieldfisher.

Mr Patten said: “The implications of this judgment mean that insurance companies, particularly the bigger and better-known ones, are going to have to think more carefully about how their policyholders are going to view this even if they win the appeal, and how they should communicate with them.”

But importantly, members are unlikely to be any more at risk with their new provider, given the high levels of protection involved.

Tom Selby, senior analyst at AJ Bell, said: “It’s worth noting that annuities enjoy 100 per cent Financial Services Compensation Scheme protection with no upper limit, so even in the worst circumstances members should still get the pensions they have paid into.

“For many people, the change will simply be a different company name on the communications they receive; it might possibly alter what insurance companies have to put into communications going forward when they take out a new policy.”