With-Profits Actuary’s Report
SCOTTISH EQUITABLE PLC
Report of the
With-Profits Actuary
on the proposed transfer of business from
Scottish Equitable plc
to
Rothesay Life plc
pursuant to Part VII of the Financial Services
and Markets Act 2000
Alan McBride FFA
With-Profits Actuary (Scottish Equitable)
February 2017
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Contents
1.
SUMMARY ................................................................................................. 3
2.
INTRODUCTION ........................................................................................ 7
3.
OVERVIEW OF SE ................................................................................... 11
4.
SE RISK MANAGEMENT ........................................................................... 17
5.
OVERVIEW OF ROTHESAY ...................................................................... 20
6.
OUTLINE OF THE SCHEME ....................................................................... 22
7.
SE FINANCIAL POSITION BEFORE AND AFTER TRANSFER ...................... 26
8.
ROTHESAY FINANCIAL POSITION BEFORE AND AFTER THE TRANSFER .. 31
9.
EFFECT OF THE SCHEME ON TRANSFERRING SE WPSF POLICYHOLDERS 33
10. EFFECT OF THE SCHEME ON NON-TRANSFERRING SE WPSF
POLICYHOLDERS .......................................................................................... 36
11. CONCLUSION .......................................................................................... 39
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With-Profits Actuary’s Report
REPORT OF THE WITH-PROFITS ACTUARY
1. SUMMARY
Purpose
1.1. I am the With-Profits Actuary of Scottish Equitable plc (“SE”) and the purpose of
my report to the SE Board is to review the impact on policyholders in the WithProfits Sub-Fund (“WPSF”) of SE of the proposed transfer (the “Transfer”) of
certain non-profit annuity policies which are currently liabilities of the Non-Profit
Sub-Fund (“NPSF”) and WPSF of SE to Rothesay Life plc (“Rothesay”).
1.2. My review of the impact of the Scheme covers both with-profits policyholders in the
WPSF who participate in the investment profits/losses arising in the WPSF and nonprofit policyholders in the WPSF who do not participate in the profits/losses that
arise on business in the WPSF. The impact on all SE policyholders is considered by
the Chief Actuary in his report which should be read in conjunction with this report
and the other technical documents, including the Independent Expert’s report.
Scope of the Scheme
1.3. On 11 April 2016, SE entered into a transaction with Rothesay to sell part of its
annuity portfolio to Rothesay.
1.4. The main objective of the transaction from the perspective of the SE WPSF relates
to the overall management of the sub-fund as it runs off.
The non-profit
immediate and deferred annuity book (and the assets backing them) represents an
asset of the fund. The sale ensures that the value of this asset (plus the
associated capital requirements released as a result of the sale) can be fairly
distributed to participating policyholders before the participating with-profits
policies have run off. As well as releasing value for distribution to customers the
removal of these liabilities from the fund removes the risk that future losses will be
made on the book of business and that such losses adversely impact on
participating policyholder payouts.
1.5. The main objective of the transaction from the perspective of SE is to free up
capital in both the WPSF and NPSF currently held against annuity liabilities.
1.6. Reinsurance agreements were put in place with Rothesay under which the future
risks and obligations relating to a specific group of immediate and deferred annuity
liabilities of the NPSF and WPSF of SE were fully reinsured to Rothesay, with the
investment assets backing these liabilities being transferred from SE to Rothesay.
1.7. The reinsurance to Rothesay resulted in an improvement to the solvency position
of the fund and removed almost all of the risk exposure associated with the annuity
liabilities, achieving the primary objective of the transaction.
1.8. Under the reinsurance agreements, approximately 187,000 policies were reinsured
from SE to Rothesay, with approximately 14,000 written in the WPSF and
approximately 173,000 written in the NPSF.
1.9. At the same time as putting in place the reinsurance, SE entered into a separate
agreement with Rothesay in which each party agreed it would use reasonable
endeavours to effect the transfer of those annuities to Rothesay, pursuant to a
court approved insurance business scheme of transfer under Part VII of the
Financial Services and Markets Act 2000 (“FSMA”).
The proposed Scheme
Effective Date (“SED”) is 30 June 2017. The proposed Transfer will remove the
remaining risk exposure to the possibility of default of Rothesay on their obligations
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With-Profits Actuary’s Report
under the reinsurance agreement.
1.10. In addition to the Transfer considered in this document, SE also plans to transfer
an additional portfolio of annuity business to Legal and General Assurance Society
Limited (“LGAS”) under a separate scheme within a short period after the
Rothesay Scheme. This transaction will have no direct impact on the WPSF.
1.11. The annuity policies in scope for transfer to Rothesay are the non-profit annuities
written in the SE WPSF and NPSF excluding those NPSF annuities sold externally on
the open market, predominantly written between 2006 and December 2015 (with
the annuities sold externally on the open market forming the portfolio to be
transferred to LGAS).
As these are all non-profit policies, the benefits are
contractually fixed, and there is no entitlement to bonuses. The Scheme will
transfer the liabilities, rights, and responsibilities of the transferring policies from
SE to Rothesay.
The policyholders in question will therefore cease to be
policyholders of SE and will become policyholders of Rothesay, with the same
contractual benefits. As mentioned above, the investment assets backing the
liabilities have already transferred under the reinsurance agreement with Rothesay.
Key features of the Scheme
1.12. I have considered the impact of the Transfer of business on transferring and nontransferring SE WPSF policyholders and in my view, the key features to note are:
Ref
Outline of key features of the Transfer
Practical aspects affecting the operation of policies and benefits due to policyholders
(i)
The contractual policy terms, conditions and charges are unchanged.
(ii)
Following implementation of the Scheme, Rothesay will assume responsibility for
administering the policies.
Based on information provided by Rothesay on their
intentions, I am not aware of any reason to expect the quality of administration for any
transferring policyholder to deteriorate as a consequence of the Scheme.
Further to this there will be no impact of the Scheme on the quality of administration for
non-transferring WPSF policyholders as no changes are planned in respect of their
administration.
(iii)
The annuities transferring from the WPSF are non-profit policies and do not share in the
with-profits estate so there is no change in contractual benefits from transferring out of
the WPSF.
(iv)
There will be no material changes to the principles or practices by which the SE WPSF is
managed or governed, including for the sake of clarity, no change in the eligibility for
participation in distributions from the WPSF. The reference to participation in profits
and losses on non-profit annuity business contained within the documented Principles &
Practices of Financial Management (“PPFM”) will be updated following transfer of this
business out of the sub-fund. Some of the future profits/losses from the annuity
business are realised as part of the proposed transfer and the preceding reinsurance
treaty with Rothesay. Scottish Equitable Policyholders Trust Limited (“SEPT”) will
continue to provide independent oversight in relation to the management of the SE
WPSF in accordance with its agreed terms of reference.
(v)
The capital released as a result of the proposed Transfer will initially remain within the
fund as part of the overall WPSF estate and therefore be available for distribution to
policyholders (within future bonus declarations) as part of the wider estate distribution
strategy for the fund. Releasing this capital as a result of the proposed Transfer, rather
than waiting for it to be released as the annuity liabilities run-off over time, is expected
to mean that a greater number of participating policyholders will share in its distribution
than would otherwise be the case.
(vi)
The existing scheme of transfer, which established the post-demutualisation structure of
SE, the 1993 Scottish Equitable Life Assurance Society Scheme (“SELAS Scheme”), is
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Ref
Outline of key features of the Transfer
unchanged by the Scheme and will continue to have effect following the implementation
of the Scheme to the extent relevant.
(vii)
There is no materially adverse tax impact expected on policyholder benefits. SE is
working with Rothesay to ensure as far as possible that the transfer does not affect
transferring individual policyholders’ tax codes as this could result in short term
fluctuations to net of tax annuity payments, though not to the total amount of annuity
received over the tax year.
I will provide an update on this aspect in my
Supplementary Report.
Aspects relating to financial strength and risk
(i)
For the transferring policyholders; based on information provided in the report prepared
by the Chief Actuary of Rothesay, the post-Transfer financial position of Rothesay is
such that regulatory requirements are expected to be more than covered. Moreover,
my understanding is that Rothesay will continue to be subject to the current Rothesay
capital and risk appetite management policies after the Transfer.
At the point of assessment used in this report, Rothesay’s financial position provides a
similar level of protection to SE’s, with Rothesay’s framework for the ongoing
maintenance of financial strength being broadly similar to that of SE.
(ii)
SE, and the SE WPSF, will be subject to the same capital and risk appetite management
policies as existed pre-Transfer.
For the non-transferring policyholders the post-Transfer financial position of SE, and of
the SE WPSF on a stand-alone basis, is such that regulatory requirements are expected
to be more than covered. The proposed Transfer will remove the WPSF’s exposure to
the risk that Rothesay will default on their reinsurance obligations and will allow the
release of the capital held in respect of this risk and so result in an improvement in the
solvency of the fund. The proposed transfer also allows a reduction in expenses
charged to the WPSF which will result in a further improvement in the solvency of the
fund.
The consequence of this improvement in solvency should be to provide increased
security for the benefits of the with-profits policyholders within the fund.
Conclusions on the Transfer
1.13. I have considered the potential impact of the Scheme on the security and benefit
expectations of the WPSF policyholders in SE prior to the Transfer, both
transferring and non-transferring policyholders. Based on this consideration and
taking into account the key features of the Transfer outlined above (and the
discussion of these and other matters contained in the remainder of this report), it
is my view that:
(i)
Taking into account the assets and liabilities transferred to Rothesay, the
security of transferring WPSF policyholder benefits will not be materially
adversely impacted as a result of the Scheme.
(ii)
Taking account of the assets and liabilities transferred, the security of the
non-transferring WPSF policyholder benefits will be marginally improved as
a result of the Scheme.
(iii)
The capital and risk appetite policies of SE and of Rothesay provide a
similar level of protection, which in turn provides further comfort that the
security of transferring and non-transferring WPSF policyholder benefits
will not be materially adversely impacted as a result of the Scheme.
(iv)
The Scheme will not result in material changes to the benefit expectations
of any SE WPSF with-profits or non-profit policyholders, other than
potentially allowing a greater number of participating with-profits
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With-Profits Actuary’s Report
policyholders to share in the distribution of the capital expected to be
released by the Transfer than would otherwise be the case.
1.14. I therefore conclude that the Scheme will not result in a materially adverse impact
on the security of transferring and non-transferring WPSF policyholders or their
benefit expectations compared to the status quo.
1.15. I am also satisfied that there will be no material change to the servicing that nontransferring WPSF policyholders will receive as a result of the Scheme and, based
on a comparison of key applicable service standards between Rothesay and SE,
expect transferring WPSF policyholders to enjoy a commensurate level of service
post-Transfer.
1.16. Further, I am satisfied that the proposed communications plan is appropriate for
WPSF policyholders and has paid due regard to the interests of WPSF policyholders
and the need to treat them fairly.
1.17. Taking all of the above into account, I am satisfied that the obligations to treat
customers fairly will not be materially adversely affected by the Transfer. It is
therefore my conclusion that the Transfer may proceed.
1.18. My conclusions above would remain the same whether or not the LGAS scheme is
implemented.
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With-Profits Actuary’s Report
2. INTRODUCTION
2.1. On 11 April 2016, SE entered into a transaction with Rothesay to sell part of its
annuity portfolio. Reinsurance agreements were put in place with Rothesay, with
effect from 1 April 2016, under which the future risks and obligations relating to a
specific group of immediate and deferred annuity liabilities of the NPSF and WPSF
of SE were fully reinsured to Rothesay, with the investment assets backing these
liabilities being transferred from SE to Rothesay. The reinsurance was put in place
on a fully collateralised basis.
2.2. At the same time, SE entered into a separate agreement with Rothesay in which
each party agreed it would use reasonable endeavours to effect the transfer of
those annuities to Rothesay, pursuant to an insurance business transfer scheme
under Part VII of FSMA. The proposed Scheme Effective Date (“SED”) is 30 June
2017.
2.3. The transaction is in line with agreed WPSF management actions as well as the
overall Aegon UK strategy to divest its annuity business and focus on its platform
and protection businesses in the United Kingdom.
2.4. The main objective of the transaction from the perspective of the SE WPSF relates
to the overall management of the sub-fund as it runs off.
The non-profit
immediate and deferred annuity book (and the assets backing them) represents an
asset of the fund. Prior to the reinsurance to Rothesay the with-profits estate (and
hence each participating with-profits policyholder) was exposed to all future profits
and losses arising from this book resulting from experience differing from that
assumed in the calculation of liabilities. The combination of the reinsurance and
proposed Transfer ensure that the value of this asset (plus the associated capital
requirements released as a result of the reinsurance and proposed Transfer) can be
fairly distributed to participating policyholders before the participating with-profits
policies have run off. As well as releasing value for distribution to customers the
removal of these liabilities from the fund removes the risk that future losses will be
made on the book of business and that such losses adversely impact on
participating policyholder payouts.
2.5. The reinsurance to Rothesay resulted in an improvement to the solvency position
of the WPSF and removed almost all of the risk exposure associated with the
annuity liabilities. The remaining risk exposure is to that of a default of the
reinsurer, which would have adverse consequences for participating with-profits
policyholders. The proposed Transfer removes this risk and will allow the release
of the capital held in respect of this risk and so result in an improvement in the
solvency of the fund. The proposed transfer also allows a reduction in expenses
charged to the with-profits fund which will result in a further improvement in the
solvency of the fund.
2.6. The capital released by both the reinsurance to Rothesay and the proposed
Transfer will initially remain within the fund as part of the overall estate and
therefore be available for distribution to policyholders (within future bonus
declarations) as part of the wider estate distribution strategy for the fund.
2.7. In addition to the Transfer considered in this document, SE plans to transfer an
additional portfolio of annuity business to LGAS under a separate scheme within a
short period after the Rothesay Scheme.
2.8. The annuity business in scope for transfer to Rothesay is the non-profit annuities
written in the SE WPSF and NPSF excluding those annuities sold externally on the
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open market, predominantly written between 2006 and December 2015 (see 6.5
for further detail). The annuities sold externally on the open market form the
portfolio to be transferred to LGAS.
2.9. The annuity business in scope comprises approximately 187,000 policies, with
approximately 14,000 written in the WPSF and approximately 173,000 written in
the NPSF.
2.10. In this report I consider the Transfer from the perspective of the transferring and
non-transferring WPSF policyholders (whether invested directly or by way of
reinsurance) of SE and whether the Transfer has any materially adverse impact on
these policyholders.
2.11. This report is written for the Scottish Equitable plc Board (“SE Board”) in my
capacity as With-Profits Actuary (“WPA”) for SE, and should be read in conjunction
with the Scheme, the Chief Actuary (“CA”) report and the report by the
Independent Expert (“IE”). It has also been shared with the Board of Scottish
Equitable Policyholders Trust Ltd (“SEPT”) which has certain oversight
responsibilities placed upon it under the SELAS Scheme and performs the role of
with-profits committee for SE. SEPT has confirmed that it has no objections to its
conclusions.
Option to add further policies
2.12. Under the deal with Rothesay, there is an option for SE to add annuity policies
which were in-force at end 2015 (but which were not initially identified as part of
the reinsurance work) to the reinsurance arrangement. This could include both
WPSF and NPSF annuity policies. Further to this, SE have the option to add new
annuity policies written in 2016 by the NPSF to the reinsurance arrangements
currently in place. Following implementation of this further reinsurance in respect
of these policies, they would then form part of the block of business to be
transferred under the Scheme.
2.13. If the option deed is executed it is expected that the additional liabilities
transferred as part of this arrangement will total c. £200m, almost all of which will
relate to NPSF liabilities, with the decision to execute the option to be made later in
Q1 2017. The WPSF is not expected to transfer any significant amount of
additional liabilities under this option. The addition of this further block of liabilities
is not expected to materially affect the impact, financial or otherwise, of the
Transfer under the Scheme. My Supplementary Report to the SE Board which will
set out any relevant updates to the content of this paper immediately prior to the
planned SED in June 2017 will include an updated assessment of the financial
impact of the transfer, allowing for any additional business added to the
arrangement as described above.
2.14. To manage the timing of the sale of the fixed interest assets currently backing
these annuities within the NPSF, in the event the option deed is executed SE
expects to agree a loan for the proposed reinsurance price from the WPSF estate to
the NPSF for a period of up to 6 months. The interest paid on this loan will be
greater than the WPSF estate currently earns on its cash holdings and therefore
the provision of this loan will provide a small increase to the future value of the
estate, marginally increasing customer security and future distributions to
participating policyholders. As the planned loan is internal to SE plc there will also
be a temporary reduction in the external counterparty exposure of the WPSF.
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Status and disclosure
2.15. I am a Fellow of the Institute & Faculty of Actuaries, having qualified in 2001, and
hold a Practising Certificate issued by the Institute & Faculty of Actuaries to act as
a Chief Actuary and a Practising Certificate to act as a With-Profits Actuary. I have
over 20 years of experience working in the UK life assurance industry, and since
2014 have been the With-Profits Actuary for SE.
2.16. I am an employee of Aegon UK Corporate Services Ltd (“AUKCS”), an Aegon UK
Group service company which provides services to SE. SE is a significant part of
the Group to which the service company provides services.
2.17. Details of any Aegon interests:

As an employee of AUKCS I am subject to a similar pay and benefits structure
as other senior managers in the organisation.

I have no individual performance incentives directly related to the success or
otherwise of the proposed Transfer.

I do not currently hold any Aegon NV shares having sold all shares that vested
in May 2016 as part of a prior year bonus award. I have no other Aegon NV
shares due to vest in the future from bonus or any other incentive
arrangements.

I have an ISA (Individual Savings Account) investment with Aegon as a
customer of Aegon Investment Solutions Ltd.

I have a Group Personal Pension Policy with SE as part of the company’s Staff
Pension Arrangements.
2.18. I consider myself to be free from conflict that would prevent me from assessing the
impact of the Scheme on WPSF policyholder benefits and the security of those
benefits.
Other advice and opinions
2.19. Mr Nick Dumbreck of Milliman LLP has been retained in the capacity of Independent
Expert and has been approved as such by the relevant regulatory bodies. In
finalising my report, I have read a draft of his report on the terms of the Scheme
and considered his conclusions. A copy of this With-Profits Actuary’s report has
also been provided to Mr Dumbreck.
2.20. In addition, I have read and considered the report of the Chief Actuary, Mr James
Crispin, assessing the impact of the Scheme on all policyholders of Scottish
Equitable. A copy of this With-Profits Actuary’s report has also been provided to Mr
Crispin.
Definitions and abbreviations
2.21. A list of the defined terms and abbreviations used in this report is included in
Annex A. Defined terms used but not defined in this report have the same
meaning as those used in the Scheme document and the IE’s Report unless
otherwise highlighted.
Compliance with Technical Actuarial Standards
2.22. This report has been prepared in accordance with, and complies with, the Technical
Actuarial Standards on Insurance, Data, Modelling, Transformations, and Reporting
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With-Profits Actuary’s Report
issued by the Financial Reporting Council.
Review of actuarial work
2.23. With effect from 1 July 2015 Actuaries are required to comply with the
requirements of Actuarial Professional Standard X2: Review of Actuarial Work as
set by the Institute and Faculty of Actuaries. In this regard therefore, this
document has been independently reviewed by a suitably qualified actuary
employed by AUKCS.
Structure of report
2.24. This report is structured as follows:
-
Sections 3 - 4 provide an overview of SE, covering both WPSF and NPSF, and
its risk and capital policy;
-
Section 5 provides key points noted about Rothesay and its risk and capital
policy;
-
Section 6 outlines the proposed Scheme;
-
Section 7 considers the financial position and risk profiles of SE, covering
both NPSF and WPSF, before and after the Transfer;
-
Section 8 considers the financial position and risk profiles of Rothesay before
and after the Transfer;
-
Section 9 summarises the effect of the Scheme on transferring SE
policyholders;
-
Section 10 summarises the effect of the Scheme on non-transferring SE
WPSF policyholders;
-
Section 11 sets out my conclusions;
-
Annex A lists the defined terms and abbreviations used in this report; and
-
Annex B explains the various solvency calculation bases and how these are
assessed in this report.
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3. OVERVIEW OF SE
3.1. This section provides some information on the history and origins of SE to provide
context for the discussion of the impact of the Scheme that is contained in later
sections.
3.2. It also summarises information on the current reinsurance arrangements and
existing capital structure of SE.
Background
3.3. Scottish Equitable traces its origins back to 1831 with the formation of the Scottish
Equitable Life Assurance Society (“SELAS”). SE was incorporated in Scotland on 14
May 1993 as a public limited company with registered number SC144517. Under a
joint venture agreement between SELAS and Aegon International B.V. dated 20
April 1993 (as amended by letters of agreement dated 21 May 1993 and 8
September 1993, and an amendment agreement dated 26 November 2010)
transferring the long-term business of SELAS to SE, it was agreed to capitalise and
operate SE with a view to the long-term business of SELAS transferring to SE. On
31 December 1993, the long-term business of SELAS was transferred to SE (as
part of the demutualisation process) pursuant to a scheme under the Insurance
Companies Act 1982 (the SELAS Scheme). SE is now a wholly owned subsidiary of
AEGON N.V. With the exception of one share owned by Aegon UK plc (“AUK”), the
entire issued share capital of SE is owned by Scottish Equitable Holdings Limited.
In turn, with the exception of one share owned by Scottish Equitable Policyholders
Trust Ltd (SEPT), all of the issued share capital of Scottish Equitable Holdings
Limited is held by AUK, an indirect wholly owned subsidiary of AEGON N.V.
SE and the Aegon Group
3.4. SE and its parent company, AUK, are part of the Aegon Group which is
headquartered in the Netherlands. The diagram below shows a simplified summary
of the Aegon Group structure, with SE shown in the context of the wider group
structure.
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Summary of the business
3.5. SE consists of a long-term fund (“LTF”) (comprising a With-Profits Sub-Fund
(WPSF), a Non-Profit Sub-Fund (NPSF)) and a Shareholder fund (“SHF”). Within
this structure, the following features are noteworthy:

the WPSF comprises conventional with-profits policies, the investment
element of unitised with-profits policies and all immediate and deferred
annuity policies in force at the SELAS Scheme effective date;

the NPSF comprises all other policies including unit-linked business, protection
and employee benefits and post-demutualisation annuities

the division of the LTF between the WPSF and NPSF exists for internal
accounting purposes, enabling respective policyholder entitlements to be
established;

profits (and losses) on assets and liabilities notionally allocated to the WPSF
are for the benefit of with-profits policyholders;

profits (and losses) on assets and liabilities notionally allocated to the NPSF
are for the benefit of the shareholder; and

assets in the NPSF and SHF are available to support WPSF solvency should
there be insufficient assets within the WPSF to meet its liabilities and vice
versa. In line with the requirements of the SELAS Scheme the WPSF is
managed with the intention that such support from the NPSF and SHF should
not be required, and vice versa.
3.6. Following the implementation of the new Solvency II regulations (see Annex B),
the requirement to maintain a separate LTF has been removed and this is now only
maintained for management purposes. The WPSF is a ring-fenced fund under
Solvency II.
3.7. The business of the WPSF consists of:
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
Traditional with-profits policies;

Conventional pension annuity policies in deferment and payment; and

The investment element of some unit-linked pensions and whole of life policies
written in the NPSF where the policyholder has selected to invest either partly
or entirely in the WPSF and thereby participate in the profits and losses of the
WPSF. This is known as ‘unitised with-profits’ business.
3.8. SE has traditionally written annuity business in respect of vesting pension policies.
In 2015 the NPSF received c. £225m of single premiums in respect of new annuity
business. The majority of new annuity business written originates from existing SE
policies with an attaching Guaranteed Minimum Pension or Guaranteed Annuity
Rate option. As part of SE’s intended strategy to cease writing new annuity
business, any future annuity new business is expected be written by a third party
outside of SE. From September 2016, for an initial term of five years, an annuity
introduction service with Legal & General commenced. During the period of this
agreement Legal & General will write annuities that SE would otherwise have
written under its obligations on existing policies that have a Guaranteed Minimum
Pension or Guaranteed Annuity Rate applying.
3.9. Under the SELAS demutualisation scheme of 1993, certain provisions were
specified to protect the future interests of policyholders who held policies at the
time of the demutualisation. This scheme established the SE WPSF as a separate
sub-fund in the SE LTF and assigned to it conventional with-profits policies, the
investment element of unitised with-profits policies, and all immediate and
deferred annuity policies in force at the SELAS scheme effective date. The SE
WPSF has been maintained in accordance with the provisions of the SELAS scheme
(and other protections) and now contains business written both before and after
demutualisation. The business was predominantly sold in the UK.
3.10. The WPSF stopped writing new business with guarantees and rights to participate
in estate and annuity profits and losses in 2002. New investment from unit-linked
policies into New Generation With-Profits (NGWP), a number of ring-fenced subfunds within the WPSF with no investment guarantees, continued to be permitted
until 2013 when the WPSF was fully closed to all new business and formally
entered run-off. Ongoing regular premiums commenced prior to 30 April 2015
continue to be accepted into some sections of the WPSF.
3.11. With-profits bonuses are set in line with the fund’s published Principles and
Practices of Financial Management (PPFM).
Investment policy and amounts
credited and debited to the WPSF are also determined in line with the published
PPFM (which itself recognises the SELAS Scheme provisions). It is important to
note that the annuity policies within the WPSF which are being transferred to
Rothesay are not participating with-profits policies, meaning they are not entitled
to any bonuses or any other form of profit distribution from the estate of the
WPSF, and as such will not be disadvantaged in this respect as a result of the
Transfer.
3.12. Below is a summary of the in-force business of SE, with focus on the WPSF, as
shown in the 31 December 2015 PRA Annual Return based on Solvency I. This
shows the impact of the reinsurances already in place for SE at 31 December 2015
(see 3.14 below) before the Rothesay and LGAS (see 3.18 below) reinsurance
arrangements and related treaties were entered into.
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With-Profits Actuary’s Report
Gross of
reinsurance
reserves (£m)
Net of
reinsurance
reserves (£m)
3,135
18,383
21,518
47
1,908
1,955
46
1,873
1,919
6,568
227
227
86,267
3,187
3,187
92,835
3,413
3,413
114,353
5,369
5,333
Total SE NPSF
2,536,346
51,866
47,238
Total SE
2,650,699
57,235
52,571
Number of
Policies1
Type of business
WPSF LIFE UK - Non-Linked
WPSF PENSIONS UK- Non-Linked
Sub-Total WPSF - Non-Linked
WPSF LIFE UK - Accumulating withprofits
WPSF PENSIONS UK- Accumulating
with-profits
Sub-Total WPSF - Accumulating
with-profits
Total SE WPSF
1: Note that post the publication of the PRA returns, an overstatement of the reported policy count for
NPSF “Deferred annuity non-profit” business was identified. As a result, the number of policies shown in
the table for “Total SE NPSF”, and the “Total SE” figure, are overstated by c. 197,000. There is no
impact on the reported reserves.
3.13. The table shows that the main business of SE WPSF comprises:

Accumulating with-profits business (also known as, and described elsewhere in
this report as, unitised with-profits); in particular individual and group
pensions business but also life (predominantly bond) business.

Liabilities for Guaranteed Annuity Options and Guaranteed Minimum Pensions
which make up just over half of the gross reserves in WPSF PENSIONS UK Non-Linked.

Non-profit annuities in payment and deferred annuities which make up just
under half of the gross reserves in WPSF PENSIONS UK - Non-Linked. The
majority of these are now reinsured with Rothesay with the exception of c.
£3m of immediate annuity reserves and c. £3m of deferred annuity reserves,
both of which may be added to the reinsurance under the option to add further
policies summarised in Section 2.12 above.
Reinsurance arrangements
3.14. There are currently a number of external reinsurance arrangements in place
relating to SE’s WPSF policies.
The tables below summarise the main
arrangements.
External accepted by SE
Reinsured from
Aviva (Royal
Scottish Assurance)
Nature of cover
Investment risk in respect of c. £4m of unit funds from unitised life
products reinsured to SE.
This reinsurance arrangement is unaffected by the Transfer.
External annuity reinsurance ceded by SE
Reinsured
to
Nature of cover
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Munich Re
Reinsurance of longevity risk on annuities vested in SELAS prior to 1/1/94 (and
allocated to the WPSF at demutualisation) and in force at 1/4/98. At 30 June
2016, reinsured best estimate liabilities under this arrangement were c. £0.5bn.
Upon completion of the Transfer, this reinsurance arrangement will transfer to
Rothesay.
The following reinsurance arrangements were established as part of the agreement
to sell the annuity portfolio in Q2 2016 and are not reflected in the 31 December
2015 PRA Annual Return.
Rothesay
Treaties
Two separate treaties with Rothesay fully reinsuring the business to be
transferred under the Scheme. This includes the business covered by the
Munich Re reinsurance treaty above. The arrangement covers the non-profit
WPSF annuity policies to be transferred to Rothesay under the Scheme.
The separate treaties have been set up to align with potential valuation
treatments under Solvency II rules. There is no impact on SE of the risk
transfer occurring under two treaties rather than a single treaty.
Note that these two treaties also cover some NPSF non-profit annuity business,
with two further treaties with Rothesay relating solely to NPSF business.
3.15. In addition to the treaties summarised in the table above, SE has a number of
minor individual facultative reinsurance cases relating to WPSF whole of life
liabilities ceded by SE to external parties. These treaties do not relate to the
Transfer.
Capital structure of SE
3.16. The capital of SE is entirely share capital. SE has made loans of £150m to AUK to
support the purchase of Cofunds (see 3.22 below), £25m to Cofunds itself, and an
internal group loan to Aegon International B.V. These loans are repayable in the
period up to 2033 and are unaffected by the Transfer. There will be no change to
the capital structure of SE as a result of the Scheme.
Recent and planned initiatives
3.17. In addition to the transfer of business to Rothesay under the Scheme, a number of
other recent and planned initiatives are worthy of mention.
3.18. In addition to the proposed transfer of annuity policies to Rothesay a separate
transfer under Part VII of the FSMA of a further portfolio of annuity liabilities of the
NPSF to LGAS is planned, with scheme effective date within a short period after the
Rothesay Scheme. Similar to the arrangement with Rothesay, the business which
will be transferred was fully reinsured to LGAS with effect from 1 May 2016. The
impact on the Scheme covered by this paper of the LGAS transfer taking place or
not taking place is considered in Section 7. There is no direct impact of this
transfer on the WPSF.
3.19. From 5 September 2016 an arrangement was put in place with LGAS in respect of
the writing of new annuity business (see 3.8 above). The arrangement does not
have a significant immediate impact on SE’s solvency position and does not affect
the assessment of the proposed Scheme as set out in this paper.
3.20. In May 2016, an agreement was reached to acquire BlackRock Life Limited’s
(“BlackRock”) UK defined contribution platform, with a view to subsequently
completing a transfer of the business into SE under Part VII of the FSMA. The
transfer is planned to be carried out in H1 2018 after the implementation of this
Scheme. Implementation of the BlackRock scheme will be considered in isolation
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With-Profits Actuary’s Report
and does not affect the conclusions set out in this report. There is no direct impact
of this acquisition on the WPSF.
3.21. In August 2016, AUK agreed to purchase Cofunds Limited (an investment
administration company) from Legal & General in a deal funded in part by a loan
from SE. The purchase was completed on 1 January 2017. There is no direct
impact of this purchase on the WPSF.
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4. SE RISK MANAGEMENT
4.1. SE maintains a risk management framework. This section provides a summary of
the key features of this framework.
SE Capital Management Policy
4.2. In order to protect the interests of policyholders, insurance business is subject to
significant regulatory oversight. In particular, regulations set out requirements for
how much capital an insurer should maintain to cover the risks associated with its
liabilities. A summary of the current regulatory regime for UK insurers is provided
in Section 7 and Annex B.
4.3. SE’s Own Risk and Solvency Assessment (“ORSA”) has a primary purpose of
providing a holistic, inter-connected view of the SE business strategy, the risks to
which the business is exposed and its capital levels. The ORSA will support the SE
Board in considering “Is our strategy affordable?” through consideration of the level
of policyholder protection in the business. Policyholder protection is primarily
driven through capital adequacy testing under normal and stress scenarios.
4.4. In addition to these regulatory capital requirements, extra capital is maintained by
SE in accordance with the SE capital management policy approved by the SE Board
and in line with the Aegon Group Capital Policy. This additional capital aims to
protect SE from breaching its regulatory capital requirements following a range of
adverse events considered as part of setting the target level of capital under the
capital management policy.
4.5. Regulatory requirements oblige companies to hold sufficient Own Funds (which is
the difference between the value of a company’s assets and technical provisions) to
cover 100% of their regulatory capital requirements.
Under the SE capital
management policy, a level of additional capital is targeted such that SE aims to
cover between 130% and 150% of its regulatory capital requirement.
4.6. In addition to the overall capital management policy for SE, the WPSF aims to
maintain sufficient assets to cover 100% of the regulatory capital requirements
associated with the liabilities of the WPSF plus further assets sufficient to maintain
an appropriate amount of working capital within the fund.
4.7. The position against the capital and risk appetite policy is subject to regular
monitoring and is also shared with regulators (as part of a close and continuous
monitoring relationship).
4.8. The SE capital management policy is reviewed at least annually by the SE Board.
No change to the SE capital management policy is planned as a result of the
Scheme. Section 7 shows that SE’s solvency position after implementation of the
Scheme remains at least sufficient to provide the protection required under the SE
capital management policy as described above.
4.9. Overall, since regulatory requirements require insurers to maintain assets that are
significantly greater than those expected to be needed to meet policyholder
benefits and since the SE capital management policy requires further assets to be
maintained such that these regulatory requirements can continue to be met after a
reasonably adverse scenario, the SE capital management policy provides significant
comfort that benefits for non-transferring policyholders will have the same level of
security after implementation of the Scheme as before.
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Role of SEPT and the With-Profits Actuary
4.10. Additional governance protection for the WPSF is provided by SEPT. SEPT was
established under the SELAS scheme of demutualisation and at that point was
provided with powers including:

The right to be consulted on and give consideration to the investment policy of
the WPSF and bonus rates declared for with-profits policies;

Various powers to call on SE to provide information, access to documentation
and certificate on any issues which SEPT may need to be satisfied about;

Power to hire professional advisers and have them paid;

The right to communicate with the regulators over any matter of concern;

The power to, or compel SE to, communicate with with-profits policyholders
over any matter of concern;

The power to appoint two Directors to each of the Boards of SE and Scottish
Equitable Holdings Ltd;

The power to act as a shareholder in the general meetings of Scottish Equitable
Holdings Ltd; and

Specific rights if Aegon wishes to transfer all of their shares to a third party
outside of the Aegon group or establish additional sub-funds within SE.
4.11. SEPT performs the role of with-profits committee for SE as defined in the FCA
Conduct of Business Rules, which gives it powers and duties including:

Providing independent assessment and advice to the SE Board on relevant
matters, including:
o Proposed changes to the PPFM;
o Proposed exercise of material management discretion for with-profits
business;
o Proposals from the SE Board that impact pay-outs to with-profits
policyholders;
o Matters that materially impact the financial position of the with-profits
funds;
o The SE Board’s annual report to with-profits policyholders concerning
management of the with-profits funds;
o Proposed changes to customer
policyholder statements; and
communications
such
as
annual
o Relevant management information such as customer complaints data.

Ability to make a report to with-profits policyholders, to be annexed to the SE
Board and With-Profits Actuary’s annual reports;

Review of investment decisions in respect of the WPSF;
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With-Profits Actuary’s Report

Review and consider the drafting, updating of and compliance with run-off
plans, court schemes and similar matters;

To work closely with the With-Profits Actuary and be entitled within reason to
request the With-Profits Actuary to carry out investigations into matters which
are of actual or potential concern;

Advise the SE Board on the suitability of candidates proposed for appointment
as the With-Profits Actuary and provide the firm with an assessment of the
performance of the With-Profits Actuary at least annually.
4.12. Further oversight and protection is given by the regulatory requirement to appoint
a With-Profits Actuary, the author of this report, to advise SE on its exercise of
discretion affecting with-profits customers, which allows him to present his advice
directly to the SE Board of directors if required. The With-Profits Actuary is also
required to work closely with SEPT and to investigate any matters which are of
concern to it.
Other risk management policies/practices
4.13. In addition to the SE capital management policy, other ongoing governance
processes include:

Maintenance of Risk Appetite policies which set limits for the different types
of risk exposures faced by the business. These limits define the amount of
risk that the organisation is prepared to seek, accept, or tolerate and are
aligned to Aegon UK strategy. As such, Risk Appetite is subject to a regular
reporting cycle to the SE Board and regulators (as part of a close and
continuous monitoring relationship).

A specific Risk Tolerance framework for the WPSF, defining relevant risk
tolerance measures for the fund and the extent to which assumed future
management actions can be employed in the calculation of the Solvency
Capital Requirement.

A “three lines of defence” model which provides a mechanism for the
identification, quantification, prioritisation, and management of risk in
accordance with SE policies and regulatory requirements. Under this model,
the first line refers to the work and governance undertaken by management
and senior management to manage risk. Separate second line assurance of
risk and capital management is performed by the SE Risk function while the
independent third line assurance is provided through SE Internal Audit.
4.14. I note that these and other aspects of SE risk management (which provide comfort
that risks are identified, understood, and managed) are not being changed by the
Scheme under consideration in this paper.
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5. OVERVIEW OF ROTHESAY
5.1. Rothesay Life Limited was established on 26 February 2007 as a wholly owned
subsidiary of its ultimate parent company, The Goldman Sachs Group LP.
5.2. Rothesay Life Limited was deconsolidated from Goldman Sachs in December 2012.
As part of this deconsolidation, its ownership was transferred to a UK holding
company, Rothesay Holdco UK Limited. Rothesay Holdco UK Limited’s largest
shareholders are Goldman Sachs (32.7%), The Blackstone Group L.P. (26.5%),
and Government of Singapore Investment Corp (26.5%).
5.3. Rothesay Life Limited was authorised by the FSA as a regulated insurance company
(licensed to write long-term classes I, III, IV, and VII) on 12 July 2007. It was
established to provide solutions in the UK defined benefit pension risk transfer
market.
5.4. Rothesay completed its first transaction in February 2008 and has subsequently
undertaken further transactions of varying size and structure, including
conventional deferred and immediate bulk annuities, collateralised buy-ins, and
longevity swaps.
5.5. Rothesay Life became a plc in March 2016.
5.6. Below is a summary of the in-force business of Rothesay as shown in the 31
December 2015 PRA Annual Return based on Solvency I:
Type of business
WPF LIFE UK
WPF PENSIONS UK
WPF OVERSEAS
Sub-Total - WPF
NPF LIFE UK - Linked
NPF PENSIONS UK - Linked
NPF OVERSEAS - Linked
Sub-Total – NPF - Linked
NPF LIFE UK - Non-Unit-Linked
NPF PENSIONS UK - Non-Unit-Linked
NPF OVERSEAS - Non-Unit-Linked
Sub-Total - NPF - Non-Unit-Linked
Total Rothesay
Gross of
reinsurance
reserves (£m)
12,097
16
12,113
2,010
104
2,115
14,228
Net of
reinsurance
reserves (£m)
11,842
16
11,858
1,990
103
2,093
13,951
5.7. Comparing this table with that shown in 3.12 shows that pre-Transfer, Rothesay
operates in fewer business markets than SE. The c. £12bn of reserves relating to
“Linked” business are primarily in respect of immediate and deferred annuities with
payments linked to inflation indices. There is also c. £2bn of reserves in respect of
fixed payment annuities. At end-December 2015 Rothesay has not written any
with-profits business and does not have a with-profits fund.
5.8. The transfer of annuity policies under the reinsurance agreement between SE and
Rothesay put in place in April 2016 represents around three times the “NPF - NonUnit-Linked” gross of reinsurance reserves shown in the table.
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Recent and planned initiatives
5.9. During April 2015, December 2015 and June 2016, three tranches of annuity
business transacted by Zurich Assurance Limited (“ZAL”) were reinsured by
Rothesay. The transaction was conducted as three funded reinsurance trades
covering c £1.2bn of in payment pension liabilities.
5.10. All ZAL liabilities reinsured with Rothesay will be transferred to Rothesay through a
Part VII transfer, which is expected to have an effective date in June 2017.
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6. OUTLINE OF THE SCHEME
Background to the Scheme
6.1. On 11 April 2016, SE entered into an agreement with Rothesay. As part of this
deal, four reinsurance arrangements were put in place with Rothesay, with effect
from 1 April 2016, under which the future risks and liabilities on a specified group
of immediate and deferred annuity liabilities of the NPSF and WPSF of SE were fully
reinsured to Rothesay. At the same time, SE entered into a separate agreement
with Rothesay in which each party agreed it would use reasonable endeavours to
effect the transfer of those annuities to Rothesay pursuant to a scheme under Part
VII of FSMA.
6.2. The Transfer and the transfer to LGAS form part of AUK’s strategy to divest its
annuity business and focus on its platform and protection businesses in the United
Kingdom. The main objective of the transaction from the perspective of SE is to
free up capital in both the WPSF and NPSF currently held against annuity liabilities.
6.3. The main objective of the transaction from the perspective of the SE WPSF relates
to the overall management of the sub-fund as it runs off.
The non-profit
immediate and deferred annuity book (and the assets backing them) represents an
asset of the fund. The combination of the reinsurance and proposed Transfer
ensure that the value of this asset (plus the associated capital requirements
released as a result of the reinsurance and proposed Transfer) can be fairly
distributed to participating policyholders before the participating with-profits
policies have run off. As well as releasing value for distribution to customers the
removal of these liabilities from the fund removes the risk that future losses will be
made on the book of business and that such losses adversely impact on
participating policyholder payouts.
6.4. The intention to eventually remove the non-profit annuity liabilities from the WPSF
is documented in the fund’s run-off plan as submitted to the regulators. While the
structure and timing of such a removal was being kept under review, it was felt
that the wider, strategy driven exercise to sell the non-profit annuities in the rest
of SE provided an appropriate opportunity to release the capital associated with
these liabilities in the WPSF and remove participating policyholders exposure to the
risk of losses in this book of business. Participating in an SE wide exercise was
also believed to provide a greater likelihood of an acceptable price given the larger
scale of the overall transaction.
6.5. Annuities included in the reinsurance agreements with Rothesay consist of the
following non-profit policies:

Pensions annuities in payment which are liabilities of the WPSF;

Life annuities in payment which are liabilities of the WPSF;

Group buyout deferred annuities, which are liabilities of the WPSF; and

Certain pension annuities in payment, life annuities in payment, group
buyout deferred annuities, and group buy-in deferred annuities which are
liabilities of the NPSF.
6.6. The following annuities have been excluded: annuities where the policyholder is
believed to have died prior to 1 April 2016 (i.e. suspended policies and suspected
deaths).
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6.7. Certain assets and liabilities related to the Transferred Business are excluded from
the Scheme, including excluded mis-selling liabilities. These excluded assets and
excluded liabilities will remain with SE. Any mis-selling liabilities which crystallise
on or before 1 April 2031 will remain liabilities of SE (and the parties have agreed
certain risk sharing and claims handling arrangements in relation to these
liabilities). Mis-selling liabilities which crystallise after 1 April 2031 will transfer
pursuant to the Scheme and will become liabilities of Rothesay.
6.8. If the Transfer does not take place, it is SE’s current intention that the reinsurance
arrangement will remain in place and hence the policies will remain reinsured to
Rothesay. No detriment would arise to policyholders who would otherwise have
transferred if this were to happen. While this would be unlikely to result in
material detriment to with-profits policyholders, the fund would remain exposed to
the risks and expenses of the reinsurance arrangements, and therefore
policyholder security would be marginally poorer than if the business was
transferred. In addition the remaining capital associated with the policies would be
released over a longer time period and so would become available for distribution
later, and so potentially to fewer participating policyholders, than if released under
the proposed Transfer.
6.9. Note that policyholder security will remain greater than if the reinsurance to
Rothesay had not been put in place as the reinsurance itself increased the financial
strength of the WPSF and therefore policyholder security.
Overview of the business transferring
6.10. The Scheme is expected to transfer the specified immediate and deferred annuities
of the NPSF and WPSF of SE to Rothesay on 30 June 2017 (the ‘Scheme Effective
Date’). The annuities which will transfer are those annuities reinsured to Rothesay
under the reinsurance arrangements described in 6.1, which are in-force as at the
Transfer Date. This will include any additional policies added to the reinsurance
arrangement prior to the Transfer Date under the mechanism described in Section
2.12. The policy numbers of the affected annuities will be listed in schedules
provided by SE to Rothesay on or before the Scheme Effective Date.
6.11. The liabilities in respect of transferring policies will transfer from SE to Rothesay.
As mentioned above, assets backing the liabilities have already been transferred
alongside the liabilities from SE to Rothesay under the reinsurance agreement.
The assets transferred from the WPSF comprised a mix of corporate and
government bonds which were explicitly held to meet the transferring WPSF nonprofit annuity liabilities prior to implementation of the reinsurance. No assets held
as part of participating with-profits asset shares were transferred as part of
implementing the reinsurance with Rothesay.
6.12. Following implementation of the Scheme, Rothesay will assume responsibility for
administering the policies.
Impact on SE policies
6.13. The policies in SE which are not transferring to Rothesay under the Scheme,
namely the remaining policies within the NPSF and WPSF (including any annuities
which are not reinsured to Rothesay) will remain in the same funds as now and no
changes are being proposed to their terms and conditions under the Scheme. The
NPSF annuity policies currently reinsured to LGAS are planned to be transferred to
LGAS under a separate scheme within a short period after the Rothesay Scheme.
Further, there will be no change to the operation of the WPSF (other than the
Page 23 of 42
With-Profits Actuary’s Report
absence of the transferred business) nor the NPSF and these will continue to
operate as discrete sub-funds of the long term fund.
6.14. The transferring SE policies will become policies of Rothesay and SE will have no
further liability for them. The contractual terms and conditions of the transferring
policies will not change as a result of the Scheme. Rothesay has its own capital
policy which provides similar protection to the SE capital management policy (see
Section 8 for further details).
6.15. Those costs associated with the Scheme that are attributable to SE will be met
from shareholder funds. Policyholders and the WPSF will bear no part of the cost
of the Scheme.
Existing Scheme of Demutualisation and changes to PPFM
6.16. The implementation of the Scheme in respect of the Transfer to Rothesay will have
no material impact on the non-transferring policyholders of SE covered by the
SELAS Scheme (other than a marginal increase in policyholder security) and the
ongoing operation of the WPSF or benefits and security of the transferring
policyholders.
6.17. The annuity policyholders of SELAS whose policies were allocated to the WPSF on
demutualisation are not participating policyholders and have no entitlement to
distributions from the WPSF. These policyholders will therefore not lose any
participation rights as a result of the transfer of their policies to Rothesay.
6.18. The PPFM for the SE WPSF will be updated to reflect the impact of the Scheme.
Specifically the reference to “participation in any profits/losses that arise on nonprofit business in the WPSF (for example certain annuities)” will be updated
following transfer of the non-profit annuity business out of the sub-fund. Some of
the future profits/losses from the annuity business are realised as part of the
proposed Transfer and the preceding reinsurance treaty with Rothesay. Putting the
reinsurance arrangement with Rothesay in place resulted in an immediate
improvement in the WPSF Solvency II Surplus. The Transfer will lock in the benefit
of this reinsurance, remove the risk of the adverse impact on participating
policyholders that would result from reinsurer default and is expected to improve
WPSF Solvency II Surplus by around a further £18m as shown in Section 7.17.
Reinsurances
6.19. As summarised in Section 3, there are a number of external reinsurance
arrangements in place for the WPSF.
6.20. Upon implementation of the Transfer, the reinsurance arrangement with Rothesay
will be redundant and will fall away.
6.21. The longevity reinsurance arrangement with Munich Re that the WPSF has in place
covering the majority of the immediate annuity policies transferring under the
Scheme will be transferred to Rothesay under the Scheme. Munich Re has been
made aware of the annuity sale and will be formally notified of the Transfer under
the notifications plan.
6.22. The WPSF’s other current external reinsurance arrangements will remain postTransfer.
6.23. It is not expected that there will be changes to the terms of the reinsurance
treaties that will remain in place within the WPSF as a result of the Scheme. No
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With-Profits Actuary’s Report
new reinsurance treaties are being introduced as a result of the Scheme.
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7. SE FINANCIAL POSITION BEFORE AND AFTER TRANSFER
7.1. This section contains information on the financial position of SE before and after
the Transfer. This information is useful in providing some quantitative assessment
of the impact of the Transfer on WPSF policyholder security.
7.2. The impact of the Transfer on SE as a whole is presented as the overall SE
solvency position is relevant to the security of WPSF policyholders. As mentioned
in Section 3.5, assets in the NPSF and SHF are available to support WPSF solvency
should there be insufficient assets within the WPSF to meet its liabilities and vice
versa. In line with the requirements of the SELAS Scheme the WPSF is managed
with the intention that such support from the NPSF and SHF should not be
required, and vice versa.
7.3. It also contains information on the impact of the Transfer on the overall balance of
risks WPSF policyholders are exposed to and covers particular matters relating to
this that are of relevance to WPSF policyholders. This information is relevant in
gaining further understanding of how WPSF policyholder security of benefits will be
affected by the Transfer.
Background on solvency assessments for UK companies
7.4. UK insurance companies are required, by regulation, to maintain a minimum level
of capital resources to reduce the risk that they are unable to meet their future
obligations to policyholders.
7.5. The new EU Solvency II framework came into effect on 1 January 2016. The
Solvency II requirements require companies to apply to use an Internal Model or to
adopt the Standard Formula to assess the amount of capital they hold, to ensure
that it remains able to meet its liabilities to policyholders in all but the most
extreme circumstances.
7.6. The College of Supervisors approved SE’s use of a Partial Internal Model in
December 2015.
7.7. In addition under SII firms have the option to apply to use a Matching Adjustment
or a Volatility Adjustment to adjust the discount rate to value certain liabilities.
7.8. The PRA approved SE’s use of the Matching Adjustment for its Immediate Annuity
Business and the Volatility Adjustment for its With-Profits Investment Guarantees.
7.9. The SELAS scheme requires that the WPSF does not rely on financial support from
the NPSF and vice versa. Separate solvency assessments are undertaken for each
of the WPSF and NPSF (as well as SE as a whole). The risk tolerance framework
for the WPSF requires that the WPSF aims to have sufficient assets to cover its
technical provisions, its notional solvency capital requirement, and to maintain an
appropriate amount of additional working capital within the fund.
Solvency calculations
7.10. In order to assess whether or not the security of WPSF policyholder benefits is
materially affected by the Scheme, it is useful to compare the solvency position of
SE, considering both WPSF and NPSF, before and after the Transfer.
7.11. The excess of the Own Funds (which is the difference between the value of a
company’s assets and technical provisions) over and above the Solvency Capital
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With-Profits Actuary’s Report
Requirement (“SCR”) gives the Solvency II surplus and this surplus provides a
useful indicator of the immediate impact of the Scheme on the level of security
provided to policyholders.
7.12. The SE solvency assessment as at 30 June 2016 is shown in the tables below. I
consider the positions at this date to be suitable for the purpose of assessing the
impact on the Scheme on policyholder security.
7.13. The solvency position is estimated to have moved since 30 June 2016 due to the
following:

Market movements are estimated to have reduced the solvency of both the
NPSF and WPSF.

Changes to demographic assumptions arising from the annual assumptions
review have increased the solvency of the NPSF while having minimal impact
on the WPSF.

Subsequent to 30 June 2016, SE made loans totalling £150m to AUK to
support the purchase of Cofunds Limited (as described in Section 3) and a
further £25m loan to Cofunds itself. The impact of these loans on the
solvency position is not material when considering the impact of the
Scheme.
Taking these movements into account, I am not aware of any events since 30 June
2016 (up to the date of this report) that would materially alter the conclusions on
the Transfer obtained from the 30 June 2016 position.
7.14. However, I will continue to monitor the solvency position and risk profile of both
the WPSF and SE as a whole and will provide an update in a Supplementary Report
to the SE Board which will also be shared with the regulators and the IE prior to
the final High Court Sanction hearing in June 2017.
7.15. As mentioned in Section 3.18, a separate scheme to transfer an additional portfolio
of immediate annuities from the NPSF of SE to LGAS is planned to be implemented
within a short period after the Rothesay Scheme. Results are shown below
illustrating the impact on SE of the Transfer to Rothesay whether or not the
transfer to LGAS is completed.
Solvency II position pre-Transfer
7.16. The table below shows the pre-Transfer Solvency II position for SE. The preTransfer positions are at 30 June 2016 as presented to the SE Board. The SCR
includes the impact of the Counterparty Risk Capital Add-on that we applied to the
PRA for in respect of the Rothesay and LGAS reinsurance. This had not been
approved by the PRA as at 30 June 2016. Following discussions with the PRA,
alternative methodology was agreed in Q4 2016 which will be reflected in the end2016 reported Solvency II position and in my Supplementary Report referred to
above. The change in methodology will not materially alter the conclusions on the
Transfer obtained from the 30 June 2016 position shown below. These results
have been subject to a limited assurance review by SE’s auditors
PricewaterhouseCoopers LLP.
SII Results (£m)
Own Funds
NPSF
1,932
WPSF
WPSF Ringfence
311
Page 27 of 42
(140)
SE Plc
2,103
With-Profits Actuary’s Report
SCR
Surplus (deficit)
Solvency ratio
1,313
171
-
1,483
619
140
(140)
619
147%
182%
N/A
142%
Note that the WPSF is a stand-alone ring-fenced fund, with any excess assets
ultimately being distributed to WPSF policyholders over the remaining life of the
fund. As a result the WPSF surplus shown in the table does not increase surplus at
a total SE plc level.
Solvency II position post Rothesay Transfer with LGAS Transfer
7.17. The table below shows the (pro forma) post-Transfer Solvency II position for SE.
In this scenario, the transfer of additional annuity policies to LGAS as described
above is assumed to have also occurred.
SII Results (£m)
NPSF
WPSF
WPSF Ringfence
SE Plc
Own Funds
1,938
320
(158)
2,099
SCR
1,157
162
-
1,319
781
158
(158)
781
167%
198%
N/A
159%
Surplus (deficit)
Solvency ratio
Solvency II position post Rothesay Transfer without LGAS Transfer
7.18. The table below shows the (pro forma) post-Transfer Solvency II position for SE.
In this scenario, the transfer of additional annuity policies to LGAS as described
above is assumed not to have occurred.
SII Results (£m)
NPSF
WPSF
WPSF Ringfence
SE Plc
Own Funds
1,868
320
(158)
2,030
SCR
1,269
162
-
1,431
599
158
(158)
599
147%
198%
N/A
142%
Surplus (deficit)
Solvency ratio
Impact of Transfer
7.19. The results show that post the Rothesay Transfer, whether the LGAS transfer
happens or not, the solvency ratio of SE remains within or above the target range
of 130% to 150% as set in the SE capital management policy. This demonstrates
that policyholder benefits will retain a similar level of ongoing protection after the
Transfer.
7.20. The impact of the Transfer on SE, and on the WPSF, is limited to its effect on the
liability held in respect of annuity administration expenses and the allowance for
counterparty default risk in respect of the reinsurance agreement with Rothesay.
There is no further impact on SE, or the WPSF, as the risk in respect of the annuity
liabilities and backing assets has already been transferred to Rothesay under the
existing reinsurance arrangement.
7.21. The results also show that in the scenario where the LGAS transfer also happens,
the SE solvency ratio post-Transfer is significantly higher than that pre-Transfer.
Page 28 of 42
With-Profits Actuary’s Report
This is due to the following:

There is a significant improvement in the solvency position of the NPSF
resulting from the release of counterparty risk capital held in respect of the
reinsurance treaties with Rothesay and LGAS.

There is an increase in the solvency position for the WPSF on a standalone
basis following the release of counterparty risk capital held in respect of the
reinsurance treaties with Rothesay and the removal of the expense reserve
held in the WPSF noting that the expense allowances paid to the NPSF by
the WPSF in respect of the annuity policies covered by the reinsurance are
set by the SELAS scheme of demutualisation.

In the case in which the planned transfer of business to LGAS does take
place, the figures above assume that SE no longer requires to maintain an
annuity administration system which results in a reduction in the residual
net liability held in respect of expenses. The share of overheads currently
allocated to annuity business is assumed to be re-spread over the rest of
the business. In practice as part of the integration of the Cofunds business
expense synergies should be achieved which should reduce the overheads.
While this has no direct impact on the WPSF, any increase in the financial
strength of SE as a whole improves the security of both WPSF and NPSF
policies.
7.22. The results also show that in the scenario where the LGAS transfer does not
happen, the SE solvency ratio post-Transfer is broadly unchanged versus the preTransfer position. This is due to the following:

There is an improvement in the solvency position resulting from a release of
counterparty risk capital currently held in respect of the reinsurance
agreement with Rothesay.

This is offset by an increase in the allowance made for future maintenance
expenses on annuity business.
In the case in which the planned transfer of business to LGAS does not take
place, the figures assume that the worst case position that the cost of
maintaining SE’s annuity administration remains at its current level.
Payments in respect of expenses currently made by Rothesay under the
reinsurance arrangement would cease upon the Transfer and hence SE’s
expense liability would increase. Note that costs incurred in respect of the
administration of group immediate and deferred annuities by external
service providers will cease upon completion of the Transfer. In practice
management actions would likely be taken to remove the variable cost and
manage down the fixed costs.
7.23. These results highlight that:

While the implementation of the LGAS transfer does affect the impact of the
Rothesay Transfer, in both cases the solvency position post-Transfer
remains at least in the target range as defined by the SE capital
management policy.

The standalone WPSF position is unaffected by the LGAS transfer as no
WPSF policies will be transferred to LGAS.
Conclusions on the overall financial impact of the Scheme and its impact on
Page 29 of 42
With-Profits Actuary’s Report
WPSF policyholder security
7.24. Based on the analysis undertaken and summarised above, I consider that the
security of benefits of the non-transferring SE WPSF policyholders is not materially
adversely affected by the Scheme. In presenting this conclusion I would note in
particular:

That the analyses and results discussed in this section demonstrate that
SE’s WPSF solvency position will be improved by the Transfer and hence so
will its ability to cover its expected future liabilities.

The existing WPSF and SE capital and risk appetite policies will not be
changed as a result of the Scheme and this provides me with additional
comfort that WPSF policyholder benefits will retain a similar level of ongoing
protection after the Transfer.
Overall impact of the Scheme on risk profile
7.25. As outlined in Section 6, the Scheme will transfer certain annuity policies of SE to
Rothesay. The arrangements which fully reinsure the future claims on those
policies from SE to Rothesay are already in place and hence the majority of the risk
transfer from SE to Rothesay in respect of this business has already taken place.
Upon transfer SE will no longer be exposed to Rothesay as a reinsurance
counterparty. In the case of the WPSF this is a risk primarily borne by the
participating with-profits policyholders. Removal of this exposure is the primary
change to both the WPSF’s and SE’s risk profile which will result from
implementation of the Scheme.
Conclusions on the overall impact of the Scheme on risk profile
7.26. Based on the discussion undertaken and summarised above, I do not consider that
a materially adverse impact will arise as a result of changes in risk profile that will
occur as a result of the Scheme.
Impact of reinsurance and fairness to non-transferring participating WPSF
policyholders
7.27. This paper is only concerned with the implementation of the Part VII Transfer to
Rothesay as the reinsurance arrangement transferring the majority of the risk is
already in place. It is worth noting however that in making the decision for the
WPSF to enter into the arrangement to sell its non-profit annuity policies to
Rothesay, detailed consideration was undertaken on behalf of the participating
with-profits policyholders around the price paid (i.e. the value of assets to be
transferred) relative to the resulting reduction in the fund’s Solvency II technical
provisions, and the amount of Solvency Capital Requirement able to be released by
the combined impact of the initial reinsurance arrangement and the proposed
Transfer.
7.28. The final price paid resulted in a small increase in own funds (i.e. excess of assets
over technical provisions) as a result of the initial reinsurance, with a further
increase which is expected to be realised upon completion of the proposed
Transfer. Similarly the initial reinsurance led to a release of SCR capital, with a
further release expected on completion of the proposed Transfer. As such, taking
all relevant considerations into account, including the removal of the risk of
participating policyholders incurring future losses on the business, the agreed price
was deemed by the With-Profits Actuary, Chief Actuary, SEPT and the SE Board to
be
fair
to
non-transferring
participating
WPSF
policyholders.
Page 30 of 42
With-Profits Actuary’s Report
8. ROTHESAY FINANCIAL POSITION BEFORE AND AFTER THE TRANSFER
8.1. The figures and statements in this section have been prepared and supplied by the
Chief Actuary of Rothesay. I have not reviewed or checked these statements or
the calculations, however, the pre-Transfer solvency position detailed in 8.2 below
has been subject to review by Rothesay’s auditors solely for the benefit of the
directors of the company and have been published in the public domain and I take
comfort from that.
Impact of the Transfer on Rothesay’s solvency position
8.2. The Solvency II financial position of Rothesay before and after the proposed
Transfer (as if it had been effective on 30 June 2016) is set out in the table below.
As the policies in question are reinsured to Rothesay and the transaction was fully
funded at the point of sale, with assets transferred to Rothesay, there is no change
in the solvency position of Rothesay due to the Scheme.
Rothesay Solvency II financial position pre and post proposed Transfer (£m)
30.06.2016
Post-Part VII pro forma
Assets
23,863
23,863
Net Technical Provisions
21,120
21,120
Own Funds
2,743
2,743
Solvency Capital Requirement
1,694
1,694
Free Assets/Surplus
1,049
1,049
SCR cover (%)
162%
162%
8.3. The Chief Actuary of Rothesay does not expect the proposed Transfer to have any
impact on the Solvency II capital position of Rothesay.
Subsequent events
8.4. The Chief Actuary of Rothesay has indicated that while he does not expect the
Scheme itself to have a significant impact on the financial position of Rothesay,
there are a number of other management actions that could have an impact on
Rothesay’s financial position. These include:

Further new business is expected to be written by the group into Rothesay;

A dividend may be made either from any of the following:

o
Rothesay to Rothesay HoldCo, or;
o
Rothesay HoldCo to shareholders.
Further capital may be raised at either Rothesay HoldCo or Rothesay level.
8.5. The Chief Actuary of Rothesay has indicated that it is his understanding from
Rothesay management they do not currently expect a material change to the risk
profile or financial position of the company in the immediate future.
8.6. The Chief Actuary of Rothesay has stated that the changes listed above, while
changing the absolute size of the balance sheet, are all within the business plan for
Rothesay and are not expected to lead to a material change to the risk profile or
financial position of the company.
Page 31 of 42
With-Profits Actuary’s Report
Rothesay Capital Policy
8.7. The Rothesay capital policy aims to ensure that the Solvency II regulatory capital
requirement is covered at a ratio of not less than 130%. If the capital ratio
increases above 150% the Rothesay Board will consider the appropriateness of
retaining the capital above this level within the business. This is in line with the SE
capital management policy.
8.8. The Chief Actuary of Rothesay has indicated that as at 31 December 2015 and 30
June 2016 (and, to the best of his knowledge, the period in between and at the
time of writing this report) Rothesay held surplus assets in excess of the minimum
requirements as per the capital policy on a Solvency II basis.
8.9. The Chief Actuary of Rothesay has stated that it is his understanding that the Part
VII transfer of the SE and Zurich policies to Rothesay will have no impact on the
capital management policy. It is also his understanding that any capital policy will
remain under review by the Rothesay Board to ensure that it remains appropriate.
Any changes to this policy will be approved by the Rothesay Board after
appropriate consultations with the PRA.
8.10. Customers will replace exposure to SE with exposure to Rothesay. While they are
different businesses with different risk profiles both are regulated by the PRA and
subject to SII requirements.
Rothesay currently operates under a Standard
Formula SCR and maintains capital buffers in excess of the SCR in line with its
Capital Policy.
Rothesay have indicated that they have undertaken an
appropriateness review of the level of capital held under the Standard Formula
approach and has concluded the level of capital held is appropriate.
Page 32 of 42
With-Profits Actuary’s Report
9. EFFECT OF THE SCHEME ON TRANSFERRING SE WPSF POLICYHOLDERS
Security of benefits
9.1. Following the implementation of the Scheme, security for the benefits of
transferring policies will be provided by Rothesay.
9.2. I have reviewed the report prepared by the Chief Actuary of Rothesay for the Board
of Rothesay (see Section 8). I have not reviewed the detail of the calculations and
I have relied on the statements made in the report. In particular, I have not
reviewed the Solvency II calculations and would not expect to do so as these
details are confidential. However, the Solvency II results have been subject to
review by Rothesay’s auditors solely for the benefit of the directors of the company
and have been published in the public domain and I take comfort from that.
9.3. The report shows that Rothesay will meet its solvency requirements on a Solvency
II basis after the Scheme has been implemented, and it will meet the requirements
of its own capital policy.
9.4. The security of benefits for transferring policyholders is provided by:

The Solvency II regulatory requirements, which are intended to ensure that
the company can remain solvent after a 1 in 200 year event; and

Rothesay’s own capital policy, which provides an additional buffer over the
Solvency II requirements.
9.5. These protections will be supported by:

Rothesay taking management actions if their capital policy is breached;

The PRA taking actions if its minimum requirements are breached; and

The controls on how the Rothesay capital policy can be changed.
9.6. Policyholders’ protections and rights as provided by the Financial Services
Compensation Scheme are unaffected by the Transfer.
9.7. In determining whether the Scheme will materially affect the security of benefits
for transferring policyholders, I have considered:

The strength of and controls on changing Rothesay’s capital policy relative to
SE’s capital policy; and

The change to the risk of insolvency facing policyholders, particularly as a
result of the different capital policies and the implications for policyholder
benefits in the unlikely event of insolvency.
9.8. As detailed in Section 8, Rothesay Life’s capital policy provides a similar level of
protection to SE’s capital management policy. Rothesay Life’s solvency position is
slightly stronger than SE which provides further comfort over the security of
transferring policies’ benefits.
9.9. The capital required under Solvency II together with the additional capital held
under the Rothesay capital policy provide comparable level of security for
transferring policyholders as compared with the position were they to remain in SE.
Page 33 of 42
With-Profits Actuary’s Report
9.10. In conclusion, Rothesay will hold capital in excess of the minimum requirements
under Solvency II. I believe that the resulting level of security in Rothesay should
be satisfactory based on the information in the report by the Rothesay Chief
Actuary and nothing I have seen leads me to conclude that the level of security for
transferring policyholders will be materially weaker after the Scheme is
implemented.
9.11. I understand that Rothesay plan to transfer in another block of annuity business
from Zurich Assurance Limited (ZAL) under a separate Scheme with a planned
transfer date in Q2 2017. The business in question has already been fully
reinsured from ZAL to Rothesay and so the transfer of risk has taken place and is
reflected in Rothesay’s current solvency position. Based on the information in the
report by the Rothesay Chief Actuary I believe that the level of security in Rothesay
should be satisfactory whether or not the scheme in respect of the ZAL business is
implemented.
9.12. However, the SE Board should also consider the conclusion reached by the
Independent Expert on this matter as he has had access to more detailed and
confidential information than me.
Policyholder benefit expectations
9.13. The contractual benefits of the transferring policies are set out in the policy terms
and conditions.
No changes are being proposed under the Scheme to the
contractual policy terms and conditions of the transferring policies.
9.14. The WPSF is subject to oversight from SEPT as a result of the powers conferred on
it by the SELAS Scheme and the powers of a with-profits committee under
regulation. As these powers are primarily related to the exercise of discretion by
SE, and the contractual benefits of the transferring policyholders are fixed and nonparticipating, I believe that the transferring WPSF annuitants will not be materially
impacted by the discontinuance of oversight of their policies by SEPT.
Taxation
9.15. SE and Rothesay do not expect there to be any adverse policyholder tax impacts
for Transferring policyholders. In particular, SE is working with Rothesay to ensure
as far as possible that the transfer does not affect individual policyholders’ tax
codes as this could result in short term fluctuations to net of tax annuity payments,
though not to the total amount of annuity received over the tax year. I will provide
an update on this aspect in my Supplementary Report.
9.16. Confirmations and clearances are being sought from HM Revenue and Customs
(“HMRC”) that the “transfer of going concern” treatment will apply for VAT
purposes and that the that the transaction is not for an “unallowable purpose” for
corporation tax purposes.
Quality of administration
9.17. With effect from the SED, Rothesay will become responsible for the provision of
services to policyholders. I understand that Rothesay is to put in place services
arrangements between it and Capita to administer the majority of annuities in
payment being transferred. I understand that the administration of the group
deferred annuities and group annuities in payment will be carried out by JLT and
HS Admin in a similar arrangement to that which is currently in place for the group
annuity business written in the NPSF.
Page 34 of 42
With-Profits Actuary’s Report
9.18. A comparison of the key applicable service standards of the SE and Rothesay has
been carried out by the companies, focussing on key metrics such as call handling
response times; member data update service levels; issuance of retirement
quotations; and complaint handling. This concluded that service levels are slightly
different for some aspects of service, with most items under Rothesay the same as
or better than under SE, and that taken in aggregate, policyholders are expected to
enjoy a commensurate level of service post-Transfer.
9.19. Based on this comparison, and the information provided by Rothesay on their
intentions, I am not aware of any reason to expect the quality of administration for
any transferring policyholder to materially deteriorate as a consequence of the
Scheme.
New business
9.20. Rothesay do not expect their planned levels of new business to lead to a material
change to the risk profile or financial position of the company.
Treating Customers Fairly
9.21. I believe that implementation of the Scheme, taking into account the contents of
the Scheme, is consistent with the requirement to treat customers fairly with
respect to the transferring policyholders of SE’s WPSF. This is because, in my
opinion, after the Transfer Date the level of security for benefits for the WPSF
policies which are transferring to Rothesay will not be materially adversely affected
and because there will be no changes to contractual policyholder benefits as a
consequence of the Scheme.
Conclusion on transferring policyholders
9.22. For the reasons set out above, I consider that the Scheme will not materially
adversely change the position of SE WPSF policyholders transferring to Rothesay.
Page 35 of 42
With-Profits Actuary’s Report
10.EFFECT OF THE SCHEME ON NON-TRANSFERRING SE WPSF POLICYHOLDERS
Security of benefits
10.1. Currently the security of benefits for all policies in SE is provided by:

SE meeting its Solvency II capital requirements;

SE meeting the additional capital requirements required by its capital policy;
and

the strength of SE’s capital policy, including review and governance
processes in place around any future changes to that policy.
10.2. As set out in Section 4.6, in addition to the overall capital management policy for
SE, the WPSF aims to maintain sufficient assets to cover 100% of the regulatory
capital requirements associated with the liabilities of the WPSF plus further assets
sufficient to maintain an appropriate amount of working capital within the fund,
thus providing some additional security for the benefits of WPSF policyholders.
10.3. Overall, the risks within both the WPSF and NPSF have reduced as a result of the
reinsurance agreements and will reduce further following implementation of the
Scheme. Section 7 of this paper shows that the financial position of the WPSF and
NPSF within SE will be improved following implementation of the Scheme.
Policyholder benefit expectations
10.4. No changes are proposed under the Scheme to the contractual terms and
conditions of any policies.
10.5. The Scheme will not result in material changes to the benefit expectations of any
SE WPSF with-profits or non-profit policyholders, other than potentially allowing a
greater number of participating with-profits policyholders to share in the
distribution of the capital expected to be released by the Transfer than would
otherwise be the case.
Taxation
10.6. There is no materially adverse tax impact on policyholder benefits as policyholder
tax treatment does not change as a result of the transfer.
10.7. Confirmations and clearances are being sought from HMRC where appropriate.
Policies in the With-Profits Sub-Fund
10.8. No changes are being proposed to the way in which the WPSF is operated following
the Transfer. Section 7 of this paper shows that post-Transfer the solvency
position of the WPSF is improved due to the release of counterparty risk capital
requirements and additional expense reserve associated with the reinsurance
treaties with Rothesay. The consequence of this improvement in solvency should
be to provide increased security for the benefits of the with-profits policyholders
within the fund.
10.9. The risk of loss on default in relation to reinsurance of WPSF annuity liabilities is
primarily borne by the participating with-profits policyholders. Any such loss within
the WPSF would reduce the WPSF estate and therefore the benefits to participating
Page 36 of 42
With-Profits Actuary’s Report
policyholders of future distributions from the estate.
The proposed Transfer
removes this risk resulting in increased security for the benefits of the participating
with-profits policyholders within the fund.
10.10. The capital released as a result of the proposed Transfer will initially remain
within the fund as part of the overall WPSF estate and therefore be available for
distribution to policyholders as part of the wider estate distribution strategy for the
fund. Releasing this capital as a result of the proposed Transfer, rather than
waiting for it to be released as the annuity liabilities run-off over time, is expected
to mean that a greater number of participating policyholders will share in its
distribution than would otherwise be the case.
Quality of administration
10.11. There are no changes planned to the administration of non-transferring policies
as a consequence of the Scheme, so there is no reason to expect the quality of
administration to deteriorate as a consequence of the Scheme.
Treating Customers Fairly
10.12. I believe that the contents of the Scheme are consistent with the requirements to
treat customers fairly with respect of the policyholders remaining in the WPSF.
This is because the level of security provided for benefits of non-transferring
policies should increase slightly compared to that available before the Transfer and
because there will be no changes to policyholder contractual benefits as a
consequence of the Scheme.
Notification to policyholders
10.13. The regulations surrounding Part VII transfers require that, unless the Court
otherwise orders, all policyholders in all affected companies should be written to in
order to inform them of the proposed Scheme. SE is proposing to contact the
following groups of policyholders:

All policyholders who are being transferred to Rothesay under the Scheme.

Participating with-profits policyholders within the WPSF of SE.
These
policyholders participate in the profits and losses generated in the WPSF and
have a direct financial interest in the proposed Transfer and as such they
should be kept informed of actions which affect the fund. As mentioned in
Section 6, the Transfer also necessitates an update to the PPFM in respect of
the reference to participation in the profits and losses generated by non-profit
business within the sub-fund. Notification of this update will also be given to
the with-profits policyholders.
An exception will be made where such policyholders cannot be traced.
In addition SE intends to make financial advisers aware of the Scheme through its
regular adviser newsletter.
SE will be seeking waivers in respect the following groups of policyholders:

Policyholders of the NPSF who are not transferring under the Scheme.

New Generation With-Profits policyholders.
These policyholders do not
participate in the WPSF estate (and in particular do not participate in the
Page 37 of 42
With-Profits Actuary’s Report
profits and losses of the book of annuity business in scope of the proposed
Transfer), their policy conditions and benefits are unchanged as a result of the
Scheme and unlike participating with-profits policyholders they have no direct
financial interest in the proposed Transfer.

Policyholders who cannot be traced and certain other groups of policyholders
and affected persons (e.g. members of trust based pension schemes) where
communication would require significant and/or disproportionate effort or is
contrary to the usual manner of communication for the policy type, including
where these policyholders are participating with-profits policyholders.
10.14. A detailed communication plan has been produced to ensure policyholders
(including where relevant Trustees or employers holding “policies” on behalf of
pension scheme beneficiaries) in SE are adequately informed of the nature and
effect of the Scheme. The communications package includes direct mailing, press
adverts, and web content. The intention is that the mailed package would meet
the legal and regulatory requirements and provide an appropriate level of detail
enabling policyholders to understand the Transfer. Policyholders will be directed to
specific website content where further technical information can be obtained or a
contact for requesting additional printed material, all free of charge.
10.15. In addition, all external longevity reinsurers will be contacted and informed of the
nature and effect of the Scheme.
10.16. Overall, I am satisfied that the proposed communication plan is appropriate and
has paid due regard to the interests of WPSF policyholders and the need to treat
them fairly.
Conclusion on non-transferring policyholders
10.17. For the reasons set out above, I consider that the Scheme will not adversely
change the position of policyholders remaining in SE’s WPSF.
Page 38 of 42
With-Profits Actuary’s Report
11.CONCLUSION
11.1. I have produced this report in my role as With-Profits Actuary of SE to set out the
impacts of the Part VII Transfer on the policyholders of SE’s WPSF.
11.2. In assessing the potential impacts of this Scheme, I have given due consideration
to the effects of the planned Transfer on the security and benefit expectations of
the WPSF policyholders.
11.3. Based on this consideration and taking into account the key features of the
Transfer outlined in this report, it is my view that:
(i)
Taking into account the assets and liabilities transferred to Rothesay, the
security of transferring WPSF policyholder benefits will not be materially
adversely impacted as a result of the Scheme.
(ii)
Taking into account the assets and liabilities transferred, the security of
the non-transferring WPSF policyholder benefits will be marginally
improved as a result of the Scheme.
(iii)
The capital and risk appetite policies of SE and of Rothesay provide a
similar level of protection, which in turn provides further comfort that the
security of transferring and non-transferring WPSF policyholder benefits
will not be materially adversely impacted as a result of the Scheme.
(iv)
The Scheme will not result in material changes to the benefit expectations
of any SE WPSF with-profits or non-profit policyholders, other than
potentially allowing a greater number of participating with-profits
policyholders to share in the distribution of the capital expected to be
released by the Transfer than would otherwise be the case.
11.4. I therefore conclude that the Scheme will not result in a materially adverse impact
on the security of transferring and non-transferring WPSF policyholders or their
benefit expectations compared to the status quo.
11.5. I am also satisfied that there will be no material change to the servicing that nontransferring WPSF policyholders will receive as a result of the Scheme and, based
on a comparison of key applicable service standards between Rothesay and SE,
expect transferring WPSF policyholders to enjoy a commensurate level of service
post-Transfer.
11.6. Further, I am satisfied that the proposed communications plan is appropriate for
WPSF policyholders and has paid due regard to the interests of WPSF policyholders
and the need to treat them fairly.
11.7. Taking all of the above into account, I am satisfied that obligations to treat
customers fairly will not be materially adversely affected by the Transfer. It is
therefore my opinion that the Transfer may proceed.
11.8. SEPT has reviewed this report and has not objected to any of the conclusions.
11.9. My conclusions above would remain the same whether or not the LGAS scheme is
implemented.
Alan McBride FFA
With-Profits Actuary to Scottish Equitable
February 2017
.......................................................
Page 39 of 42
With-Profits Actuary’s Report
ANNEX A – DEFINED TERMS AND ABBREVIATIONS USED WITHIN THIS REPORT
AUK
Aegon UK
AUKCS
Aegon UK Corporate Services Ltd
BlackRock
BlackRock Life Limited
CA
Chief Actuary
FSMA
Financial Services and Markets Act 2000
FCA
Financial Conduct Authority
FLAOR
Forward Looking Assessment of Own Risks
HMRC
HM Revenue and Customs
IE
Independent Expert
LTF
Long Term Fund which for SE includes its NPSF and its WPSF
LGAS
Legal and General Assurance Society Limited
NPSF
Non-Profit Sub-Fund which is a separate account in the LTF
maintained in respect of business other than with-profits business
ORSA
Own Risk and Solvency Assessment
Own Funds
This is the difference between the value of a company’s assets and
the value of its liabilities on a Solvency II basis
Pillar 1
Solvency I Pillar 1 basis
PPFM
Principles and Practices of Financial Management
PRA
Prudential Regulation Authority
Rothesay
Rothesay Life plc
SCR
Solvency Capital Requirement which is regulatory capital that is
required to be held by an insurer under Solvency II regulations
SE
Scottish Equitable plc
SED
Scheme Effective Date
SE Board
Scottish Equitable plc Board
SELAS Scheme
Existing SE Scheme of Demutualisation
SEPT
Scottish Equitable Policyholders Trust Ltd which acts as the withprofits committee for SE’s WPSF
SHF
Shareholder Fund which represents assets of a company other than
assets in its LTF
Solvency II
Risk based prudential regime for insurance and reinsurance
undertakings in the European Union
Transfer
Proposed transfer of a portfolio of non-profit annuity policies from
SE to Rothesay
WPA
With-Profits Actuary
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With-Profits Actuary’s Report
WPSF
With-Profits Sub-Fund which is a separate account in the LTF
maintained in respect of with-profits business
ZAL
Zurich Assurance Limited
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With-Profits Actuary’s Report
ANNEX B – OVERVIEW OF SOLVENCY BASES SUPPORTING THIS REPORT
Described below are the key features of the various solvency assessment bases
supporting this report and used to understand the impact on policyholders.
Solvency II
The regulatory capital regime for insurers was replaced by a new European Directive,
referred to as Solvency II, on 1 January 2016. The Solvency II requirements require
companies to apply to use an Internal Model or to adopt the Standard Formula to assess
the amount of capital they hold, to ensure that it remains able to meet its liabilities to
policyholders in all but the most extreme circumstances.
The Directive also requires that the business conducts an Own Risk and Solvency
Assessment (ORSA) that includes an evaluation of the overall solvency needs taking into
account the specific risk profile, approved risk tolerance limits, and the business
strategy.
Of particular importance is the consideration of the Forward Looking
Assessment of Own Risks (“FLAOR”). As part of FLAOR, insurance companies are
expected to address the following issues:

All material risks from all assets and liabilities;

Management practices, systems and controls, including risk mitigation;

The quality of processes and inputs, and in particular the related governance
issues;

The link between business planning and the “overall solvency needs” (which we
understand incorporates regulatory and internal capital requirements, e.g. target
rating capital requirements);

Explicit identification of possible emerging risk scenarios;

Relevance of potential external stresses;

Use of a consistent valuation basis.
While Solvency II results for SE will not be publicly disclosed until the year-end 2016
results are published in May 2017 this report makes reference to figures as at 30 June
2016. The Solvency II assessments have been scrutinised in preparing this report and
have also been shared with the IE and regulators in the preparation of their reports.
Solvency I Pillar 1
Solvency I Pillar 1 (“Pillar 1”) is based on EU regulatory requirements which ceased to
apply as of 1 January 2016. Assets are taken at market value and reserves are set up to
cover a fund’s liabilities. These liabilities (which for the base Pillar 1 calculations exclude
non-guaranteed discretionary payments) are valued using assumptions that include
prudent margins. Solvency capital, expressed as a percentage of reserves and of sums
at risk, is required in addition to the reserves. This calculation is commonly referred to
as the “regulatory peak”.
Year-end Pillar 1 results are publically disclosed and are used in this report to provide
some background of the makeup of SE’s business with reference to figures in the public
domain.
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